about 3 years ago • 3 mins
French media group Vivendi announced plans over the weekend to spin out Universal Music Group into a standalone company, in hopes the world’s biggest music label will enjoy a critically acclaimed solo career.
What does this mean?
Music companies have seen their stars rise and values soar in recent years as streaming services like Spotify earned them billions in royalty payments. That might be why Vivendi’s decided to let its music business go it alone: the company’s planning to list Universal on Amsterdam’s stock exchange by the end of the year. Vivendi’s already sold 20% of the business off to a group of companies that included Chinese tech giant Tencent, and now it’ll give 60% of the newly formed company’s stock to its shareholders – and keep 20% for itself, naturally.
Why should I care?
For markets: The hills are alive with the sound of money.
Universal, Sony Music, and Warner Music control nearly 80% of the music market between them – a market that, according to Goldman Sachs, could more than double in size by 2030 to hit $45 billion. And investors seem to agree: Warner’s seen its share price rise 24% since it listed last June, while this announcement saw Vivendi’s stock jump 20%.
The bigger picture: Vivendi is streamlining its business.
You’d be forgiven for wondering why, if Universal’s such hot property, Vivendi would want to spin it off at all. But by narrowing its portfolio of businesses, the French conglomerate should leave its investors with two more valuable stocks and make itself a more compelling investment case going forward. Keep in mind that Universal was valued at $36 billion when the Tencent-led investors bought their stake in 2019, but Vivendi was valued at just $37 billion late last week. Consider then that Universal only accounted for 73% of Vivendi’s profits in 2019, and it’s clear investors are valuing the whole at much less than the sum of its parts.
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Investors have gone back to snubbing cheap-looking “value” stocks in favor of much-beloved “growth” stocks – proving that if you come at the king, you’d best not miss.
What does this mean?
Growth stocks – think fast-growing tech companies – had a strong 2020, climbing 37% in the US and 18% in Europe. That wasn’t the case for value stocks like banks and energy companies, which didn’t rise at all in the US and fell 20% in Europe. But all that changed when news of the effective vaccines broke in November: investors ditched growth stocks for value stocks, in hopes the recovery would soon be underway and beaten-down companies would be the ones to benefit the most.
It, uh, didn’t last long: growth stocks have gone back to outperforming value stocks in the last month.
Why should I care?
For markets: Sit tight, the road to recovery’s a long one.
Investors’ return to growth stocks suggests they’re not feeling confident the economy will recover nearly as quickly as economists are expecting. And given all the vaccine rollout difficulties and the spike in new variants, they’re not likely to change their minds any time soon. That means they might be more inclined to stick with growth stocks – which have done well out of the pandemic – until vaccinations pick up, and only then start to think about other opportunities.
The bigger picture: Investors might be too gung-ho on stocks.
Still, there’s no doubt in investors’ minds that stocks are the place to be: global investors poured a record amount of money into equity funds – especially those focused on US and tech stocks – at the start of the month. But Bank of America has cautioned things might be getting out of hand: investor optimism is nearing levels where global stocks have historically pulled back by an average of 9% in the following three months.
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