Billionaire Bill Ackman has long described himself as a student of Warren Buffett, and has envisioned fashioning his hedge fund -- Pershing Square -- as a "modern-day Berkshire Hathaway." That dream was one step closer to reality today when Pershing Square made a bid to buy Universal Music Group (UMGNF +1.71%) in a deal valued at $64.3 billion. The company has not yet officially responded to the offer.
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Going all-in
Pershing already owns a 4.7% stake in Universal, the music giant whose artists include Taylor Swift, Sabrina Carpenter, Kendrick Lamar, Drake, Lady Gaga, Bad Bunny, Coldplay, and Billie Eilish. Its roster also includes Bob Dylan, Elton John, and the Beatles. Universal has about 30% market share and is one of the "Big Three" record labels, along with Warner Music Group and Sony Music, a subsidiary of Sony Group.
The deal is complicated. Under the terms of the agreement, the music giant would merge with a specially created acquisition company, and its stock listing would move from Amsterdam to the New York Stock Exchange.
Shareholders would receive a total of 9.4 billion euros (roughly $10.9 billion) and 0.77 shares of newly issued stock for each share of Universal they own. That works out to about 30.40 euros or $35.25 per share, a 78% premium compared to the stock's closing price on April 2, according to Pershing. If Ackman can win over currently shareholders, he expects the deal to close by the end of 2026.
Ackman first bought a stake in the music label back in 2021, just ahead of Universal's spin-off from Vivendi. However, since its public debut, Universal stock has stagnated, falling 36% as of market close on Monday. Ackman attributes this "underperformance" to a variety of issues, including the postponement of its U.S. listing, an underutilized balance sheet, and "suboptimal" shareholder communications.
Ackman goes on to say, "Notably, none of the above issues relate to the company's execution of its music business, and importantly, all of the above issues can be addressed in a merger transaction."
OTC: UMGNF
Key Data Points
Modern-day Berkshire Hathaway
Ownership of Universal would mark an important milestone and a cornerstone investment in Ackman's plan to turn Pershing Square into the next Berkshire Hathaway. Hedge fund investors can be a fickle bunch, pulling out capital on a whim. Therefore, fund managers are required to keep cash on hand so they don't have to liquidate holdings. The music label would provide an ongoing source of cash flow, or "permanent capital," according to Ackman. This would give the billionaire a free hand to build Pershing into a conglomerate worthy of the Warren Buffett seal of approval.
The languishing stock price has depressed Universal's valuation, with the stock currently trading at less than 22 times earnings. If Ackman can pull this off, he'd be getting Universal Music for a "song."
