Universal Music Group announced a plan on Wednesday to cut its equity stake in Spotify in half and to roughly double the size of its authorised share repurchase programme, saying the proceeds will be used both for buybacks and to fulfil commitments to artists.
The group's board approved the reduction of its 2.7-billion-euro holding in Spotify and said that proceeds from the sale would be shared with artists in line with a 2018 commitment commonly referred to as the "Taylor Swift clause" - an arrangement under which any proceeds from a Spotify stake sale are to be distributed to all artists on a non-recoupable basis.
UMG also intends to launch an additional 500-million-euro buyback, subject to shareholder approval at the annual general meeting, effectively doubling its total buyback authorisation. The board said it views the company's shares as undervalued relative to its performance and prospects.
The move follows an unsolicited takeover proposal submitted three weeks earlier by activist investor Bill Ackman, who had put forward a 64-billion-dollar bid for UMG and suggested selling the Spotify stake and using 1.5 billion euros of the proceeds as part of the cash consideration for a potential deal. UMG's board has chosen to pursue a sale of the stake on its own terms rather than returning proceeds directly to shareholders as Ackman had advocated.
For the first quarter, UMG reported revenue of 2.9 billion euros - equivalent to 3.4 billion dollars at the exchange rate cited by the company - which was flat on a reported basis compared with the same period last year but represented an 8.1% increase when adjusted for constant currency. The company said a weaker U.S. dollar weighed on reported revenue growth.
Adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) fell 3.8% to 636 million euros in reported terms, while on a constant currency basis adjusted EBITDA rose 3.9%.
UMG highlighted its top sellers for the quarter as including BTS, Taylor Swift, Olivia Dean, Morgan Wallen and the K-Pop Demon Hunters soundtrack. The company reiterated that proceeds from the Spotify stake reduction would be allocated to the buyback programme and shared with artists according to the previously stated terms.
Context and company rationale
UMG framed the share repurchase expansion as a response to the board's view that the market undervalues the company's shares relative to its operational performance and forward prospects. The board's decision to proceed with a stake sale and to allocate proceeds partly to artists preserves the 2018 contractual commitment surrounding proceeds distribution.
Financial details
- First-quarter revenue: 2.9 billion euros ($3.4 billion) - flat year-on-year in reported terms, up 8.1% in constant currency.
- Adjusted EBITDA: 636 million euros - down 3.8% reported, up 3.9% in constant currency.
- Additional buyback proposed: 500 million euros, pending shareholder approval, doubling the company's buyback authorisation.
- Spotify stake being reduced: 50% of a 2.7-billion-euro holding.
- Exchange rate cited by the company: $1 = 0.8547 euros.
Artists and catalogue performance
UMG named BTS, Taylor Swift, Olivia Dean, Morgan Wallen and the K-Pop Demon Hunters soundtrack among its top sellers for the quarter, underscoring catalogue and current-artist contributions to revenue during the period.
Note: The board's actions follow an unsolicited takeover approach that recently proposed alternative uses for proceeds from the Spotify stake; UMG has taken a path that preserves artist-sharing commitments while increasing capital returned to the market through buybacks.