The term IPO, short for initial public offering, is often used generically to describe a private company transitioning into a public company by listing on the New York Stock Exchange, Nasdaq or another stock exchange. But in the case of Universal Music Group (UMG) and parent company Vivendi, technically speaking, “IPO” isn’t the correct term for its planned listing on the Amsterdam Euronext exchange in late 2021.
The most accurate wording is that Vivendi will spin off UMG – as used in its Feb. 13 press release – as a standalone corporation with stock that’s separate from its parent company. This isn’t empty pedantry: each path to a public stock exchange has important differences for the company and its shareholders.
Vivendi will keep only a 20% stake in UMG, the world’s largest music company, which it has owned since 2004. A Tencent Corp.-lead consortium, which has given “an initial favorable response” to the listing, according to the press release, owns 20% of UMG from two investments in 2020 at a 30 billion euros ($36.35 billion) valuation. Vivendi plans to distribute the other 60% of UMG’s share capital to its shareholders made possible by amending its bylaws during a special shareholder meeting on March 29, 2021. Another shareholder meeting to approve the distribution will occur closer to the listing date in late 2021.
Music industry observers should be familiar with the different approaches to listing on a public exchange. The Madison Square Garden Company cleaved into two divisions, sports and concerts, in an August 2020, tax-free spin-off. Each MSG shareholder received one share of the new company, MSG Entertainment, owner of such iconic Manhattan venues as Madison Square Garden and Radio City Music Hall. The MSG Company changed its name to MSG Sports and changed its New York Stock Exchange ticker from MSG to MSGS. MSG Entertainment became a standalone company and began trading on the NYSE as MSGE.
In an IPO, a company hires underwriters – investment banks such as Goldman Sachs – to take its executives on a “road show” to pitch its stock to institutional investors at a set price before shares open for trading on an exchange. Those investors can flip the shares for a quick gain if the price trades above the IPO price. Or IPO participants can hold their shares in expectations of long-term growth. Warner Music Group had a traditional IPO in May 2020, as did Music Acquisition Corporation, a special purpose acquisition company, on Feb. 5.
Vivendi won’t conduct a direct listing either — an unorthodox route to a stock market that circumvents the traditional IPO process and avoids underwriter fees that typically range from 6–7% of IPO proceeds for listings between $100 million and $500 million, according to PricewaterhouseCoopers. In those scenarios, a direct listing can allow the company to pocket an extra $7 million to $30 million. Spotify popularized the direct listing in April 2018: Already well capitalized, the company didn’t need money from an IPO; instead, a direct listing gave existing shareholders an easier alternative than finding buyers on the private market. With no IPO price, Spotify monitored early orders to choose an opening price of $132; the share price rose to $169 and closed the first trading day at $149.95.