Vivendi makes $404m from sale of Beats, but where did that 13% share come from?

Universal Music’s parent company Vivendi issued a press release on Friday which confirmed the sale of its 13% stake in Beats Electronics to Apple for $404 million.

The major had close ties with Beats since Jimmy Iovine was Chairman and CEO of Interscope Geffen and A&M but also Chairman of Beats Electronics. The terms Apple’s acquisition meant that he had to leave his post at Universal Music, although the $404m payday surely sweetened that departure considerably.

What is difficult to reconstruct is how Universal Music ended up with a 13% share in the company. According to Vivendi’s 2011 Financial Report: "In August 2011, HTC Corporation committed to acquire for $300 million (approximately €222 million) a 51% interest in Beats Electronics LLC, 21.1% of which is held by Universal Music Group (UMG)." The sale is also referenced in Vivendi's 2012 Financial Report:"HTC Corporation acquired for $300m a 51% interest in Beats Electronics, 21.1% of which is held by UMG. UMG recorded an €89m gain (excluded from EBITA and ANI)”.

Beats Electronics ended up buying back that 51% share of the company from HTC in two stages, the first half in 2012 and the second half in 2013 after an injection of cash from the Carlyle Group. Vivendi’s own financial reports do not remark on the company re-investing in Beats Electronics but in 2013 they do point out a significant dividend received from Beats Electronics worth €54 million. The Vivendi 2013 report also points to the company owning a portion of Beats by remarking: "Available-for-sale securities notably included securities held by UMG in Beats and Spotify for €161 million and €143 million,respectively (€70 million and €84 million as of December 31, 2012). In 2013, the fair values of these securities were reassessed with the entry of new investors to their capital."

So where did that 13% equity share come from? There are two possible explanations. The first is that in 2011 Universal Music was left with 13% share after selling 21.1% of Beats Music to HTC, which would mean that it originally had a massive 34% ownership stake in Beats. The second is that Universal Music re-invested in Beats during the buy-back process either in 2012 or 2013, although that is not clearly stated in Vivendi’s subsequent financial reports.

Question marks on the percentages aside, it is worth pointing out that there seems to be no reason to be calling into question why none of the proceedings from the sale will go to artists. All signs point to Universal Music’s equity in Beats to be the result of an investment and as such not something the company received because of the strength of its catalogue. This is a very different scenario than if Spotify was purchased or IPO'd, because in that case Universal Music's equity in the company is directly related to the strength of its catalogue and, by proxy, its artists. The $404 million cash injection derived from the Beats sale is no different than if it had come from a smart real estate investment and it would be very hard for anyone to argue otherwise.

(Andrea Leonelli)