Let’s Break Down the Thoughts-Blowing Cash in Common Music’s IPO

That is, by a long way, the music enterprise story of the 12 months. Tomorrow morning (September 21) in Europe, as New Yorkers are sleeping and Los Angelenos are drifting off, 60 p.c of the world’s largest music firm will hit the inventory market.

That’s the slice of Common Music Group (UMG) that may float on the Amsterdam Euronext, because the music main’s present guardian firm, Paris-based Vivendi, relinquishes it to its personal shareholders. (An extra 20 p.c of UMG is privately owned by a consortium headed up by China’s Tencent; one other 10 p.c is owned by funding agency Pershing Sq. Holdings and its associates; the ultimate 10 p.c of the corporate will probably be retained by Vivendi.)

Sources near the matter counsel UMG is braced for a “rollercoaster” first day on the inventory market. That’s largely as a result of fiscal guidelines in Vivendi’s dwelling market of France forestall some institutional buyers from holding massive firm stakes concurrently at dwelling and overseas — so they might be compelled to promote their UMG shares quick-smart after buying and selling begins. Different shareholders will merely wish to money of their chips ASAP if UMG, as anticipated, hits a market cap worth over $40 billion. On the opposite facet of the buy-sell divide, a number of onlookers will probably be eager to accumulate UMG shares, such is the market warmth hooked up to music as of late.

However even earlier than this rollercoaster begins its ascents, descents, and loop-the-loops, the corporate’s arrival on the general public markets has already modified the face of the worldwide music trade. Right here’s how.

1. If Common is price masses, so are its fiercest rivals

UMG is dwelling to each the world’s largest recorded music firm and the world’s second-largest music publishing firm. As such, it has an unequalled capacity to form the worth of music itself. There’s no higher current instance of this than August twenty fifth, when UMG held its Capital Markets Day — primarily a rehearsed seduction of Europe’s largest funding banks. UMG clearly impressed its audience with a convincing message of projected development for music rights within the decade forward.

Proof of mentioned buyers’ pleasure lies within the efficiency of Common’s key rival, Warner Music Group, on the markets that very same day. Warner, which trades a minority of its firm on the Nasdaq, noticed its personal share value develop by over 4 p.c on August twenty fifth — growing its market cap valuation by near $1 billion inside a couple of hours.

If Common now goes on to concrete an astronomical valuation on the Euronext, it would function a reference level for the valuation of each significantly-sized music firm, particularly those that are publicly-traded — together with Warner, Hipgnosis Songs Fund, Imagine and Spherical Hill. And speaking of astronomical valuations…

2. $64 billion robust? And even larger?

Circumstances are set for Common’s day-one market cap valuation to make an enormous dent within the historical past books. Prior to now few hours, Vivendi has set a “reference value” market cap for UMG forward of tomorrow’s itemizing at €33.5 billion ($39.3 billion at present alternate charges).

There are a couple of causes I believe it will show conservative over the course of Common’s debut buying and selling day:

  • As I write this, Warner is buying and selling at a market cap of round $21.3 billion. On comparative market dimension alone, Common would due to this fact be price someplace round $40 billion (Warner posted $4.46 billion in revenues in its final fiscal 12 months; UMG was 88 p.c larger at $8.40 billion). Common, although — regardless of a world pandemic — grew its topline revenues 4.7 p.c year-over-year in its fiscal 2020, whereas Warner was flat. That’s only one indication why a further premium must be placed on UMG’s worth versus that of its rival.
  • Analyst confidence in Common is hovering. The likes of Financial institution Of America and Exane BNP have written glowing experiences on the corporate, whereas in a paper earlier this month, JP Morgan Cazenove urged that UMG’s “truthful worth” was really €54 billion — equal to $64 billion. JP Morgan analyst Daniel Kerven wrote: “We proceed to consider that Warner Music Group is undervalued and that Common Music Group ought to commerce on a major premium, given a greater monitor file, higher governance and best-in-class administration.”
  • UMG is floating simply as florid trade numbers are being revealed left, proper, and middle. UMG’s personal first half of 2021 mirrored year-over-year income development of 17.3 p.c, and got here full with a near-$1 billion EBITDA revenue margin; Warner’s numbers have been up 27 p.c YoY in its most up-to-date quarter; and the Recording Business Affiliation of America, with beautiful timing, simply confirmed that the recorded music enterprise within the US — the world’s largest music market — was up by $1.5 billion (+27 p.c) within the first half of 2021 versus the primary half of 2020.

