Universal Music Group’s Q1 results show continued strength in streaming revenue at the major – but it was the announcement on plans for a potential IPO that could have huge ramifications for the music industry.
The major has moved closer to an IPO or possible sale of a stake to a third party following the approval of a management plan for UMG by the board of parent company Vivendi.
“Vivendi's Supervisory Board approved the Management Board's proposal notably to examine and carry out the necessary preliminary legal operations required for a potential change in the Universal Music Group’s shareholding structure,” Vivendi said in its financial statement. “Thereafter, the Management Board will present the various options for such an evolution.”
Vivendi CEO Arnaud de Puyfontaine said on the earnings call that it was “agnostic” over how UMG is spun off.
“We will have a very open mind as regards the different available options,” he said, adding that no timeline had been made for the process.
The three main options include a partial IPO, sale of a stake in UMG to a third party or taking on a partner - but the valuation will be key. Last year it went as high as $40 billion (£29.59bn).
"There is no crystal ball," said de Puyfontaine. "The spread as regards to the valuation is a huge spread."
Noting the opening IPO valuation of Spotify at $26.5 bn (£19.61bn), CFO Hervé Philippe said: "When you see the valuation of Spotify in the market, it's interesting to see it and we do believe that the value of UMG is largely above that."
While any IPO process could be long and complicated (de Puyfontaine described its "elaborate" international structure), a highly profitable UMG could ultimately have a valuation that’s higher than Vivendi’s. The valuation of Spotify shows the potential appetite for investors in the music industry as it returns to growth.
De Puyfontaine said UMG had been a “fantastic partner of Spotify from the very beginning - it's been a journey where there is common interest to be able to be part of this new era for the music industry”.
“We have taken the decision to be able to remain a shareholder of Spotify because we think there is potential in the future,” he added. “As a strategic partner, it is very important to walk the talk. So we have no other intention at this stage than to remain a Spotify shareholder.”
As a strategic partner, it is very important to walk the talk. So we have no other intention at this stage than to remain a Spotify shareholder
Arnaud de Puyfontaine
The streaming boom at UMG shows no sign of tailing off based on the latest figures from Vivendi.
“The user growth recently reported by the major streaming platforms continues to support the strong increase in Universal Music Group’s subscription and streaming revenues,” said the company.
The Facebook deal also contributed to revenue growth in Q1.
For the first quarter of 2018, revenues amounted to €1.222bn (£1.067bn), up 4.5% at constant currency compared to the previous year. Recorded music revenues were up 5.9% at constant currency to €980m (£855.4m) as growth in subscription and streaming revenues of 31.5% to €557m (£486.1m) more than offset the decline in physical (down 26.2%) and download sales (down 25.6%).
Physical sales, which totalled €155m (£135.3m), suffered in comparison with Q1 2017 when La La Land, Fifty Shades Darker and Moana performed particularly well.
Big sellers for the first quarter of 2018 included the Black Panther soundtrack, the Migos album and carryover sales from Post Malone, Imagine Dragons and Kendrick Lamar.
Music publishing revenues grew by 3.9% at constant currency to reach €208m (£181.5m), thanks to increased subscription and streaming revenues. Merchandising and other revenues declined by 18.7% at constant currency.
UMG has also reported revenues for the year up to April 2018 of €1.657bn (£1.446bn), up 7.2% at constant currency compared to the same four-month period in 2017.
To read Music Week's comprehensive guide to what an IPO would mean for Universal and the rest of the music industry, click here.