Why Universal Music Group's Investment From Tencent Is Good News for the Music Business: Analysis

on the last day of 2019, will give Tencent a 10% share of Universal for €3 billion , valuing Universal Music Group at €30 billion . Tencent, a majority owner of streaming company Tencent Music Entertainment, and unnamed "certain global financial investors" have an option to buy an additional 10% at the same valuation.

The message to the music and investor communities is clear: music assets command a premium over their prices just a few years ago. At a reasonable estimate for full year 2019 revenue and EBITDA -- each increasing 20% from 2018 -- the Tencent deal's €30 billion valuation is 26.4 times earnings before interest, taxes, depreciation and amortization. The deal will be completed in the first half of 2020.

The 30 billion euro valuation sets a favorable precedent for future deal-making. Investors might pay a premium for Universal's top global market share in recorded music -- 37% in 2018, according to the IFPI -- and second-largest share of the music publishing business behind Sony/ATV Music Publishing. And the Tencent investment creates a strategic partnership that will give Universal an advantage over its peers in China.

Universal's relatively high 26.4 times EBITDA multiple is influenced by strong growth in global revenues. Previous acquisitions, made when the industry was in decline, were cheap in comparison. Warner was acquired by Access Industries in 2011 at an 8.4 multiple. Two years later, Warner bought Parlophone Records at a 7.5 EBITDA multiple. Private equity firm Terra Firma paid 18.5 times EBITDA for EMI in 2007 -- high at the time for an entire company during a market downturn.

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