With these tailwinds behind it, Common’s market cap may find yourself someplace above $40 billion and even $50 billion by the point this week is out.

To place into perspective how wild music’s journey has been through the Spotify period: In 2005, Warner Music Group — going through as much as the injury being wrought upon it by Napster and piracy — floated, for the primary time, on the New York Inventory Trade, and had a rocky opening day, failing to hit a mooted market cap of $3.4 billion. (WMG’s market cap peaked that 12 months at $3.9 billion.) Simply 16 years later, WMG is price greater than 5 instances as a lot because it was again then. UMG at present is, virtually actually, price greater than ten instances what Warner was in 2005.

3. Sir Lucian Grainge and Vincent Bolloré enter the stratosphere

Guess what music trade gossips couldn’t wait to find inside the pages of Common’s itemizing prospectus final week? In fact: The main points of the financial compensation of Sir Lucian Grainge, the L.A.-based British exec who has led UMG as international CEO and chairman for the previous decade.

Right here goes, then: Grainge is getting a $150 million bonus for his troubles post-listing, plus 1 p.c of no matter valuation Common achieves above $30 billion. (So if UMG hits a $40 billion market cap, Grainge will get a further $100 million; if it hits $50 billion, he’ll get one other $200 million, and so forth.)

That is along with a bonus Grainge has already acquired this 12 months of roughly $20 million associated to the acquisition earlier this 12 months of 10 p.c of UMG by a consortium led by Tencent — and along with different bonuses associated to Pershing Sq.’s current buyout of 10 p.c of UMG.

Briefly, there’s likelihood that Grainge will pocket bonuses from UMG price over $200 million this 12 months. It’s believable this determine may even soar up past $300 million.

Sir Lucian Grainge’s bonuses are set out inside UMG’s pre-listing prospectus

There will probably be many working in music — not least the struggling-to-make-a-living 99 p.c of artists on Spotify — who might decry such figures as bloated. However from the angle of sheer enterprise efficiency and trade management, it’s exhausting to say Grainge is undeserving of his payday. In 2013, three years into Grainge’s reign as CEO, UMG was price someplace within the area of $8.5 billion, as per a (rejected) bid for UMG from Japanese firm Softbank. Since then, underneath Grainge’s management, the worth of UMG has elevated 5 instances. Whilst lately as 4 years in the past, UMG was valued at half of what it’s price at present.

The main points of how Grainge’s private risk-taking have instantly ballooned UMG’s worth are too quite a few to record right here. (An instance, although: His dedication to purchase EMI Music for $1.9 billion in 2012 — within the pit of monetary uncertainty for file labels, and 4 years earlier than the US recorded music enterprise would even display annual development once more — is etched in music biz legend.)

Within the decade since Grainge took over UMG, the corporate’s worth has elevated by someplace within the area of $32 billion. So, if Grainge finally ends up with a $200 million bonus this 12 months, it would nonetheless solely be price round 0.6 p.c — and doubtless much less — of the thumping enhance in UMG’s price that he’s overseen.

For French media mogul Vincent Bolloré — Vivendi’s largest single shareholder, and a person Grainge very a lot needed to maintain completely satisfied this previous decade — relinquishing $200 million to the chief will probably be small fry. When Common lists in Amsterdam, Bolloré (through his Bolloré Group) will find yourself with greater than $7 billion in UMG inventory.

Tomorrow, Lucian Grainge is definitely going to hitch the leagues of the mega-rich as soon as and for all. Vincent Bolloré, nonetheless, will probably be shifting into an unbelievable new realm of wealth — the sort loved by individuals who construct their very own house journey for enjoyable.

Tim Ingham is the founder and writer of Music Enterprise Worldwide, which has serviced the worldwide trade with information, evaluation, and jobs since 2015. He writes an everyday column for Rolling Stone.

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