The question of what UMG is really worth won’t be answered until September 21, when its shares start trading on the Euronext Amsterdam stock exchange. (Vivendi will distribute 60% of UMG’s share capital to current shareholders and retain the remaining 10% after the sales of Tencent and Pershing Square.) The average analyst valuation was $ 47.5 billion, and most exceeded 45 billion. of dollars. JP Morgan, who valued UMG at $ 62 billion, called the company “one of the best assets in the European market” and predicted that its estimate – well above all of BofA Securities’ $ 59.1 billion – “will ultimately be cautious”.
Analysts arrive at business valuations by applying a multiple to a company’s expected earnings before interest, taxes, depreciation, and amortization (EBITDA) that reflects its potential for future profit. (In this case, analysts calculated valuations using their 2022 UMG EBITDA forecast.) The more growth analysts expect, the higher this multiple. So while a utility company like Edison International is trading at 13.4 times EBITDA, fast-growing tech startup Roku has a multiple of 138.
Analysts give UMG multiples of between 19.1 (Citi) and 28.7 (JP Morgan), with most of them around 24. This reflects the common forecast of around 10% annual growth for the company. This is why the multiple that the market ultimately gives to UMG will not only reflect how investors view this organization, it will affect the value of other companies in the industry as well. If stocks go up and stay high, it could convince investors that recorded music catalogs and publishing rights are in fact undervalued. If UMG stock disappoints – which seems unlikely, given analyst sentiment – investors could reconsider whether the music rights and the public companies that hold them are worth the historically high prices they recently traded for. The title that will be hit the most is that of Warner Music Group, and it could go down – or, more likely, go up – depending on how UMG performs.
The multiple at which UMG is trading will ultimately depend on two factors. One is the growth potential of music rights – primarily for recordings, which generate about five times more revenue than publishing rights for the company. The other is the amount of premium, if any, that investors will be willing to pay for UMG over WMG, the other major publicly traded label. (Sony Music is owned by Sony Corp., which is public but includes a variety of other companies.) In many industries, investors are willing to pay a higher multiple for a company with greater market share, with the ‘idea that it has more leverage negotiations or other competitive advantages.
WMG, which went public in 2020, is currently valued at around $ 23.8 billion, a multiple of 21.6 of analysts’ forecast for 2022 EBITDA and 621% above $ 3.3 billion which Access Industries paid in 2011. The company enjoys steady growth, improving margins and strategic investments in, among others, gaming giant Roblox and NFT pioneer Dapper Labs. Some analysts give UMG a premium, though, although the amount varies: Alliance Bernstein gives WMG a multiple of 18.8, lower than where it is currently trading, and UMG 20.7, while JP Morgan gives WMG 22 and UMG 28.7.
Explanations of why UMG might charge a premium vary, but it has better margins and faster growth. It also has more of the most successful artists: 17 of the top 20 in the United States for the year ending September 13, according to MRC Data. “This allows you to extract a higher royalty rate and ‘non-attributable’ revenue from online platforms,” said Jason Peterson, president of music technology and distribution company GoDigital Media Group. Morgan Stanley, who gives UMG a 15-20% premium over WMG, says the company is “the most important negotiation” for digital services, while Pershing Square and Alliance Bernstein believe its market share to it. gives an advantage of trading with companies like TikTok and Platoon. This advantage could be global: the fact that Tencent owns 20% of UMG could boost the company in China, “a very unique place to operate a business”, according to another executive.
Amid all the speculation about the value of UMG, the company’s results have been strong: at the end of July, it announced its second quarter results, with revenue of $ 2.37 billion, up by 23% compared to the previous year. (H1 revenue – a better basis for comparison, given that the pandemic began in Q2 2020 – rose 11% to $ 4.52 billion.) Several analysts hiked their valuations as well. . And despite fears of a bubble, the prices of musical assets continue to climb.
Either way, UMG is finally getting by, its spin-off marks the start of a new chapter for the music business. The last time two major labels were listed on the stock exchange – WMG and EMI Music, in the mid-2000s – the revenues generated by the craters led investors to speculate on their level of decline or on which entities could privatize them in order to to restructure them. Now, 15 years later, it seems the sky is the limit.