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Who pulls the strings

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Today’s memo is about Bill Ackman and Universal Music Group. The activist hedge fund manager’s firm is the third-largest shareholder in the major label. He wants to move UMG to a U.S. stock exchange, which led to a swift reply from UMG. It’s a great time to talk more about his influence on the company.

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Why Bill Ackman invested in UMG

In 2020, Bill Ackman had his eyes set on a “mature unicorn” to take public. Universal Music Group was the perfect target. It was a ‘capital-light’ business with value to unlock.

Here’s a quote from Ackman’s Pershing Square Holdings’ investor report on the business:

When PSH bought its 10.25% stake in UMG, its revenue growth was strong and had plenty of runway. Only 11% of the world was subscribed to a paid music streaming service in 2019, and PSH expected it to reach 30% by 2030. Music is also less capital-intensive than movies, gaming, and other forms of media. Pershing Square Holdings saw UMG as a better bet than both Spotify and Netflix.

Here’s a chart from the hedge fund’s 2021 investor presentation:

Netflix, to be fair, was a bet that Ackman would do over again today. He bought over $1 billion worth of shares in January 2022 then sold them three months later for a $400 million loss. If Ackman still held those shares today, when Netflix is trading near its all-time high, his position would have been worth nearly $2.5 billion.

Meanwhile, UMG’s market cap and share price are around the same as it was three years ago when the company first went public. But many of UMG’s public stances in recent years, including price raises, streaming thresholds, artist-centric, and the push on social media platforms to become a more material part of UMG’s revenue, are all points that can be found in PSH’s presentations since it got involved in the business.

The case for UMG on NYSE or Nasdaq

Last week, after anti-Semetic incidents in Amsterdam, and tepid results from UMG’s Q3 earnings, Ackman posted on X that UMG would be taken off the Dutch stock exchange and moved to a U.S. one, like NYSE or Nasdaq, which he believes will unlock more value and capital for the company. He also wants to move to company’s domicile to the United States. UMG swiftly replied and said that Ackman does not have the authority to do that himself.

We rarely see UMG put out press releases to counter a take from one of its board members, but Ackman has a track record of aggressively entering businesses he invests in.

It comes at a time when UMG has had an up-and-down year in the public market. UMG lost the upper hand to TikTok in the licensing debate when the label’s biggest artist, Taylor Swift, partnered with TikTok directly.

This summer, UMG’s stock slid nearly 30% after Q2’24 earnings underperformed despite a strong quarter from Spotify. It was a sign that UMG and Spotify’s growth may no longer be in lockstep given the maturation of music streaming in the world’s most developed markets. It also raised attention to Apple Music and Amazon Music, which UMG’s leadership implied have not kept up with growth. It puts more pressure on the moves that Ackman and PSH want to see.

The most likely scenario is a dual listing for UMG’s stock. Some will remain on the Amsterdam stock exchange, while some will likely move to Nasdaq or UMG. It would help maintain a global investor base with European investors who have been with the company for years, like Vivendi, France’s Vincent Bolloré, and Concerto Partners. It’s the expected compromise given Ackman’s right to request a U.S. stock exchange listing and the welcomed bump in value that the move would lead to.

But even if progress stalls on the U.S. listing, expect to see more changes from UMG and public pressure from PSH. Here’s UMG’s “Streaming 2.0” goal from its Capital Markets Day:

This next era will require more bold moves from the major record label. It may also lead to stronger pushes from board members, including Ackman, to deliver on these goals.

If he sees this as a bigger opportunity than Netflix, the last thing he wants is to miss out on billions of dollars again.

CHARTMETRIC STAT OF THE WEEK

Ever since Shaboozey’s “A Bar Song (Tipsy)” became a hit, I wanted to know how much J-Kwon came up since the song interpolates his 2004 hit, “Tipsy.” Not only did Kwon get a “crazy percentage, his original song jumped from 35 daily terrestrial radio plays before ”A Bar Song” to over 150 daily plays in August 2024.

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Dan Runcie
Founder of Trapital

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