How a Universal LBO could hit the right notes
BREAKINGVIEWS-How a Universal LBO could hit the right notes The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Jennifer Johnson
LONDON, Oct 30 (Reuters Breakingviews) - The music industry has had a noisy 21st century. First came Napster and digital downloads. Now it's artificial intelligence. Shares in €32 billion Universal Music UMG.AS, the world’s largest label group, trade below the level at which they debuted in 2021, even after an earnings-driven bump on Friday. The company spoke to buyout shops including TPG and Blackstone about a potential take-private, Bloomberg reported, citing people familiar with the matter. Any transaction would be complex, given the influence of Vincent Bolloré and his Vivendi conglomerate, but also potentially rewarding.
Music-label buyouts evoke memories of Terra Firma’s disastrous £3.2 billion 2007 EMI purchase. The deal came with unsustainable debt amid falling sales. Lender Citigroup took control after four years. Since then, buyout shops have instead favoured direct ownership of song catalogues, which promise steady and transparent cash flows thanks to streaming.
Universal, home to ABBA and The Beatles, has catalogues aplenty. But unlike pure intellectual property owners, including Blackstone’s Recognition Music, labels must invest in new talent. This can lead to volatile cash flows, which is not ideal for buyout barons or lenders. Also concerning is the prospect of losing streaming share to AI-generated songs.
Still, that fear at least seems premature. According to data provider Luminate, the most popular AI track in the first half of this year placed at 282 in its global cross-platform ranking, far below real artists. In short, there's no evidence so far of AI tanking labels' revenue or taking a meaningful share of the streaming market. Compare that with the level of technological disruption present in 2007, when EMI said that physical revenue, mostly CDs at the time, was down 20% on a constant currency basis.
If human-made songs hold their appeal, a buyout may be tuneful. Assume that Vivendi, Bolloré and other major shareholders like Tencent and GIC keep their stakes. That would leave 52% of the shares to buy. At a 25% acquisition premium to Friday's mid-morning price, that's a €21 billion outlay. The implied enterprise value of €45 billion is 15.8 times 2026 EBITDA.
Universal itself could fund much of the purchase by taking leverage up to, say, 6 times 2026 EBITDA, raising an incremental €13 billion to buy out minorities. Buyout barons could then chip in €8 billion, granting them a 30% stake in the company.
Next, assume 7% annual revenue growth, in line with analysts' forecasts for this year and next. Also assume that EBITDA margins rise slightly to 23% over time, as analysts expect. By 2031, the company's enterprise value would be €68 billion, using the same 15.8 times multiple. If all free cash flow over the five-year period went to paying down debt, the equity would be worth €60 billion, meaning that the buyout barons' stake would have more than doubled to €18 billion. The annualised return, 17%, could be much higher if Universal's growth accelerates in private hands.
The question is whether Bolloré would want any of this. His clan thwarted Bill Ackman’s attempt at a deal earlier this year. The Frenchman is usually in the driving seat. That suggests a stark conclusion: the biggest risk to a Universal buyout isn't EMI-style financial hubris, or even technological disruption, but the mood of a famously opinionated billionaire.
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CONTEXT NEWS
Universal Music held preliminary discussions with private equity firms earlier this year about going private, Bloomberg News reported on October 26, citing people familiar with the matter.
The firms included Apollo Global Management, TPG and Blackstone, according to the report. Talks have not progressed and Universal has not started a sale process, the report said.
Universal's board in May unanimously rejected an unsolicited takeover proposal from Bill Ackman's Pershing Square Capital Management.
Universal on October 29 reported a pickup in subscription streaming revenue growth for the third quarter of 2026, and said that pressure on its market share has moderated from the first half of the year. Its shares were up roughly 12% as of 0827 GMT on October 30.
(Editing by Liam Proud; Production by Oliver Taslic)
((For previous columns by the author, Reuters customers can click on JOHNSON/Jennifer.Johnson@thomsonreuters.com))