Common Music: how a lot is the world’s greatest label price?

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When Vivendi rejected an $8.5bn provide from SoftBank to purchase Common Music Group in 2013, business analysts and executives had been baffled. 

The French group turned down a value that was $2bn to $3bn greater than analysts’ valuations of Common. Hammered by piracy introduced on by the arrival of the web, music revenues had shrunk yearly for greater than a decade — and no turnround was in sight. 

Eight years later, the contrarian wager by Vivendi and its controlling shareholder, French billionaire Vincent Bolloré, seems to be sensible. 

On Tuesday, the group will spin out 60 per cent of Common, itemizing it on the Euronext Amsterdam alternate. The prospectus provides Common an indicative valuation of €33bn, however analysts imagine it’s price far more — JPMorgan places it at €54bn.

Every Vivendi shareholder will get one share of the newly unbiased firm. Bolloré Group will personal 18 per cent and Vivendi will maintain 10 per cent.

There are not any official lock-ups for the main shareholders, however Vivendi has dedicated to not promote any shares for 2 years and analysts anticipate a interval of stability.

Column chart showing global recorded music revenues ($bn)

The music business has staged a dramatic comeback since streaming companies started funnelling billions of {dollars} to its greatest firms — Common Music, Sony Music and Warner Music — who maintain the copyrights to a lot of the world’s songs.

Their homeowners have taken discover. Leonard Blavatnik, Warner Music’s billionaire controlling shareholder, took the third-largest music firm public final 12 months. His web price jumped by $7.5bn on the first day of trading, Bloomberg has estimated. 

Bolloré and Vivendi have additionally been cashing in. Vivendi has offered a 3rd of Common since 2019 for about €9bn, first promoting 20 per cent to a Tencent-led consortium at a €30bn valuation in 2019 and 2020 then promoting a 10 per cent stake to Invoice Ackman’s hedge fund Pershing Sq. at a €35bn valuation in 2021. 

The offers have additionally reworked the wealth of Lucian Grainge, Common’s chief govt. He acquired €17m for negotiating the Tencent deal and is because of get a $150m bonus for the itemizing. 

The case for these offers is clear. Recorded music gross sales, which bottomed out at $14bn in 2014, have accelerated to hit $21bn in 2020, in keeping with the Worldwide Federation of the Phonographic Business (IFPI) information. Streaming makes up most of that income, rising to $13.4bn in 2020, up 20 per cent 12 months on 12 months.

International gross sales are nonetheless beneath their 1999 peak, however buyers are beginning to overlook the Napster and iTunes period when piracy was rampant and CD gross sales slumped. 

Nonetheless, the valuations of the three dominant label teams had not likely been repriced to match this development. Common and Sony Music had been lodged inside bigger French and Japanese conglomerates, whereas Warner Music had been privately managed by Blavatnik’s Entry Industries. Buyers couldn’t simply wager on music’s renaissance.

Spotify’s stock market listing in 2018 modified that, however the Swedish firm sells subscriptions to music — not the music itself. Public choices from two of the large three label teams present a clearer sense of how far the business has come.

“No huge grasp recording catalogue has modified palms [since EMI in 2012],” stated one senior music govt. “There hasn’t been an opportunity to reset worth primarily based on the place streaming has taken it.”

Buyers dance because the music performs on

Wall Avenue analysts are salivating over Common. JPMorgan referred to as the corporate “a unprecedented asset”, predicting that its €54bn valuation “will show conservative”. UBS famous Common’s “irreplaceable” catalogue, valuing it at €45bn. Financial institution of America has valued Common at €50bn — a 30 per cent premium to Warner Music.

The euphoria relies on a easy premise: as extra folks pay for streaming on apps comparable to Spotify, the worth of music rights will develop. And Common is the world’s largest proprietor of music rights.

The California-based group managed 36 per cent of the recorded music market in 2020, in keeping with the IFPI. Its roster consists of The Beatles, Kendrick Lamar, Taylor Swift and Olivia Rodrigo. All of final 12 months’s high 10 promoting artists had been signed to Common.

