Knocking on UMG’s door: Ackman's proposal is a self-help plan dressed up as M&A
Prasad Gollakota
There is a tremendous amount of fuss surrounding Bill Ackman’s proposal to acquire the outstanding shares in Universal Music Group: an announcement, a detailed presentation deck and a headline 78% premium comprising part cash and part scrip. Typical M&A theatre, at least on the surface. Yet when the smoke clears, what remains looks far less like a genuine bid than a self-help exercise.
Ackman already owns a stake in UMG, and this is his second UMG-related attempt to use a blank-cheque vehicle to buy shares in the group after a failed transaction in 2021.
Pershing Square’s latest proposal values UMG at €30.40 a share, versus a pre-bid close of €17.10, and offers €5.05 in cash plus 0.77 shares in a newly listed “New UMG” company. The market’s verdict was underwhelming, and UMG shares only climbed to around €19 on Tuesday when the proposal was announced.
That gap tells you almost everything.
A credible bid usually does one of two things: it either offers shareholders a real cash premium today, or combines the target with something that makes the business genuinely more valuable tomorrow.
Pershing’s proposal does neither in any meaningful sense. Ackman is not saying UMG has a weak catalogue, poor management or broken operations. His argument is that the stock is poorly valued because of its Amsterdam listing, uncertainty around the intentions of the company’s largest shareholder, a supposedly underused balance sheet, poor communication with investors and the market’s failure to fairly value UMG’s Spotify stake. In other words, the business is not the problem; the issue is the market’s rating of the business.
That distinction matters because it explains why the proposed transaction feels so hollow.
Sparcs may not fly
In simplified terms, Pershing is proposing to merge UMG with its SPARC vehicle and create a New York-listed New UMG. A SPARC, or special purpose acquisition rights company, is a close cousin of a special purpose acquisition company but with one crucial difference.
A SPAC raises investors’ cash upfront and parks it in trust while it searches for a target, typically with around two years to complete a deal. A SPARC gives investors rights first, but only asks them to commit cash after a deal has been identified and disclosed, with those rights lasting far longer than is usually the case in a SPAC – up to 10 years from issuance.
In theory, that is more appealing because investors only commit cash once the target and terms are known. In practice, a SPARC is an empty vehicle whose value depends entirely on the deal it pursues.
Pershing’s proposal includes €9.4bn of cash, which sounds substantial relative to its pre-bid market cap of €31.8bn until you look at where it comes from. Pershing says the cash portion will be funded with €2.5bn from Pershing Square, including €1.05bn from SPARC rights holders, together with €5.4bn of additional investment-grade debt financing at New UMG and €1.5bn of net proceeds from the sale of UMG’s Spotify stake. Pershing is not turning up with a huge cheque for UMG; rather, it is proposing a deal under which UMG leverages itself, sells one of its assets, and uses the proceeds as part of the consideration.
The remainder, in the form of shares in New UMG, is even more underwhelming. It is presented as a fictional value in the New UMG company equivalent to about €47.2bn, or €25.35 per share.
I use the word “fictional” deliberately, as the entire value uplift is expected to arise from moving UMG’s listing from Amsterdam to NYSE (giving the company potential S&P 500 eligibility), alongside fewer shares, more leverage and what Pershing says would be improved capital allocation and investor communication.
That is the essence of the proposal. UMG shareholders are being offered a mix of cash and stock in a new, more leveraged company with the same underlying music business and fewer shares. The reduction in the share count is largely self-financed with new debt and the monetisation of an asset. If the rerating does not happen, much of the headline premium simply vanishes and the proposed consideration falls back towards the low €20s per share. Whatever premium remains is largely the product of capital optimisation, not new value created by Pershing.
A share buyback funded from a company’s own balance sheet can boost equity value per share, but it is not the same thing as an outsider creating value through a transformative acquisition.
There is nothing Pershing is bringing that enhances the fundamental value of UMG. No industry expertise and no operational synergies. It is a shareholder using the M&A construct in an attempt to force a market reappraisal of an asset. It is financial engineering combined with hope. And hope alone is not the basis for a credible bid.
Ballad of a thin man
In a normal SPARC transaction, warrants would also form part of the sponsor’s reward and give it a meaningful slice of the post-combination equity. Here, Ackman has said Pershing Square would waive its right to receive SPARC sponsor warrants. Ironically, that only reinforces the central point: Pershing’s real upside lies in the rerating of the UMG stake Ackman already owns.
On its reported 4.7% stake, a move from €17.10 to Pershing’s €30.40 headline value implies a paper gain of a little over €1bn. That might explain why the proposal came in a press release and a non-binding proposal, rather than a formal offer supported by the documents that would ordinarily accompany a credible bid.
The market’s reaction was equally revealing. If investors believed €30.40 was credible, UMG’s shares would have moved much closer to it. They did not. They moved enough to acknowledge that Ackman had identified some real pressure points, but nowhere near enough to endorse the proposal on its own terms. The market appears to have read this less as credible M&A and more as an activist pitch.
That is not to say the proposal is meaningless. In fact, the opposite may be true. Its real significance may be that it hands UMG a public roadmap for rerating itself. JP Morgan said there is “nothing in [the] proposal that UMG could not do itself”.
That may be the most important market takeaway. UMG’s board and remaining shareholders do not need Ackman’s SPARC and can adopt parts of this plan on their own timetable if they think the valuation case is sound.
That may explain much of the share price bounce. Investors may not believe in the full proposal, but they may believe that UMG has now been handed free public advice on how to rerate its own stock: get to New York, sharpen the capital allocation story, consider leverage and the Spotify stake and communicate better. If so, the move in the shares was not an endorsement of the bid; it was a probability-weighted response to the possibility that UMG may now find that advice harder to ignore.
To be fair, he might have gone about it in a needlessly showy way, but from Ackman’s point of view, that might actually be mission accomplished.
Prasad Gollakota is a former FIG banker and co-head of the global capital solutions group at UBS. He was later chief content and operating officer at edtech company xUnlocked and specialises in financial institutions, banking regulation, capital markets and complex capital and funding solutions.