Tencent in Talks to Buy 10% of Universal Music Group

Chinese digital giant Tencent has entered negotiations with French media conglomerate Vivendi to buy a 10% stake in Universal Music Group.

Vivendi announced the talks Tuesday, saying that the negotiations were based on a valuation of UMG of €30 billion ($33.6 billion). Tencent’s potential 10% stake would therefore cost €3 billion ($3.36 billion). The deal would give Tencent a one-year option to purchase another 10% stake on the same terms.

Vivendi also said the two companies were exploring other areas of “strategic commercial cooperation” that would help grow UMG through new digital initiatives and markets. In addition, Vivendi is continuing to seek other buyers interested in a stake in its extremely lucrative music unit, which boasts a glittering roster of superstars such as Katy Perry, Lady Gaga and Kanye West, as well as divisions dealing with publishing, merchandise and other areas.

Tencent is known primarily for its gaming and social network business – it owns China’s powerful WeChat platform, which has 900 million daily users. But the company also has its own music unit, Tencent Music Entertainment Group, which raised more than $1 billion in an IPO late last year that valued the division overall at $21.3 billion.

In a letter to staff, Lucian Grainge, the CEO and chairman of UMG, hailed the talks with Tencent.

“This is an exciting development for both Vivendi and UMG and affirms once again just how much our strategy and hard work are succeeding,” Grainge wrote. “As Vivendi discussed last week with its investors, we continue to deliver remarkable, record-setting results. Our success is driven by placing our recording artists and songwriters at the center of everything we do and providing them with the industry’s best creative and commercial resources on a global basis.

“Obviously, we remain part of the Vivendi family – today’s announcement is about a minority investment by Tencent.  I can assure you that Vivendi’s Supervisory and Management Boards as well as the Bolloré family continue to be steadfast supporters of our strategy, our work and our teams.  And it goes without saying, that our commitment to recording artists and songwriters will continue unchanged.”

Tencent had long been rumored to be one of the suitors for a stake in UMG after Vivendi announced a year ago its intention to sell up to 50% of the company. The French media giant ruled out an IPO as an option.

“Vivendi announces that it has entered into preliminary negotiations with Tencent Holdings Limited (“Tencent”) for a strategic investment totaling 10% of the share capital of Universal Music Group (UMG) at a preliminary equity valuation of €30 billion for 100% of UMG on a fully-diluted basis,” Vivendi said in its statement Tuesday. “In addition, Tencent would have a one-year call option to acquire an additional 10% at the same price and terms.”

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