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Billionaire investor Bill Ackman's Pershing Square proposed a takeover of Universal Music Group on Tuesday in a $64 billion deal, the latest twist in his nearly five-year quest for the music label giant.
Pershing Square is proposing a cash-and-shares offer through its acquisition vehicle that values Universal Music at around 30.40 euros per share - a 78% premium to the last closing price of 17.10 euros - making the deal worth 55.75 billion euros ($64.31 billion), according to Reuters calculations.
Universal Music Group – the company behind international superstars including Taylor Swift, Billie Eilish and Kendrick Lamar - is expected to move its listing to New York from Amsterdam, paving the way for more investors, including index funds, to own the company and ultimately lead to more robust earnings and a higher valuation.
Universal Music issued a statement, acknowledging it had received the unsolicited and nonbinding proposal from Pershing Square, which the directors will review, together with their advisers.
"The Board of Directors has complete confidence in UMG’s strategy and the leadership of Sir Lucian Grainge and the company's management team," Universal said in a statement, adding it would have no further comment on the proposal until the board of directors completes its review.
For Ackman, one of the world's most voluble investors who cemented his fame and fortune as an activist investor forcefully pushing corporate America to adopt changes, this is a far friendlier approach, investors and industry analysts said.
Even as the music industry is flourishing, Universal Music Group's share price has lagged, something Ackman is pledging to fix with this proposed deal.
Laying out the financial specifics in a conference call on Tuesday, Ackman said the transaction will not hamper the company from continuing to be the dominant player in the industry but that Universal has "never really graduated" from being operated like a private company.
Ackman's letter to Universal Music Group's board carried a mixed tone, at times complimentary of current management led by Grainge, who is chairman and chief executive, and critical of the company's "underutilised balance sheet" and handling of its 2.7 billion-euro investment in Spotify Technology.
Fears of AI disrupting the music industry have played a role in UMG's lacklustre performance. Its share of the music market has been sliding and streaming growth is decelerating, Wells Fargo analysts noted. In March, UMG delayed its plans for a US listing.
Nonetheless, Ackman will need the support of UMG's top shareholders, Bollore Group, which holds an 18.5% stake, and Vivendi, which owns 13.4%, to push through any transaction. China's Tencent is a significant shareholder. French billionaire Vincent Bollore's family controls 80% of UMG's voting rights.
Ackman first flirted with Universal Music Group in 2021 when his Pershing Square Tontine Holdings, a shell corporation created to take a private company public, zeroed in on its target. But Ackman shelved the complex deal in the wake of heavy U.S. regulatory scrutiny. Instead, Pershing Square became one of UMG's biggest investors in 2021, and Ackman sat on its board until last year.
Post-transaction, Ackman said Grainge should remain Universal Music’s chief executive.
Ackman said he and former Hollywood superagent Michael Ovitz met with Grainge over dinner "a couple of weeks ago" to discuss the potential merger.
"Lucian encouraged us to send it in," Ackman said.
Ackman proposed adding new directors, including Ovitz, who shepherded the careers of Madonna and Michael Jackson. Ovitz would become the board chair. Additionally, two representatives from Pershing Square will get seats, he said, not saying yet whether he will be one of the directors.
Shares of UMG, which is listed in Amsterdam, were up 13% on Tuesday, while Bollore Group climbed 5%. Shares in Vivendi were up over 10%.
HOPES U.S. LISTING WILL BOOST UMG AS INDUSTRY FACES UPHEAVAL
Pershing bought a 10% stake in UMG from Vivendi ahead of its 2021 Amsterdam IPO and has since repeatedly pressed for a New York listing, arguing it would boost UMG's share price and liquidity.
It cut its stake to 7.48% last year to trigger a mechanism for the US move. But in March, UMG said market conditions had forced it to delay its plan for a U.S. listing.
Pershing currently has a 4.7% stake, making it UMG's fourth-biggest shareholder.
UMG's shares have lost almost a third of their value since its IPO and currently trade at a long-term multiple of 21.8 times earnings, compared with Spotify's 40 times, according to LSEG data.
Even as global music revenues grow year after year, UMG and other major labels like Sony and Warner Music are scrambling to stay competitive as streaming services from Spotify, Amazon, Apple, and Deezer take an ever greater share.
They are now also contending with disruptions brought on by the expansion of artificial intelligence – from copyright disputes to the advent of song-generating AI tools – that threaten to upend how music is created, consumed and monetised.
One survey last year found a staggering 97% of listeners cannot distinguish between AI-generated and human-composed songs.
NEW ENTITY WOULD BECOME NEVADA CORPORATION
Under Tuesday's proposal, Pershing's SPARC Holdings would merge with UMG and the new entity would become a Nevada corporation listed on the New York Stock Exchange.
The deal could prompt UMG management to leave, the ING analysts said, given that they had wanted a free hand in growing in emerging markets through M&A deals targeting 1 billion euros a year over the next few years.
"This seems a rather direct rebuttal of this strategy," they said.
Pershing Square said that under the transaction, UMG shareholders would receive a total of 9.4 billion euros in cash and 0.77 shares in the new company for every share held in UMG.
The cash portion of the new proposed deal would be funded by Pershing from its SPARC's rights holders, debt, and net proceeds from the company's stake in Spotify, it said.
The transaction would be subject to approval by the UMG and SPARC boards, a two-thirds vote in favour by UMG shareholders in attendance at a meeting and required regulatory approvals, it said, and is expected to close by the end of the year.
ACKMAN NEEDS 'FULL-ON CHARM OFFENSIVE', ANALYST SAYS
The move underscores Ackman's ambition for large deals, said Dan Coatsworth, head of markets at AJ Bell, who said the Pershing founder had long admired Warren Buffett's style of finding good companies going cheap and buying them outright.
But he added that Ackman would need a "full-on charm offensive" to win over major shareholders. Bollore Group did not respond to a request for comment, while Vivendi declined to comment on the proposal.
Tencent Holdings, UMG's third-biggest shareholder, did not respond to a request for comment.
