Will listing in the US increase the value of UMG?

Call for Universal Music Group (UMG) to move stock listing and US headquarters from Amsterdam by next year, board member and billionaire activist investor William Ackman argued that the move could make the company more valuable. But financial sources are divided on whether that will happen.

On Friday (Nov. 8), Ackman said his hedge fund, Pershing Square Capital Holdings, which owns 10.25% of UMG, will exercise its right to require the company to register with the Securities and Exchange Commission of the US following violent attacks on Israeli soccer fans on Thursday night (November 7th) in Amsterdam, where UMG's stock is listed on the Euronext stock exchange. But would the move really benefit the company, as Ackman seems to believe?

“It could increase the value of UMG significantly, because even though it will increase your taxes and you will spend a lot more on expensive securities lawyers, it gives you access to the giant US retail market, and UMG is the perfect kind of company for small investors,” he says Eric Gordonprofessor at the University of Michigan's Ross School of Business.

In the US, more than 62% of single adults own stocks, a group referred to as retail investors. While large institutional investors such as Pershing account for about three-quarters of the trading volume on US exchanges such as the Nasdaq or the New York Stock Exchange, retail investors are a strong and growing group. Since the start of the pandemic, when small investors on Reddit fueled the rise in the stock price of companies like GameStop and AMC, more than 30 million new investors have opened brokerage accounts, according to a University of Missouri study.

Four institutional investors currently control nearly 60% of UMG's current stock pool. In his post last week, Ackman argued that the lack of liquidity — in part because only a small portion of UMG's stock changes hands frequently — could improve if UMG goes public in the U.S.

“UMG is trading at a deep discount to its intrinsic value with limited liquidity in significant part due to not having its primary listing in [New York Stock Exchange] or Nasdaq Exchange and does not qualify for inclusion in the S&P 500 and other indices,” he wrote.

Ackman's argument is essentially that if UMG were to list and start trading in the US, its value would make it an important stock in the US financial markets, which in a few years would earn it inclusion in a major index, he says Gordon. Inclusion in an index such as the S&P 500 creates more demand for a company's stock because mutual funds and exchange-traded funds that track the S&P begin buying the stock.

Over the weekend, UMG said Pershing can seek that UMG listing in the US if it sells at least $500 million worth of UMG shares of its own as part of that listing.

“If I had to guess, Ackman will end up with the right to sell his shares in the US public market and that the company will issue new shares in the US so Ackman is not the only one selling,” says Gordon .

One stock analyst believes that UMG would not become a more valuable company if it went public on a US stock exchange because its shares already trade at a premium to shares of Warner Music Group ( WMG ). In an investor note on November 1, JP Morgan analysts wrote of the premium, arguing that “UMG should trade at a significant premium to WMG…to reflect greater scale, a better growth track record and solid margin expansion, the better in the management and better governance category”.

According to Bulletin boardAccording to its calculations, UMG shares recently traded at about 17 times trailing 12-month adjusted EBITDA, while WMG shares traded at about 11 times.

Taking UMG's stock to a U.S. stock exchange also has another downside: the operating costs that publicly traded U.S. public companies face from shareholder lawsuits.

“One area that US issuers have to manage, as opposed to non-US issuers, is the volume of shareholder disputes moving in the US,” he says. Michael Postermusic industry attorney at Michelman & Robinson. “It's expensive to deal with litigation, there are a lot of fees associated with managing, settling and adjudicating claims and it's frankly a distraction for management. These things help make trading in the US more expensive from an operational perspective.”