Via DMN/Allindstrom

Universal Music Group is now ‘actively reconsidering’ its major investment stake in VEVO, according to a pair of sources discussing the matter with Digital Music News. One source, an executive at Universal Music Group who insisted on confidentiality, stressed that discussions are ‘still pretty early stage,’ ‘based on a lot of different considerations,’ but ‘definitely on the table right now.’

It’s unclear what portion of the investment is being reviewed. Currently, Universal Music Group is a major joint venture partner and stakeholder in VEVO, alongside Sony Music Entertainment and Abu Dhabi Media (which carries a smaller role). In fact, former UMG chairman Doug Morris is widely credited with conceptualizing the idea, based on a desire to finally monetize music videos in the post-MTV era. More than two years and $200 million in revenues later, the idea seems to be lifting off the tarmac.

But Morris is now with Sony Music, and the situation at Universal is dramatically different in 2012. Currently, the divestiture discussions at UMG are happening at a fairly high level, with owner Vivendi either a direct participant or overshadowing presence in the strategic thinking. This goes far beyond VEVO, and a second source tied into those broader discussions pointed to several major reasons for the possible dial-out. Those include further trimming to satisfy regulators, a shift towards more core assets and operations, and an opportunity to take cash ahead of a significant outside investment.

Enter Allen & Co., the one-percenters rumored to be courting investment amounts in the $100 to $150 million range. That could balloon the valuation of VEVO as high as $1 billion, and provide the perfect ‘liquidity moment’ for UMG, according to the source. “Remember, ‘non-core’ is the operative word here,” the second source continued. “Also, ‘cash’ is another word here.”
Neither source was able to disclose sensitive details related to Universal Music Group’s pending acquisition of EMI Music, though the mega-label has been dumping assets to please regulators on both sides of the Atlantic. In May, word leaked of substantial catalog sell-offs and even real estate sales, all designed to raise cash and shed pounds in the eyes of skeptical regulators. The Wall Street Journal recently pegged those chops at around $620 million.

But the remaining heft could pose a serious problem in the digital sphere. Back in the US, a major concern among lawmakers – as expressed in recent Senate hearings – was the overbearing influence a combined UMG+EMI would wield over digital startups. Entities like Spotify, for example, would be completely dependent upon the newly-formed label megalith, and forced to pony whatever royalties demanded. In that light, a reduction in VEVO – the largest standalone music site online – might make sense and could theoretically ease some of those licensing concerns. “The digital arguments get really tricky, but it does cut back the size [of UMG],” the source offered.

But there are also some very serious financial considerations in play. Earlier, separate sources noted that Universal Music Group chairman Lucian Grainge is under intense pressure to tighten the belt, and find a way to finance the relatively exorbitant, $1.9 billion EMI acquisition. The includes a confirmed guarantee to pay the full amount regardless of approvals, or at least the difference between the next-best offer (estimated at roughly $700 million, assuming a $1.2 billion offer from Warner Music Group).

That’s quite a bag to be holding, and Grainge may have been motivated to acquire by another legacy metric: label marketshare. That is, UMG’s is now smaller than Sony’s, and other increasingly blah-blah details. In a similar legacy light, old-line luxuries like multimillion dollar salaries are now under attack, especially with parent Vivendi girding through a difficult stock plunge and restructuring of its own. That includes the potential spin-offs of various units, a situation that could make the EMI buyout simply too big to chew if UMG takes a lonely walk.

The source further noted that VEVO content licensing agreements would probably remain unchanged, though admitted difficult discussions related to sales and broader JV integrations would have to be sorted out. Exact ownership shares and valuations could not be ascertained at the time of publication.