At first blush, it would not appear that the deal by Vivendi to sell its 61% stake in Activision Blizzard back to the video game company for $8.2 billion would have any impact on Universal Music Group.
But in the context of the French conglomerate’s corporate maneuvering, it appears that the Activision Blizzard deal could be a prelude to a sale of Universal Music, which Vivendi also owns.
Right now, Vivendi is struggling to get out from under a roughly $15.5 billion debt pile. In addition to the Activision deal, the company earlier in the week said it entered into exclusive talks to sell its majority stake in Maroc Telecom. Vivendi also explored a sale of GVT, a Brazillian telecom company, that was ultimately halted over lowball bids and, according to press reports, is considering a spin-off of its French telecom company SFR.
Vivendi has said that it wants to sell these assets so it can focus on content production. So far the only assets Vivendi hasn’t explored selling are French pay-TV company Canal+ and Universal Music, which ranks as the world’s largest music company and the record label home of Justin Bieber, Drake, The Killers, Kanye West, Rihanna, Lady Gaga and many more.
In fact, it recently emerged that three months ago Japan’s SoftBank Corp offered a stunning $8.5 billion for Universal Music that Vivendi, to the surprise of many, rejected. The reason the offer was stunning and Vivendi’s rejection surprising was because the $8.5 billion was at least $2 billion more than what many consider to be the fair market value for Universal Music. And the bid was unsolicited and not subject to a competing offer!
A report in the Financial Times cited two anonymous sources as saying that Vivendi’s rationale for rejecting SoftBank’s offer was that it felt a sale of Universal Music would lead the entire company to “fall apart.” Against the backdrop of the Activision sale, however, that rationale makes little sense.
The reason SoftBank, a wireless telecommunications company, wanted to buy Universal Music is supposedly the same reason why Vivendi wants to keep it — to integrate music into its mobile devices to drive sales of both. For SoftBank, that logic makes sense since it is doubling down on telecoms, recently agreeing to buy Sprint, the third-largest phone carrier in the U.S., for $21.6 billion. For Vivendi, on the other hand, it doesn’t make sense both because it has thus far been unable to successfully integrate Universal Music with its telecom assets and it is actively trying to dispose of them! Through that lens, the idea that selling Universal Music would lead Vivendi to “fall apart” seems wholly illogical. Indeed, it appears that Vivendi itself is basically tearing down its own house piece by piece.
Or, as a Credit Suisse report on the Activision sale more diplomatically put it, “For us, Vivendi is now looking increasingly like a full break-up story.”
Outside of its telecom holdings, Activision Blizzard represented the only other asset Vivendi owned that had synergies with Universal Music. While franchises like Rock Band and Guitar Hero have petered out, the general trend of incorporating music into video games is still very much alive. Sure there are synergies between Universal Music and Canal+, but not enough to justify keeping the record company — and certainly not enough to justify turning down a $2 billion premium.
To be sure, the strategic need for Vivendi to retain Universal Music is outweighed by both the financial imperative to pay down its debt and the fact that, unlike GVT for instance, there is already at least one known buyer for the record label. Raw math shows that between the $8.2 billion Vivendi is collecting for Activision Blizzard — which is actually a discount to its market value — and the $8.5 billion SoftBank offered for Universal Music, Vivendi could wipe out its entire debt load and have more than $1 billion leftover.
Putting aside its own corporate issues, Vivendi would be wise to sell Universal Music now, while it is at the apex of its value and before Sony Music potentially goes up for sale. On the latter point, industry observers speculate that Sony Music might be vulnerable to a takeover as a result of activist investor Dan Loeb’s campaign against Sony. Loeb, the founder of hedge fund Third Point who just cashed out of Yahoo for $600 million, is campaigning for Sony to separate its music and film assets from its core consumer electronics business, a move which opens a window for a potential buyer to come in with an offer to buy either Sony Music or Sony Pictures Entertainment together or individually.
But here’s the thing: from a buyer’s perspective, Universal Music is a much more attractive asset than Sony Music. And the reason is because Universal Music is by far the world’s largest recorded music company and owns the industry’s second-largest music publishing catalog, which is where a disproportionate amount of revenue is derived for record labels nowadays. Music companies don’t make money on recorded music, but rather from the rights they hold to songs that allows them to collect a license fee from live performances, radio airplay, and streaming services, among other avenues. In short, publishing is where the power lies, and Universal Music controls the rights to well over one million songs. (while Sony’s music publishing catalog is larger, control is split between the company and a number of other parties, unlike Universal, which owns its catalog outright.)
Now that the SoftBank offer has come to light, Vivendi might not have the luxury of dismissing another bid for Universal Music. Analysts and investors were severely disappointed that it rejected the first one. In a report entitled “Stepping Sideways, Away From Media,” analysts at Bernstein Research wrote that they “regret that Vivendi did not recently dispose of Universal Music” and called its media-only strategy “confused and shrunk” in light of the Activision Blizzard deal.
Reading the signals, it seems increasingly likely that Vivendi’s media strategy will end up being shrunk further through an eventual sale of Universal Music.
Correction: This article was corrected to reflect the fact that Universal is the world’s largest record label and second-largest music publisher. Sony owns the industry’s largest music publishing catalog. However, Universal wholly owns its publishing catalog, while ownership of Sony’s is split between the company and a few other parties.