BREAKINGVIEWS-Play Bill Ackman’s music deal in key of activism

By Jeffrey Goldfarb

NEW YORK, April 8 (Reuters Breakingviews) - Bill Ackman is playing “Hot Cross Buns” and passing it off as Rachmaninoff. The hedge fund manager’s offer to buy Universal Music UMG.AS for some 56 billion euros, or $65 billion, harps on themes typical of board-bullying campaigns. Some of the ideas strike the right chord. They just befit a solo performance.

Since its 2021 initial public offering, the recording giant behind artists from Sabrina Carpenter to Bad Bunny has slumped. An investor in its market debut would now be nursing a 25% loss. Ackman himself contributed to the woes when he left Universal Music’s board last year and his Pershing Square outfit sold part of its stake. As he tries to rebrand himself as an heir to Warren Buffett, he now wants to revive the beat.

What he’s presenting, however, is the familiar activist refrain of financial engineering. As part of the cash-and-stock proposal, Universal Music would borrow 5.4 billion euros and sell its stake in music streaming service Spotify SPOT.N. The proceeds would effectively repurchase shares, juicing the earnings ascribed to each one that remains. He also wants to shake up the board, move the company’s home from the Netherlands to Nevada, and list shares in New York in a bid for index inclusion that would force managers to buy them.

These ideas are worth considering, which probably explains why Universal Music already has done so. Boss Lucian Grainge postponed a planned U.S. listing last month due to market ructions, but one remains on the agenda. The company also just unveiled its first stock buyback.

The rest of Ackman’s thesis is either off-key or unoriginal. His assertion that aircraft engine builder GE Aerospace and hotelier Hilton Worldwide HLT.N serve as valuation guides for a music producer is discordant. Simply uninspired: his belief that the pace of revenue growth should pick up by collecting more streaming spoils, a process already underway.

Pershing Square also doesn’t offer much to assuage widespread fears among investors about how artificial intelligence could hurt the industry. Ultimately, none of this helps its case with big shareholders like French billionaire Vincent Bolloré, who may ultimately decide the bid's fate.

Ackman is nevertheless upbeat. He reckons his formulaic financial remix could generate a 45% internal rate of return by 2030. It’s hard to see, however, why he should be the one to orchestrate it.

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CONTEXT NEWS

Billionaire hedge fund manager Bill Ackman’s Pershing Square on April 7 offered to buy Universal Music Group for about 56 billion euros ($65 billion) in cash and shares of a shell company.

Under the terms of the deal, Universal Music shareholders would receive 9.4 billion euros in cash and 0.77 shares in the new company for every existing share. Pershing Square funds, its SPARC vehicle, and affiliates would provide 2.5 billion euros of the cash, while the rest would come from new debt and the sale of Universal Music's stake in Spotify.

Bollore Group holds nearly 19% of Universal Music and Vivendi owns more than 13%. Pershing Square holds about 5%.