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Lots of questions posed by Tencent’s end-of-year Universal deal

By | Published on Wednesday 1 January 2020


Chinese web giant Tencent ended its year yesterday by announcing it had finalised a deal to buy 10% of the Universal Music Group from French entertainment conglom Vivendi for about $3.3 billion. Which poses a number of interesting questions for the wider music community as 2020 gets underway.

Vivendi formally announced its intent to sell a slice of Universal Music in 2018, seemingly keen to capitalise on the renewed interest in music rights in investment circles caused by the streaming boom. Tencent was rumoured as a possible buyer from the off, and then in August 2019 Vivendi confirmed a deal was being finalised that would see the Chinese firm take 10% of Universal upfront, with the option to buy another 10% down the line.

However, Tencent was actually leading a consortium of investors interested in buying a slice of Universal, and sources say that some of those other financial backers got cold feet at the final stage, for a time jeopardising the whole deal. But Tencent managed to get new backers on board just in time to sign on the dotted line before the end of 2019. Albeit with just hours to spare.

Tencent and Vivendi have confirmed that the deal sees the consortium led by the former take 10% of Universal Music now, with the option to buy another 10% at the same valuation up to 15 Jan 2021.

Tencent, of course, is already the leading player in digital music in China through its standalone Tencent Music business, which operates three streaming services and a leading karaoke service in the country, and exclusively represents the catalogues of various global music companies within the Chinese market, including all three majors.

It also has other interests in music beyond China too, operating the service Joox in certain other territories, having a formal alliance with Spotify, and being an investor in Indian streaming platform Gaana.

How taking a minority stake in Universal fits into all that is anyone’s guess. But there’ll be plenty of speculating and gossiping about the deal when the music industry returns from its Christmas break next week, with the following among the questions being asked…

1. Will the Tencent deal crossing the line speed up talks with other bidders interested in taking a slice of Universal Music? Vivendi has previously said it could sell up to 50% of its music business.

2. Will the indie music community in Europe succeed in persuading competition regulators to investigate the Tencent transaction? Pan-European indie label trade group IMPALA has already called for such an investigation.

3. Will Tencent owning a slice of Universal impact on the ongoing music licensing investigations by competition regulators in China? Concerns continue to be expressed about the way Tencent Music manages the major label catalogues that it exclusively represents in the Chinese market.

4. Will Tencent owning a slice of Universal impact on Tencent Music’s distribution alliances with Sony Music and Warner Music in China? Could the other majors seek to enter into direct deals with all the Chinese streaming services or look to do an exclusivity deal with someone else?

5. Will the deal have any impact on the day-to-day operations of Universal Music? It seems likely that the first noticeable impact will be through new projects and ventures in Tencent’s home market.

6. Finally, was the valuation of Universal Music used in the deal the right one? Could on-going lawsuits over the reach of the termination right in US copyright law, the strengthening negotiating hand of the artist within the music rights sector, and ongoing uncertainty about the long-term viability of the current streaming music business model all mean that Tencent et al ultimately overpaid for their Universal slice?

Questions, questions. But in the short-term Vivendi’s own investors – some of whom were getting frustrated with how long the Universal share sale was taking – should be pleased that the year ended with a seemingly positive deal for them. Now let the gossiping begin!