U.S. buyout firm KKR and China Tencent Music Entertainment Group eyeing to purchase 50% stake in UMG

Tech-savvy KKR has prior experience in the music industry given its earlier deal with Bertelsmann; however negotiations with Vincent Bollore are expected to be tough, especially if KKR and Tencent push for a controlling stake.

According to sources familiar with the matter at hand, China’s Tencent Music Entertainment Group and U.S. buyout fund KKR are exploring bids for a 50% stake in Universal Music division in a potential deal worth around $22.73 billion (20 billion euros).

According to two sources, Vincent Bollore, a French tycoon who has a 25% stake in Vivendi, Universal Music’s parent, is in the process of selecting banks to oversee a partial sale of Universal Music Group (UMG). Sell-side banks are expected to be appointed next month in March with the process likely to kick off in the second half of this year.

With banks trying to gauge investor appetite for the unit, discussions with potential buyers are underway.

Incidentally, UMG is the world’s biggest music label ahead of Warner Music and Sony Music Entertainment and is home to artists like Lady Gaga, Kendrick Lamar, Taylor Swift, and Drake.

Vivendi, KKR and Tencent Music declined comment.

Analysts have expressed different views on UMG’s valuation.

According to Daniel Kerven, a media analyst at JPMorgan, UMG is “a unique asset – under-monetized, must-have global content that is strategic to the tech giants and can’t be replicated”; he pegged UMG’s fair value at 44 billion euros, much higher than rival estimates. In comparison, Goldman Sachs valued it at 35 billion euros, Deutsche Bank at 29 billion and Exane BNP Paribas at 25 billion euros.

In 2017, Vivendi’s CEO Arnaud de Puyfontaine opined the business could be worth more than $40 billion.

Puyfontaine’s comments at that time cam in the context of Vivendi exploring a possible stock market listing, a plan it later shelved midst challenges in eking out big profits in the sector.

As per Deutsche Bank’s forecast, Universal is likely to generate around 1.5 billion euros of free cash flow excluding interest payments in 2023.

According to sources, potential bidders may find it hard to negotiate with Bollore since they may not be able to secure a majority stake and have a meaningful say on UMG’s strategy going forward. Bollore will wants to stay in the driving seat, they said.

However, some private equity funds including KKR are willing to enter an equity partnership with Bollore and help fund UMG’s international expansion, even if they won’t be able to take full control, said sources.

According to sources, big buyout firms, such as KKR, which are technology-savvy could play a meaningful role. KKR has previously entered a joint venture deal with Bertelsmann, Europe’s largest media company, to back music rights management company BMG. This deal has proven to be quite lucrative for KKR, and it has doubled its money when it sold its stake back to Bertelsmann in 2013.

According to record industry trade group IFPI, the global recorded music revenues rose by 8.1% in 2017 to $17.3 billion with streaming revenues representing the bulk of the growth.

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