The Time Is Right for a Universal Music Deal

The first half of 2019 may end up marking the peak of the party in the music industry. French media conglomerate

Vivendi

needs to sell a stake in Universal Music Group, the world’s top music company, while everyone is still having such fun.

Santa Monica-based UMG grew revenue by 18.6% in the first half compared with the same period of 2018, excluding currency gains, Vivendi reported after the market close in Paris on Thursday. Streaming revenue grew by 25.5%, but the real surprise was that physical music sales—a segment long in decline—were up by 15%. On a call with analysts Vivendi called out the soundtrack to the Lady Gaga and Bradley Cooper movie “A Star Is Born” as well as album sales by Queen and releases by the Japanese band King & Prince. Vivendi shares rose 6% Friday.

But this isn’t the start of a new golden age for the CD. Physical album sales can be lumpy, depending on releases. The fashion for vinyl records is real, but the market is still small. Vivendi said it still sees declining physical sales as the “normal trend.”

Meanwhile, streaming is slowing. Last year UMG’s revenue from platforms like Spotify and Apple Music rose by a thumping 37.3%. In the U.S., the number of songs streamed increased by 72.5 billion in the first half, according to a midyear report by data provider Nielsen, compared with an increase of 76.6 billion a year earlier.

Lady Gaga and Bradley Cooper perform ‘Shallow’ from ‘A Star Is Born’ at the 91st Academy Awards in February.


Photo:

mike blake/Reuters

Vivendi—which also owns a mixed bag of other companies including a French cable network and ad agencies—said a year ago that it would sell as much as 50% of UMG, but is taking its time. It gave little detail of discussions with potential partners alongside its half-year results, but said that it expects to announce a deal within six months. It has talked with Tencent, China’s music-streaming leader, according to Bloomberg.

One problem seems to be Vivendi’s aggressive price expectations—sell-side valuation estimates for UMG start at roughly $20 billion—even though the owner doesn’t want to give up control. Vivendi expects a minimum valuation of $25 billion-$30 billion, according to Bloomberg. The first-half results could help reassure bidders.

Another barrier to a deal could be continuing contract negotiations with streaming giant Spotify, whose growth has led the industry’s revival. But the status quo, whereby virtually all the industry’s profits are taken by rights owners like UMG and its artists rather than innovative distributors like Spotify, doesn’t seem likely to change any time soon—however unfair.

This is because UMG always has the nuclear option of withdrawing its catalog from Spotify, which puts the platform in a weak negotiating position. The reminder that streaming revenue is slowing and CDs aren’t yet dead won’t have strengthened Spotify’s hand, either. Even Spotify bulls such as Benjamin Swinburne, an analyst at Morgan Stanley, don’t expect this year’s negotiations to change the company’s cut of industry revenues.

First-half results have reinforced UMG’s reputation as the most attractive asset in a booming industry. The rest of the year may not be so easy. Vivendi should press its advantage.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

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