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.

Chinese consumers have quickly adopted to streaming-music services, showing a willingness to pay for the likes of Spotify Technology SA. Tencent Music Entertainment Group, the tech giant's streaming business, went public in December 2018 in one of the biggest U.S. listings in recent years.

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.

Tencent will likely try to influence future licensing negotiations between Universal and TikTok owner Bytedance Inc., Mr. Yang said. 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.

The music industry is turning the page on an era of technological disruption that once bedeviled it. Universal, along with rivals such as Warner Music Group Corp. and Sony Corp.'s Sony Music Entertainment, now benefits from streaming services like Spotify and Apple Inc.'s Apple Music, which have emerged as revenue growth drivers.

Against that backdrop, 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 consortium, which also includes the Chinese company's streaming arm 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 it 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 07:06 ET (12:06 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.