The music business doesn’t do certainties.
This capriciousness, of course, is one of the things that makes it so beguiling. Three minutes of songwriting inspiration; an influential new fan; an out-of-the-blue pop-culture hook-up — they can all instantly rocket a song, or a star, into the consciousness of millions. Yet there’s at least one truism those toiling in the music biz can usually guarantee: The major record companies hate it when their competitors succeed.
Last year, two of the “big three” — Sony Music (home to Epic, Columbia and RCA) and Warner Music Group (home to Atlantic, Warner Bros. and Parlophone) — had particular reason to send daggers the way of their biggest rival, Universal Music Group.
UMG, commercially speaking, tyrannized the blockbuster music charts of 2018. Eight of the year’s top 10 most popular artists (across all formats) in the U.S. — including Drake, Eminem, Kendrick Lamar, J.Cole and Post Malone — were signed to the company. As a result, UMG ended last year with an unprecedented near-40 percent annual streaming market share in the States.
And yet, as we gaze unknowingly into the yet-to-be-written void of 2019, UMG’s rivals will be experiencing mixed emotions. Despite their obvious annoyance about UMG’s success, the owners of Sony and Warner also, paradoxically, have reason to cheer Universal on — albeit through gritted teeth.
Why? Because Universal’s parent, Vivendi, is in the process of selling up to 50 percent of the world’s biggest music-rights company — and all indications suggest it’s going to bank an astronomical sum of money. This, in turn, could spell amazing news for Sony and Warner’s own valuations; which, again in turn, could potentially start a megabucks sales frenzy.
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An analogy: Mr. Universal lives on the same street as Mr. Sony and Mr. Warner. Every day, as they pass Mr. Universal’s door, Mr. Sony and Mr. Warner will him to fail at life. But now, Mr. Universal has put his house up for sale, and the neighborhood gossips are rumoring that it might go for much more than anyone dared expect.
If it does, Mr. Sony and Mr. Warner will get straight on the phone to their realtor.
The neighborhood gossips in this case are the world’s investment banks — and right now there are a number of them getting extremely excited about what people may pay for Universal Music Group (which, in addition to its recorded-music operation, also owns giant publisher UMPG and merch company Bravado).
Deutsche Bank, for one, recently slapped a €29 billion ($33 billion at current rates) valuation on UMG. In a report dated January 6th, “Dreaming of Streaming,” DB projected that Universal’s modern-day value was worth some 38 times the music company’s last-known annual EBITA (earnings before interest, taxes, and amortization) figure, from 2017, of €761 million ($860 million).
Deutsche Bank isn’t an outlier on this matter. In a different January report, Morgan Stanley suggested that UMG was worth $29 billion at a “base valuation” — but that in a “bull case” the company could be worth anywhere up to a staggering $42 billion.
This “bull case” was predicated on Morgan Stanley’s hypothetical projection that 700 million new people start paying for music streaming services over the next decade — in addition to intense market demand for a stake in UMG. A congested pool of would-be buyers, said Morgan Stanley, could “create competitive tension . . . and potentially yield [a $42 billion] ‘trophy’ valuation.”
Further valuations for UMG have stuck to this script. In its report, Goldman Sachs (September 2018) came in at €22.7 billion-€35.1 billion (circa $33 billion), and, in January, Exane BNP Paribas pegged UMG at €25 billion ($29 billion) — although, unlike Morgan Stanley, this forecast included “no M&A premium” assumptions. Exane, among others, suggested that buyers of UMG could include everyone from Liberty Media to Tencent, Google, Facebook, Alibaba, Amazon, Spotify and Apple.
In the true spirit of the music industry, then, let’s focus on the biggest hit we have: Morgan Stanley’s teasing projection that, should potential buyers get whipped up, one of them might acquire 50 percent of Universal Music Group relative to a whopping company valuation of $42 billion.
That would represent a massive 48.8-times (!) multiple on UMG’s last-known annual EBITA figure from 2017. (Universal’s EBITA for 2018 will become known next week when Vivendi announces its Q4 results.)
What, then, might this kind of multiple mean for Universal’s two biggest rivals? Assuming that the same rampant desire for music-rights ownership will carry following a UMG supersale, what price tag might Warner and Sony be able to achieve?
For Warner, that calculation is fairly straightforward. Rather than UMG’s EBITA, in its fiscal results WMG opts for the similar fiscal measure of OIBDA (operating income before depreciation and amortization). In calendar 2017, Warner’s annual cumulative OIBDA figure stood at $471 million. With that gigantic 48.8-times multiple applied . . . WMG’s valuation would come out at a very healthy $23 billion.
Sony offers a less-clear comparison. Just like Universal and Warner, Sony Corp’s “music” division includes both recorded music and publishing operations; however, it also officially encompasses a “Visual Media & Platform” component, which covers revenues generated by a mobile video game, Fate/Grand Order, which (a) has little to do with music and (b) turns over more than $1 billion annually.
That said, in its UMG report, Deutsche Bank makes a handy estimate that Sony Corp’s music division (including “Visual Media & Platform”) posted an annual EBITDA (earnings before interest, tax, depreciation and amortization) of 139.39 billion yen ($1.26 billion) in the firm’s FY2018 — i.e., the 12 months to end of March last year. (To be clear, Sony’s music publishing and recorded-music companies combined aren’t as big as Universal’s, but with Visual Media & Platform added, Sony’s “music” outfit becomes the largest in the world.)
If we once again apply UMG’s dream 48.8-times multiple to these figures, we end up with Sony Corp’s “music” division grabbing a colossal valuation of $61.5 billion. (What’s more, this doesn’t include Sony’s ownership of EMI Music Publishing, which it officially acquired in November 2018 — and which, in the 12 months to end of March 2018, posted revenue of $663 million and an adjusted EBITDA of $249 million.)
These numbers are, obviously enough, very rough approximations of a crazy-best-case situation for WMG and Sony’s music divisions, based on Morgan Stanley’s unprecedented potential $42 billion valuation of Universal.
Yet, combined, they speak to the possibility of music’s “big three” being worth in the region of $125 billion today, depending on boldly optimistic forecasts for music streaming’s future, and the heat of M&A competition. (Even applying Deutsche Bank’s 38-times 2017 EBITA multiple to the three companies, their combined value arrives close to $100 billion.)
There are additional factors at play in this narrative, too: It is public knowledge, for example, that Warner Music Group’s top executives stand to earn personal windfalls from any sale of the company due to generous stock-based compensation agreements ($70 million of which was distributed to these individuals in 2017).
For the next 12 months, the music business will rightly be fixated on Universal Music Group: who buys into the company, how much they pay and what agenda they bring to the table. After that, though, all bets are off. With tens of billions of dollars to be made, the global record business could be on the verge of getting turned upside down and inside out.
Tim Ingham is the founder and publisher of Music Business Worldwide, which has serviced the global industry with news, analysis and jobs since 2015. He writes a weekly column for “Rolling Stone.”