Taylor Swift performs at the 2019 American Music Awards in Los Angeles
Common is the world’s largest proprietor of music rights, with artists comparable to Taylor Swift © Chris Pizzello/Invision/AP

Document labels now earn money primarily by gathering royalties from tech firms. Spotify and Apple Music pay out greater than two-thirds of each greenback earned to music rights holders. In recent times, Common has additionally struck offers with social media apps comparable to TikTok and Fb in addition to health teams comparable to Peloton, which pay to make use of songs on their platforms. 

This mannequin is extra worthwhile than the CD period as a result of Common not has to spend cash on bodily distribution. Revenue margins climbed from 16 per cent in 2018 to twenty per cent in 2020. It has forecast annual income development within the “excessive single digits” and earnings earlier than curiosity, tax, depreciation and amortisation margins within the “mid-twenties” within the coming years.

Music executives additionally argue that streaming makes their revenues extra predictable and fewer depending on scoring hit albums. 

“Music is now a utility . . . everybody’s completely happy to pay their $10 a month,” stated Merck Mercuriadis, head of the acquisitive Hipgnosis Songs Fund that has devoured up music catalogues lately at frothy costs. “I feel Common will find yourself being a $100bn firm in a really, very quick order,” he added.

Nonetheless, per-capita music spending stays beneath its peak within the US, in keeping with JPMorgan. In 1999, recorded music income per capita was $81 on an inflation-adjusted foundation, effectively above the $37 spent final 12 months.

Virtually half of Common’s recorded music income comes from music that’s lower than three years outdated, which means that it should proceed investing to find new expertise. 

Common’s income jumped from €6bn in 2018 to €7.4bn in 2020. Nonetheless, it additionally spent €2.5bn on catalogue acquisitions and artist advances through the 12 months, together with re-signing stars comparable to Taylor Swift and paying greater than $300m to purchase Bob Dylan’s songwriting catalogue.

Will the streaming dream bitter?

The large query is: why the race to listing now? Sceptics say these offers are an admission that valuations are at their peak and music homeowners hope to money in earlier than investor enthusiasm putters out.

Man Fingers, the personal fairness govt behind a disastrous buyout of EMI within the late 2000s, praises Common’s turnround however provides: “I can’t imagine anyone may have anticipated the costs to get to the extent of immediately. Anybody wise will surely cut back their publicity.” 

Some analysts warn of dangers to Common’s future development as rising markets grow to be larger drivers of the streaming market. 

With extra established streaming markets comparable to Sweden reaching saturation, music firms want to India, China and different populous, low- and middle-income nations so as to add new subscriptions. China is the world’s seventh-largest music market by income, however analysts forecast that it’s going to crack the highest 5 and maybe finally the highest three. Nonetheless, subscribers pay far much less to stream in these areas, dragging down the common income earned per person. 

These markets are centred round native acts. Common has been investing in creating expertise to wade in, striking joint ventures in China with Tencent, for instance. Nonetheless, “betting on China is a dicey proposition”, warned Invoice Werde, the previous Billboard journal editor who now directs a music programme at Syracuse College.

“The whole thing of what’s being offered to potential buyers within the music business proper now could be the idea within the world way forward for streaming music,” he stated. “That’s not solely mistaken however it’s additionally extra fraught than most individuals perceive.”

There may be additionally a nagging worry that the web will spur extra artists to bypass document firms. The share of Spotify streams captured by the dominant labels and Merlin, a bunch representing indie labels, has been declining, from 87 per cent in 2017 to 78 per cent in 2020. 

For now, Wall Avenue has dismissed this concern. “Whereas a small group of high artists could doubtlessly bypass music firms by going direct to the buyer, doing so at scale and on a long-lasting foundation stays a frightening train,” stated Société Générale analysts. 

When requested by the Monetary Occasions whether or not the music market had reached a peak on this cycle, Grainge unsurprisingly dismissed the notion. The corporate was making a living from new sources, he argued, comparable to video gaming, health apps and social media firms.

“I’ve been by way of two recessions and two downturns. I do know what can go mistaken,” he stated. “We’re simply opening up new areas of monetisation that we couldn’t even predict earlier than.”

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