Taylor Swift's record label plays to one billionaire's tune

A listing of Universal Music Group would benefit some investors more than others

Universal Music Group's desire to become a publicly traded stock has long sounded like a broken record. Almost four years after parent company Vivendi SA first floated the idea, the record company that's home to Taylor Swift, Billie Eilish and Bob Dylan is finally set to be listed by the end of 2021.

The spin off is good news for Vivendi investors. But it may benefit one shareholder more than most: the billionaire Bollore family that controls the French media conglomerate. The listing, which could be the biggest in Europe this year, will not free the record label of patriarch Vincent Bollore's machinations.

Rather than selling shares in an initial public offering, Vivendi instead plans to distribute 60 per cent of UMG's stock to its existing investors and retain 20 per cent for itself. The remaining 20 per cent were recently acquired by a consortium led by Chinese tech giant Tencent Holdings Ltd., in a deal that ascribed UMG an enterprise value of 30 billion euros ($36 billion).

That transaction highlighted how Vivendi, whose market capitalization is just 31 billion euros, is valued at less than the sum of its parts. Its other businesses, which include the pay-TV operator Canal+ Group, advertising firm Havas and publishing house Editis, generate about 40 per cent of profit. Spinning UMG out will likely leave investors with two stocks that are more valuable separately. And having a less diversified portfolio makes Vivendi a less confusing investment case. Shares in rival record label Warner Music Group have climbed 24 per cent since its own IPO in June, helped by the increased adoption of online music streaming.

That affords the New York-based firm a valuation including debt of 24 times expected earnings before interest, taxes, depreciation and amortization. Were UMG to list at a similar earnings multiple, it could expect an enterprise valuation well north of the 30 billion euros at which Tencent invested.

Pursuing a spin off also means investors benefit directly from the new value creation, though they might reasonably ask why they're not receiving more of the stock.

An IPO would have generated cash proceeds that Vincent Bollore, the former Vivendi chairman who still calls the shots at the company, may have been tempted to spend on ill-advised acquisitions. Although the 68-year-old magnate has a largely successful history of generating investor returns, his record in recent years has been spottier. For example, Telecom Italia SpA shares have lost two-thirds of their value since Vivendi started building its 24 per cent stake in 2015.

The UMG deal's structure nonetheless confers some advantages on Bollore, whose son Yannick assumed the Vivendi chairmanship in 2018. Family holding company Bollore SA currently owns 27 per cent of Vivendi and exerts de facto control. After the spin off, Bollore SA will therefore control 36 per cent of UMG's capital - a combination of its own direct 16 per cent stake and Vivendi's 20 per cent. That ownership will help it shape the direction of the company and let it block some big strategic decisions that require shareholder approval. Factor in Tencent's 20 per cent holding, and ordinary shareholders will hold less than half the stock.

The set up is typical of the Bollores, who control companies that span ports, oil terminals, batteries and media through a Byzantine hodgepodge of interweaving shareholdings and minority investments. UMG is also listing in Amsterdam, which allows for dual-class shares that can give some investors greater voting rights.

Vivendi investors will surely be relieved that the music is finally playing. But they should bear in mind that Vincent Bollore will retain a great deal of influence. (Bloomberg)