Streaming Services Are Music to Vivendi's Ears

By Nick Kostov Features Dow Jones Newswires

A resurgent music industry, fueled by the rise of streaming services, is tempting the parent company of Universal Music Group to cash in on the music company with an initial public offering.

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In an interview, Vivendi SA Chief Executive Arnaud de Puyfontaine said the French media conglomerate could float a minority stake in the music company, departing from the company's longstanding opposition to selling any part of the California-based music company.

"This is not a sacred cow," Mr. de Puyfontaine said, adding the firm has no imminent plans to carry out the IPO.

Vivendi's flirtation with a Universal IPO shows how the music industry has begun to turn the corner on nearly two decades of decline. Record labels that once suffered steep losses on CD and unit sales are now growing again as Spotify and other services pay license fees for the rights to stream songs from their libraries.

"I remember the people a few years ago who explained to us that music was a dying business and would never recover," Mr. de Puyfontaine said. "I have a good memory, and facts are proving them wrong."

Universal Music has been a bright spot for Vivendi as subscription-based streaming has emerged as a possible business model for the music industry, with growth outpacing declines in physical music sales and digital downloads. Universal Music and its rivals -- Warner Music Group Corp and Sony Corp.'s Sony Music Entertainment -- rake in royalty payments whenever listeners access their songs through the streaming services.

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In 2016, the industry's global revenue from recorded music grew 6% to $15.7 billion, the single largest year-over-year gain since the International Federation of the Phonographic Industry started tracking the market in 1997. The rise owed largely to a 60% increase in streaming revenue, which now amounts to $3.9 billion.

While label executives are relieved to see industry revenues rise they also recognize that a single year of robust growth is hardly a guarantee that their fortunes have reversed.

Among other issues, neither Spotify nor its rivals has ever reported a profit. To change that, those services may need to lower the royalty rates they pay music companies like Universal.

The nascent recovery "does not erase 15 years of declines, or continuing uncertainty about the future," Cary Sherman, CEO of the music industry's U.S. trade group, wrote in a blog post earlier this year.

Mr. de Puyfontaine, however, said that Vivendi's stock may be undervalued in part because it doesn't reflect the true value of the music unit. Some investment banks pitching the idea of a float value the unit at up to EUR20 billion, Vivendi General Counsel Frederic Crepin told shareholders last month. Analysts value the unit at closer to EUR13 billion.

Vivendi has undergone a deep transformation in the past three years but Mr. de Puyfontaine and Vincent Bolloré, Vivendi's chairman and main shareholder, have yet to convince investors that the company has promising growth prospects. Two years ago, Vivendi ignored calls from an activist shareholder to unlock value by selling some or all Universal..

Investors also say that floating a stake in Universal Music Group could complicate Vivendi's attempts to find synergies between its music, film and television and videogame assets. It could become a distraction, adding a regulatory burden and increasing the time that Lucian Grainge, Universal Music Group's CEO, would have to spend on Wall Street investors. Mr. Bolloré met with Mr. Grainge in California last week but didn't discuss a possible IPO, according to people familiar with the matter.

A Universal spokesman declined to comment.

"It can make some sense to increase the value of its shares, but it makes no sense in terms of its global strategy," said an analyst for one of Vivendi's top investors. "It would be something just to tell the analysts : 'Look, my share price is undervalued.'"

Vivendi's shares have risen about 3.7% since Mr. Bolloré became chairman three years ago, and investors and bankers say they are still skeptical about how Vivendi's strategy to build a media giant focused on Southern Europe will pan out. By comparison, France's blue chip index is up 18% over the period and the index tracking European media stocks has gained 15%. That's despite Vivendi giving back EUR8 billion in cash to shareholders through special dividends and share buybacks.

But Mr. de Puyfontaine is unfazed. He stressed that Vivendi has an edge on competition because of its combination of owning content, building partnerships with telecom companies to distribute that content, and having data on how its customers consume that content.

"We are proving day after day that our businesses are working together, and that they are creating much greater value for Vivendi than the sum of our parts," Mr. de Puyfontaine said.

Ethan Smith contributed to this article in Los Angeles.

Write to Nick Kostov at Nick.Kostov@wsj.com

(END) Dow Jones Newswires

May 22, 2017 15:26 ET (19:26 GMT)