Friday, August 2, 2013

Should Sony Entertainment and Universal Music Leave Their Parent Companies?

Over the last several months, financial propositions have been made to cleave Sony Entertainment and Universal Music Group -- the world's two largest music companies  – away from their parent companies. If these proposals were ever to come to fruition, they would radically change the face of the music industry as we know it and also present a number of interesting possibilities. 

David Loeb of Third Point, a hedge fund which has 6.9% invested in Sony Corp, in May first called on the Japanese conglomerate to put its music and film holdings up for an Initial Public Stock Offering which could possibly raise as much as $2 billion. Loeb argued that the move would strengthen the company with the "transparency that comes with public reporting, an active media analyst community evaluating financial performance regularly and an expert board with strongly aligned incentives.”  Today (Aug. 1), news brokeposting its first profitable quarter in two years due in part to a weaker Yen -- down. The market, it seems, favors the idea of an independent Sony Entertainment.  that the Sony board plans not to spin-off its entertainment holdings, which sent shares of Sony down 3% -- despite

Two weeks ago, news broke that Japanese Telecom SoftBank (which recently merged with Sprint) had made an $8.5 billion dollar offer to buy Universal Music Group from Vivendi, a French conglomerate that, much like Sony, has had its share of financial challenges. A report in the Financial Times noted that Vivendi has been under pressure to restructure its holdings as its stock shares had fallen 13 percent since early May. And much like Sony, Vivendi has an activist investor in Vincent Bollore who is similarly pressing Vivendi to dispose of its holdings, which include Activision Blizzard and French TV group Canal Plus. Vivendi, again like Sony, has insisted on keeping its entertainment holdings and instead sold-off its 53% in Maroc Telecom as it tries to focus more on its media and entertainment holdings.

Both scenarios point to the desirability of music content creation companies in 2013 and their intrinsic value. In a follow-up piece on SoftBank’s $8.5 Billion proposal, Billboard’s Ed Christman concluded that the “$8.5 billion pricing SoftBank offered, gave UMG about a 9X multiple, which is a significant improvement over the 7.6 multiple that Citigroup realized through the sale of EMI.” Meaning that the value of record companies are increasing. And with Telecoms like AT&T, Verizon and Sprint increasingly looking to buy music platforms to entice consumers, major record companies may never have been a more desirable asset.

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