David Bowie's Record Label Is Dancing in the Street

(Bloomberg Opinion) -- The world's two biggest record labels have achieved a sweet harmony over the market value of music.

Warner Music Group Corp., the label behind David Bowie, Bruno Mars, Lizzo and Tom Petty, on Wednesday priced the shares for its initial public offering at $25 apiece. That valued the debt and equity of the world's second-biggest record label at $15 billion, or about 24 times trailing Ebitda, a measure of earnings.

That's almost exactly the same valuation multiple that Universal Music Group, its larger rival, was afforded when French parent Vivendi SA sold a 10% stake to a consortium led by Tencent Holdings Ltd. earlier this year. The alignment reinforces what looked like a pretty generous offer for the Universal stake at the time. And Warner's shares did even better in the immediate aftermath of the IPO, rising by 15%. For an industry that seemed to be on its knees not that long ago — and not in a flattering “rock star on stage” way — these are heady times.

How to price record labels has long seemed a difficult question. For more than a decade, the onslaught of music piracy seemed to suggest that their value was, essentially, nothing. But the surge in online streaming services means that those beleaguered assets have suddenly become attractive. Spotify SA's 2018 IPO first hinted at the phenomenon: The streaming giant is now valued at some $30 billion, even though it isn't expected to be profitable this year. The labels, who take a generous cut from Spotify in the form of royalties, are getting in on the act.

Universal's owner, Vivendi, had long bemoaned the so-called “conglomerate discount” in its own shares, arguing that the music business and other assets weren't being assessed at their full worth by investors. As such, Chief Executive Officer Arnaud de Puyfontaine has been holding out the prospect of a Universal Music IPO since 2017, and investor optimism about the prospective listing — boosted by the stake sale to Tencent — has helped its stock outperform France's benchmark CAC 40 Index. Even now, however, Vivendi is only talking about an IPO by 2023.

Instead it is Len Blavatnik who has blazed a musical trail. The Ukraine-born billionaire bought Warner for just $3.3 billion in 2011, and the IPO has delivered a handsome return. The Universal stake sale will have given him one yardstick by which to set a price, and now Vivendi will have a barometer on the public markets that it can use in the same way.

The pop in the Warner share price will have gladdened the heart of Vincent Bollore, the Breton billionaire who controls Vivendi. But he'll also know that if the shares of the rival music label ever falter, then Universal's prospects will be judged accordingly. There's a downside to singing in a duet.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.