Key Morningstar Metrics for Universal Music Group
- : EUR 31Fair Value Estimate
- : ★★★★★Morningstar Rating
- : WideMorningstar Economic Moat Rating
- : MediumMorningstar Uncertainty Rating
Pershing Square has offered to merge Universal Music with Pershing’s special purpose acquisition vehicle, SPARC Holdings. Universal shareholders would receive 0.77 shares in SPARC plus EUR 5.05 in cash per share of Universal. Pershing shared plans to unlock value it sees in Universal.
Why it matters: Universal’s stock has plummeted even as its operating performance has remained strong. Pershing acknowledged that the business is sound, and retaining CEO Lucian Grainge is a critical component of this deal. Operational changes are not part of Pershing’s plan to extract value.
- Pershing wants to optimize capital allocation by adding debt to the unleveraged balance sheet, selling the firm’s 3% stake in Spotify, and moderating dividend growth.
- Pershing will also take three board seats—including the addition of Michael Ovitz as chairman—and intends to better attract shareholders, in part by domiciling and listing shares in the US.
The bottom line: We see Universal as grossly undervalued and agree that this merger can help unlock some of the value, even as the tradeoff would be giving up some shares of the wide-moat firm at levels well beneath our unchanged EUR 31 fair value estimate.
- Pershing says the value of the SPARC shares plus the EUR 5.05 results in total consideration of EUR 30.40 per share—fair value, in our view—but the assertion of the SPARC value appears to be completely speculative.
- After receiving the cash portion of the bid, current Universal shareholders will own 93% of SPARC, which will consist solely of Universal Music.
Between the lines: Most shareholders will have little say in the outcome, as Vincent Bollore, Tencent, Vivendi, and Pershing Square own nearly 50% of shares outstanding. Pershing said Bollore was receptive to initial outreach but has not yet had the opportunity to analyze details.
- Minority shareholders who do not want to retain ownership in SPARC can elect to receive EUR 22 per share instead, subject to unspecified proration.
