Vivendi turns to Tencent to gain Universal foothold in China
US political opposition to Chinese investment in what could be considered a strategic asset could obstruct a deal
Paris/Beijing — Vivendi is in talks to sell up to 20% of Universal Music Group (UMG) to Tencent, valuing its prized asset at about €30bn, in a bid to break into China’s growing but tightly controlled music market.
While at a preliminary stage, the discussions highlight Tencent’s role as gatekeeper to China and the desire of Universal, whose revenues are surging as a result of online streaming, to expand beyond its traditional markets.
French media group Vivendi, controlled by billionaire Vincent Bollore, said that Tencent will first buy 10% of Universal and have an option to buy a further 10%.
Universal is the world’s biggest music label ahead of Sony Music Entertainment and Warner Music, and is home to artists such as Lady Gaga, Taylor Swift, Drake and Kendrick Lamar.
Both groups are also “considering areas of strategic commercial co-operation”, Vivendi said, raising questions about the scope of the talks.
“It is unclear if the stake sale depends on the parallel commercial deal with TME [Tencent Music Entertainment] and what economic transfers this deal involves,” said Jerry Dellis, an analyst at Jefferies.
Dellis also said in a note to clients that US political opposition to Chinese investment in what could be considered a strategic asset could obstruct a deal.
A deal with Tencent would boost Universal’s presence and fit well with the Chinese company’s subsidiary TME, which tends to outbid its local competitors in acquiring music copyrights in mainland China.
After a cash-burning competition to snap up music rights, China’s content regulator demanded in 2018 that music streaming sites share 99% of their rights reserve with each other.
Unlike Western players such as Sweden’s Spotify, Tencent Music generates only a fraction of revenue from music subscription packages, and instead relies heavily on services popular in China such as online karaoke and live streaming.
Universal and Tencent both hold shares in Spotify, the world’s biggest music streaming platform with a market capitalisation of about $27bn, while the Swedish firm is a stakeholder in Tencent Music.
Tencent said at the time of its last earnings that it was adding more music behind a paywall, including popular Taiwanese singer Jay Chou, to raise revenue. But it said it might take time before Chinese users adapt to this relatively new approach.
Vivendi shares surged 7% as analysts welcomed progress on the sale of a stake in Universal and the implied valuation.
“The valuation looks good, and the progress made on the UMG deal is also positive,” said Gregory Moore, fund manager at Keren Finance, which owns Vivendi shares.
Meanwhile Tencent, whose shares closed 1% lower in Hong Kong, after Vivendi’s announcement, declined to comment.
Vivendi CEO Arnaud de Puyfontaine said in July that proceeds of the sale of up to 50% of Universal would be used for bolt-on acquisitions and share buybacks.
The group first said it would sell part of Universal a year ago but had made little progress until announcing in July that it had selected investment banks to start a formal sale, which should be finalised by the start of 2020.
Investment banks have estimated the business is worth€17bn-€44bn.
Vivendi also said that it is continuing the process to sell further minority stakes in Universal to other partners.
Financial firms are being sounded on top of potential industrial partners, a source close the matter said.