TCEHY Tencent Holdings Ltd (PK)

By Shan Li and Mauro Orrù 

Tencent Holdings Ltd. is buying a 10% stake in the music giant behind Ariana Grande, Drake and Billie Eilish for EUR3 billion ($3.36 billion) in a deal that bolsters the Chinese internet giant's growing presence in the record industry.

The company said Tuesday it was leading a consortium that has agreed to acquire a stake in Universal Music Group from Vivendi SA, valuing the world's largest music company at EUR30 billion. The investment also gives Tencent the option to double its stake in the Los Angeles-based company.

The deal hands Tencent exposure to some of the biggest names in music -- Universal's stable also includes classic acts like Queen and the Beatles -- and will strengthen the tech company's dominance of the growing Chinese market.

The agreement, after months of talks, comes as the music industry turns a page on an era of technology disruption that once bedeviled it. The valuation of Universal -- the largest of the three major music companies, with more than 38% market share in the U.S. -- highlights the degree to which the industry's fortunes have rebounded in recent years. Universal paid around $1.9 billion for rival EMI's recorded-music assets in 2012, a price that exceeded some expectations, after online piracy had devastated recorded-music sales globally.

The rise of streaming services such as Spotify Technology SA and Apple Inc.'s Apple Music has since helped reverse the fortunes of the major record companies, which also include Warner Music Group Corp. and Sony Corp.'s Sony Music Entertainment, whose combined revenues have grown annually since 2014. However, sales remain below the peak they hit in 2000, when CD sales crested.

China has been a particular bright spot, with consumers quickly adopting to streaming and showing a willingness to pay for such services. Tencent Music Entertainment Group, the tech giant's streaming business, went public in the U.S. in December 2018 in one that year's highest profile listings. It is China's largest music-streaming company and operates several popular apps, including QQ Music and an online karaoke platform.

Tencent said a separate deal would follow soon allowing its streaming business to buy a minority stake in Universal's Chinese operations.

Beyond China, Tencent is trying to defend its music-streaming business from the rising threat of blockbuster short-video app TikTok, which has increasing influence over the music industry by turning little-known musicians into viral sensations, said Shawn Yang, managing director of research firm Blue Lotus Capital Advisors. "Old Town Road," by rapper Lil Nas X, became a global hit after it caught on among TikTok users.

Bytedance Inc.-owned TikTok and its Chinese version, Douyin, allow users to add snippets of music to their videos -- a process that depends on licenses from Universal and other major music companies.

"Tencent Music is more and more challenged by TikTok," he said, adding that such video services were growing in importance as a distribution platform for music.

For Vivendi, the stake sale allows the French company to cash in on a resurgent music industry and enables Universal to further develop in Asia.

Universal has become a bright spot for Vivendi, which also said Tuesday it was in talks with other investors about selling an additional minority stake in its music arm at a price that "would at least be identical."

Details of the negotiations with Tencent emerged in August, a year after Vivendi said it would embark on a search for strategic buyers to sell up to 50% of its music subsidiary.

The purchase by the Tencent-led consortium, which includes Tencent Music and other undisclosed investors, is expected to close by the end of the first half of 2020, subject to regulatory approvals. Given trade tensions between the U.S. and China, the transaction could face added scrutiny, although analysts expect the deal to ultimately prevail because the deal only involves a minority stake and doesn't involve innovative technology or sensitive user data.

Write to Shan Li at shan.li@wsj.com

(END) Dow Jones Newswires

December 31, 2019 10:47 ET (15:47 GMT)

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