Bill Ackman/Universal Music: Spac deal strikes a pleasant tune

Billionaire investor Bill Ackman is better known for his business acumen than his musical skills. His latest deal is unlikely to get everyone dancing but it still hits the right notes.

Pershing Square Tontine Holdings, Ackman’s blank-cheque company, is in talks to buy a 10 per cent stake in Universal Music Group for about $4bn. The convoluted deal falls short of a megamerger. A 10 per cent drop in PSTH shares on Friday reflected investor disappointment. Vivendi, Universal’s French parent, is still planning to spin off 60 per cent of the record label via a listing in Amsterdam later this year. Ackman is merely getting in early.

Yet PSTH shareholders should take heart. Spac deals are notorious for involving little known start-ups with no profits. Universal, by contrast, is the world’s biggest record label and boasts increasing revenue and earnings.

Audio streaming services such as Spotify have helped to resuscitate what was once an ailing business. Universal, whose artists include Taylor Swift and Lady Gaga, reported €7.4bn in revenue and generated €1.3bn in ebitda last year. The figures account for about half and four-fifths of Vivendi’s group total respectively.

PSTH’s deal will give Universal an implied enterprise value of €35bn, or 21 times forward ebitda. Rival Warner Music is on about 22 times.

Vivendi itself trades on a multiple of just 14 times. One might argue that it would be cheaper to seek exposure to Universal by buying Vivendi shares. Vivendi shareholders will receive Universal shares as a special dividend. But this would generate tax liabilities. These would offset some of the recent gains in Vivendi shares, which are up 10.5 per cent this year. 

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Market conditions have changed since PSTH completed its fundraising last year. The abundance of cheap debt, a booming stock market and a glut of rival Spac money have made it hard to find big, attractive targets. Ackman’s decision may not be music to everyone’s ears, but that does not make it a bad deal.

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