Universal Music Group head Lucian Grainge. Photo Credit: UMG
Pershing Square’s proposed $64 billion Universal Music Group (UMG) takeover deal is officially out in the open – but will the gigantic transaction wrap? The multibillion-dollar question is now taking center stage and prompting discussions about what the “New UMG” would look like.
We broke down that floated $64 billion deal in detail this morning. But to recap, the longtime share-price critic Pershing is seeking to reincorporate Universal Music in Nevada, list the major label on the New York Stock Exchange, and slice the company’s outstanding shares by about 17% to 1.54 billion.
Existing investors would have the option of trading each of their shares for, among different things, €5.05 (currently $5.85) and 0.77 shares in the New UMG, which, between the float reduction and a SPAC investment, would see Pershing up its stake to 11.7% overall.
But will investors (two-thirds of whom must approve the scheme), UMG’s management, and the board go for the proposal? Time will tell, but we aren’t without some valuable insights from Pershing, which held a related 75-minute conference call this morning.
In the first place, Pershing acknowledged a goal of facilitating investor communications with the public announcement. Put differently, talks with shareholders seem to be in their early stages.
“This is a company with a concentrated shareholder base,” Pershing Square CEO Bill Ackman said. “Bolloré Group controls 28% of the business. The transaction here requires a two-thirds vote of shareholders… Without Bolloré we don’t have a transaction.
“My first phone call yesterday was to Bolloré. And to just share with them a high-level summary of the transaction. And the words I got back were ‘these are music to my ears.’ And with that, we decided to go forward and launch this presentation,” he continued.
And while it remains to be seen where conversations with other stakeholders (chief among them Tencent) will go, in general, Ackman struck an optimistic tone about the possibility of securing the investor support needed to finalize the deal.
At least in theory, Pershing’s emphasis on renewed share-price growth – and its reminder that “UMG’s share price is down 39% from its peak two years ago” despite the business’s revenue improvement – will resonate with shareholders. Out of the gate, UMG stock (UMG on the Euronext Amsterdam) turned in a double-digit spike.
“In general,” Ackman added when pledging enhanced investor transparency from the New UMG, “we hear from shareholders that they just find the business hard to understand. Have difficulty getting their questions answered. They’re surprised almost every quarter with puts and takes in the earnings.”
On the board-approval side: Pershing hasn’t been shy about its desire to add three board members, including CAA co-founder Michael Ovitz as well as two reps.
Of course, this intention won’t be lost on UMG’s existing board, which, as noted, must sign off on the deal. And said board includes UMG CEO Lucian Grainge, with whom Ackman and CAA’s Ovitz had dinner “a couple weeks ago.”
“[W]e presented the idea of this potential transaction without really getting into details about a specific proposal,” Ackman recounted. “Lucian encouraged us to send it in, and [he said] it’s something the company’s going to take a hard look at. But I don’t want to speak for management or the existing board.”
Interestingly, Ackman also mentioned restructuring Grainge’s “much too complicated” contract. To state the obvious, having the exec’s support would be significant for Pershing – though we’ll have to see where the cards fall.
A couple closing notes: Pershing’s proposal doesn’t begin and end with UMG’s reincorporation. Rather, the move would compel the divestiture of the major’s roughly $3.1 billion/€2.7 billion Spotify stake – with a cool $868 million/€750 million windfall for artists, per the report.
Additionally, the plan would usher in an emphasis on a more leveraged structure, with further acquisitions and especially share buybacks resulting. And as described by Ackman, UMG needn’t even give up its Euronext Amsterdam listing altogether to get the pivot over the finish line.
“It is not essential, as part of this transaction, that UMG gives up its Euronext listing,” Ackman spelled out. “That’s something that could be considered.”