HITS Daily Double


Bill Ackman called Universal Music Group “the perfect business” in a dog-and-pony show for investors that spelled out the rationale behind his Pershing Square hedge fund's shelling out of $4b for a 10% share—184.8m shares—in the music company.

Impressed by Sir Lucian Grainge and his management team, UMG’s dominance in the industry and the entrepreneurial nature of the company’s individual labels, Ackman initially proposed purchasing 17.5% of UMG but was limited to 10% due to tax laws. Pershing Square paid 22-times EBITDA for its chunk of the company, which will be going public in mid-September on the Euronext Amsterdam stock exchange.

“We look forward to owning more,” Ackman said, noting that Pershing Square’s goal is to always be a minority shareholder of any company it invests in. "It's one of the great businesses in the world."

Talks between UMG parent Vivendi and Pershing Square began in November. Pershing Square stockholders will be receiving their shares in the new UMG around Thanksgiving. Ackman expects that there will be a strong shareholder push to set up a dual listing in the U.S. on either the NYSE or Nasdaq.

Once it had a handle on how the music business operated, Pershing Square saw that UMG “requires almost no capital to grow at a high rate,” making it attractive on multiple levels. Investors saw it as undervalued as the “only uncontrolled, pure-play, music-streaming content company” and they may well be correct: In the last two weeks, two analysts have pegged UMG’s value at €50b and €47b.

The spin-off is expected to go smoothly thanks to the lack of poison pills and no stock options to pay out to management or employees as all current bonuses are handled in cash. (Ackman anticipates that will change once UMG is a stand-alone company).

Impressed by the growth in the streaming marketplace between 2015 and 2020, the Pershing Square team likened the music industry’s transition as similar to the computer industry’s shift to software. In this case, the growth will be driven by smartphone users who pay for subscription streaming services; their prediction is that 67% of smartphone users will be paying for music-streaming services by 2030, up from 34% in 2020.

By that time, streaming will account for 90% of UMG’s revenue, which will result in lower costs and higher margins. The value of UMG will hold steady for DSPs as no streaming company can exist without the 70% of the music that the three majors control.

Ackman, who said his first music purchase was an album by Sting and whose grandfather wrote some songs that are in UMPG’s catalog, said the investment went beyond just making money and was “ownership of artistry.” He speculated that Vivendi stayed at the bargaining table with Pershing Square due to its “unique collection of shareholders... institutions with a track record of long-term investing and an appetite for buying more shares.”

UMG will have a new, independent, 10-member board with Grainge, a second UMG executive and eight non-executives on or before 9/27. Unable to predict whether his team will get a seat, Ackman said there will be “engagement’ with management, helping them deal with shareholders; he says they will not take on an activist role.

As for what the deal does for Pershing Square, Ackman said, “It’s one big advertising sign for whatever we do next.”

As the conference call passed the two-hour mark, Ackman and his team got into the math behind the deal, their RemainCo and SPARC, their opt-in SPAC... at which point anyone with a record collection tuned them out.