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Q3 2021 hedge fund letters, conferences and more
Why Universal Music Group?
For me this is an appealing investment. I like the idea of owning a piece of the music industry.
UMG earns revenue every time their music is played. UMG has predictable recurring revenue that requires almost no capital to grow. There’s zero marginal cost. You can listen to it over and over. A lot of their content is timeless. UMG is a predictable free cash flow generation business.
UMG’s shares offer investors a way to participate as an owner of unique under-monetized, must-have, irreplaceable robust content and has the scale and global customer relationships to leverage it, UMG will greatly benefit from the accelerated consumption of online content in the U.S. and around the world.
In conclusion, UMG is the IP rights holder (content is king) and has many distributors fighting to distribute its content, UMG is in a position to succeed. And unlike other streamers, UMG is not competing for “consumer eyeballs”. It just needs its ears.
Summary
- People want music. That’s not going to change. It’s a need. It’s essential. It’s part of us. It’s how they consume it that’s changing. Streaming is taking over.
- Streaming will continue to grow at a good rate. Consumer spending on music generated an all-time high. This is a huge tailwind.
- Spotify, YouTube Music, Apple Music, Prime and other streamers work from Universal Music. It’s the streamers that bare the cost of attracting subscribers.
- Universal has transfer pricing power. The music streamers’ margin goes to the label. If Spotify raises prices, Universal can raise theirs without losing business.
- Bill Ackman: “if you own UMG, you own a royalty on people listening to music”.
Universal Music Group N.V.
ADR:OTC:UNVGY (1 ADS: 0.5 Ordinary) (Unsponsored ADR Citi’s Depositary Receipt Services, entitled to dividends but no vote)
Euronext Amsterdam:UMG.as
Universal Music Group N.V. is primarily traded on the Euronext Amsterdam under the sticker UMG.
Note: Currency amounts are in Euro € unless mentioned otherwise. USD-EUR 0.89 Price of 1 USD in EUR as of December 21, 2021.
Universal Music Group N.V. (UMG) is a world leader in music entertainment with three main operating businesses: recorded music; music publishing; and merchandising. UMG operates in 60 countries and has a vast catalog of recordings and songs stretching back over a century and comprises the largest. UMG is home to some of the biggest names in music.
Universal Music’s origins date back to 1934 when it became the US branch of UK based Decca Records. In 1962 it merged with MCA. In 1995 Seagram took control of MCA and was renamed Universal Studios with the music division labeled Universal Music Group. In 2000 Vivendi bought Seagram’s entertainment assets. Universal Music and Pictures are not attached anymore. Universal Pictures is owned by Comcast.
UMG has 1.8 billion shares outstanding trading at ~€24. This implies a market cap of ~€43.5 billion ($49b). UMG had revenues of €7.4 billion and €1.487 billion in EBITDA (20% margin) FY2020.
Results for the first nine months of 2021 are on the upside:
Source: UMG Q3-2021 Results
UMG is a new publicly traded company. On September 21, 2021, with more than 99.9% shareholders approval, Vivendi SE (OTCPK:VIVEF) spun-off 60% of the shares it owned. Vivendi retains a 10% stake in UMG for a minimum of two years. It’s worth noting that Vivendi has owned UMG since 2000 through its acquisition of beverage giant Seagram. Below is a table of the main shareholders:
Source: UMG Prospectus Page 2. Concerto and Scherzo are collectively referred to as the Tencent-led Consortium. They own 20%.
Netherlands won out because it “has been one of UMG’s historical homes,” even though the business is based in the U.S. Another attraction might be that Dutch corporate governance laws offer strong protections against takeovers.
Thesis
I will explain the thesis with two stories.
The first story is my own personal experience buying music. I bought my first CD when I was a teenager. It cost me $28 back in 1996. That’s $49.36 in today’s money! Even though the CD had 12 songs, I bought it for only one song. So I paid $49 in today’s money for one song. Then I bought my 2nd CD, a double album so I could listen to one song for $44. I don’t even want to break down the math inflation because it’s insulting to my intelligence. For the reader that’s pondering moving on because of my teenage stupidity, be reassured that I haven’t bought a CD in over twenty years. But that’s what people did back then. It was also the period where the music industry was at its most profitable. It was a terrible proposition for the consumer and a great one for the music industry.
Then Napster happened. Illegal music sharing software hit the music business hard, really hard. It was game over for the music industry. The gravy train was gone. Consumers were rebelling. What followed was 20-years of decline in CD sales.
Then streaming happened.
Source: IFPI Global Music Report 2021
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Article by Brian Langis
