TCEHY Tencent Holdings Ltd (PK)

By Shan Li and Anthony Shevlin 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 7, 2019).

BEIJING -- Tencent Holdings Ltd. is negotiating to buy 10% of Universal Music Group, the world's largest music company, from Vivendi SA for about EUR3 billion ($3.36 billion) -- a deal that would strengthen the Chinese internet giant's growing clout in the global record industry.

The investment, if consummated, also gives Tencent an option to double its stake. A deal would give it a seat at one of the world's music giants. Los Angeles-based Universal has signed blockbuster artists like Ariana Grande, Drake and Billie Eilish. Its stable also includes classic acts like Queen and the Beatles.

It would also tighten Tencent's dominance of the music industry in China, where consumers have quickly adopted streaming platforms and shown increasing willingness to pay for music.

Tencent Music Entertainment Group, the tech giant's music-streaming business, went public in December in one of the biggest U.S.-listed debuts in recent years. Tencent Music operates several popular apps, including QQ Music and an online karaoke platform.

Tencent wants to be seen as "the leading music platform in China," said Shawn Yang, managing director of research firm Blue Lotus Capital Advisors.

Vivendi last year said it was considering selling up to 50% of Universal, but ruled out an initial public offering, seeking to cash in on a resurgent music industry. The talks with Tencent represent a less ambitious step -- at least initially. The potential deal values all of Universal at EUR30 billion.

Under the terms of the deal, announced Tuesday by the French media company, the Chinese internet giant would have a one-year option to acquire an additional 10% stake in Universal at the same terms.

"Vivendi is eager to explore enhanced cooperation which could help UMG capture growth opportunities offered by the digitization and the opening of new markets," the company said. It added that it hoped the deal would improve the promotion of Universal's artists.

Vivendi's investors welcomed the move, with shares up 7% in trading in Paris, despite analysts at Citi saying the valuation was below their expectations.

"While there is no doubt the implied equity value is above what is currently implied by the market price -- around EUR25 billion -- it is also below the top end of the range," Citi said. It added that bulls were expecting a valuation between EUR30 billion and EUR40 billion.

As for Tencent, Citi said having a stake in one of the three big music labels will offer it strategic insights on how the industry could develop.

Aside from boosting Tencent's position in China's online music world, a stake in Universal helps the Chinese company block rival Bytedance Inc. from music licensing deals, some analysts said.

Bytedance's wildly popular short video apps TikTok and Douyin have challenged Tencent's dominant social networking app WeChat for advertising revenue and user time. TikTok and Douyin allow users to add snippets of music to their videos -- a process that depends on licenses from Universal and other major music companies.

"If there is anything that can create pressure on TikTok, it's music," said Blue Lotus's Mr. Yang. "It still relies heavily on music copyright."

Tencent has amassed stakes in hundreds of companies in recent years, from fresh startups to publicly listed technology firms. The company has taken high-profile stakes in overseas companies including Spotify Technology SA, Tesla and Epic Games, creator of the hit videogame "Fortnite." In 2016, Tencent and its partners paid $8.6 billion for a majority stake in Supercell Oy, the Finnish game maker behind "Clash of Clans."

But the company has reined in its overseas deal-making this year as economic growth has slowed at home and potential investments face greater regulatory scrutiny in the U.S. amid escalating trade tensions, analysts said.

The transaction is subject to due diligence and Vivendi said it plans to continue seeking other potential buyers for an additional minority stake in Universal.

Tencent's interest in Universal shows how the music industry is turning the page on an era of technological disruption that once bedeviled it.

Universal now benefits from subscription-based streaming services like Spotify and Apple Inc.'s Apple Music, which have emerged as revenue growth drivers. Their growth is outpacing declines in physical music sales and digital downloads.

Universal 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. Last year, Spotify sold shares to the public via direct listing in April that illustrated a rekindling of investor interest in the music business

Against this backdrop, Universal has become a bright spot for Vivendi. The company last month said its first-half net profit more than tripled, boosted by the growth of its music business.

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

(END) Dow Jones Newswires

August 07, 2019 02:47 ET (06:47 GMT)

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