Pershing Square Holdings (PSH) fund manager Bill Ackman has made a €55bn (£47.9bn) cash and shares bid for Universal Music Group (UMG) which he plans to list in New York to revive its underperforming share price.

Ackman’s Pershing Square Capital Management has proposed merging UMG with Pershing Square SPARC Holdings, the special purpose vehicle he set up four years ago to make a large acquisition.

Shareholders in UMG, which include London-listed investment company PSH, will receive €9.4bn in cash and 0.77 new UMG, or SPARC, shares for each UMG share they own. This values Euronext Amsterdam-listed UMG at €30.40 per share, a 78% premium to last week’s closing price of €17.05. It jumped 11.4% to €19.05 today. 

The cash component is designed to give French conglomerate Bolloré Group an exit from its 18% stake. Ackman said uncertainty over Bolloré’s holding was one reason UMG share price had badly underperformed since Pershing Square bought 10% of the company in 2021 at €18.27. 

UMG had fallen 23% since Pershing Square helped bring it to market at €25.10 in September 2021 in contrast to the 55% and 61% gains in the MSCI World and S&P 500 indices.

The other reasons cited by Ackman were the postponement of UMG’s US listing, under-utilisation of its balance sheet, absence of a capital allocation plan, lack of investor credit for its €2.7bn stake in music streaming platform Spotify and poor investor relations and communication.

Although UMG shares have languished, Ackman told the company’s board that chief executive Sir Lucian Grainge and the management team had done “an excellent job” with revenues and earnings growing by 11% and 13% a year. 

Ackman wants Michael Ovitz, the former talent agent and Walt Disney president, to chair the board with two representatives of Pershing Square also becoming directors.

Under the transaction, 17% of UMG shares will be bought back and cancelled while preserving the company’s investment grade balance sheet. 

PSH, which held 13% of its assets in UMG at 31 December, is on the hook for providing some of the cash payment, firstly as one of the SPARC rights holders, which will provide €1.05bn, and as part of the Pershing Square group which will stump up €1.5bn.  The bulk of the financing, €5.4bn, will come from new borrowing with €1.5bn from the part sale of the Spotify stake. 

Ackman envisages UMG adopting a new dividend policy of growing pay-outs by 2% a year rather than the currently distributing half of net income to shareholders. He believes this will free the group to grow annual cash flow from €2.3bn to €3.8bn in the next five years to fund re-investment, including acquisitions, and increase share buybacks.

This follows a difficult first quarter for Ackman’s FTSE 100-listed US hedge fund. Its shares fell 19% compared to a 2% decline in the S&P 500, leaving them on a 26% discount to net asset value at 31 March.

The bid for UMG comes as Ackman is in the process of launching a new US-based fund Pershing Square USA and completes the acquisition of insurer Vantage which is meant to re-establish retirement home developer Howard Hughes at the centre of an investment conglomerate modelled on Warren Buffett’s Berkshire Hathaway. 

Our view

James Carthew, head of investment company research at QuotedData, said: “Finally, Pershing Square has found a use for its ‘SPARC’ vehicle. Pershing Square provides a list of reasons why it thinks UMG has underperformed but does not mention AI, which I have seen cited as the cause of this year’s almost 30% share price slide. The shift to a New York listing might help the rating, but there is no obvious peer to UMG – Sony Music Publishing and Warner Chappell Music are both parts of much larger content production and publishing businesses. The big question is whether this ignites a bidding war for the company.”

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