Bill Ackman's UMG Bid: A Bargain or Just Hot Air?

While headlines tout Pershing Square’s offer valuing Universal Music Group (UMG) at $64 billion, a closer look suggests founder and CEO Bill Ackman might be aiming for a bargain, according to some Wall Street music investors and industry executives.

Despite the impressive valuation, the cash option, if available to all shareholders, wouldn't exceed UMG's initial public offering.

Pershing Square's valuation hinges on a projected UMG stock price of 30.40 euros ($35) per share by December 31, 2026, valuing the deal at 55.55 billion euros ($64 billion). However, the offer allows shareholders to choose all cash at 22 euros a share, totaling 40.34 billion euros ($43 billion).

This $43 billion figure falls below UMG's valuation after its first day of trading, which closed at 25.10 euros, valuing it at 46 billion euros (about $54 billion). Pershing Square plans to bring only 9.4 billion euros ($10.85 billion) to the table, including 2.5 billion euros ($2.89 billion) in cash, 5.4 billion euros ($6.23 billion) in debt, and 1.5 billion euros ($1.73 billion) from selling UMG's Spotify holdings.

The non-binding offer includes 5.05 euros ($5.82) per share and the equivalent of 0.77 share in new UMG stock, reducing the share count by 17%.

Adding Ackman's existing UMG stock (worth $2.5 billion) to the equation, he's aiming to control UMG for roughly $12 billion, contributing only $5.5 billion of Pershing Square's capital. Post-deal, Pershing Square would hold an 11.7% stake in UMG, according to a Billboard transcript of a Pershing Square conference call with Wall Street analysts.

Industry insiders suggest Ackman's strategy is to acquire UMG cheaply or boost its share price.

One financial investor described the offer as a “non-transaction transaction,” questioning if Ackman is truly buying the company or simply seeking control to improve its performance.

Another executive noted the offer's structure relies heavily on equity and future valuation, without a significant cash premium for shareholders.

Pershing Square anticipates shareholders will opt for 77% of their shares and 5.05 euros, but the math falters if they choose the all-cash payout of 22 euros per share. Barclays Bank analysts point out the limited availability of the cash alternative.

Skepticism remains about the offer's genuineness, with some suggesting it's a ploy to inflate UMG's share price.

Ackman's offer has seemingly worked to some extent, with UMG's stock rising nearly 11.5% to 19.06 euros on Tuesday, April 7. One financial executive believes Ackman has made UMG's stock more valuable.

Ackman has voiced his belief that UMG shares are undervalued, a point he reiterated during Tuesday's conference call. UMG CFO Matt Ellis echoed this sentiment, noting a “meaningful dislocation” in UMG’s market valuation, leading to a share buyback program.

Pershing executives believe UMG management hasn't focused enough on the share price, particularly regarding its $2.7 billion Spotify stake.

Ryan Israel, Pershing Square Capital Management chief investment officer, stated they can enhance capital allocation and shareholder communications for significant earnings per share growth.

However, concerns persist regarding Pershing Square's understanding of the music business despite its five-year UMG ownership.

A financial executive worries about the impact of a financially structured transaction on investments in artists and songwriters.

Israel addressed these concerns, affirming that investments and acquisitions to improve the company's competitive position remain a priority.

Yet, industry insiders remain skeptical, with one executive likening the conference call to “the greatest hits of someone who knows just enough to be dangerous.”

Pershing Square declined to comment. UMG didn't respond to requests for comment by press time.

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