Tencent Music Entertainment Group’s ambition to become the world’s most valuable music company has faltered – for the time being at least. The Chinese music entertainment platform was unable to match the value of Spotify through its $1.1 billion US initial public offering.
China’s largest music distributor is officially valued at $21.3 billion after pricing its American Depositary Shares on Wednesday at $13 each. This is at the bottom of the $13 to $15 price range it had pitched to prospective investors.
Tencent Music had high hopes of trumping Spotify’s $26.6 billion valuation when it kicked off the roadshow for the listing on December 3. According to a source familiar with the company, it had pitched for an implied valuation of as high as $30 billion before it announced the price range, which capped its implied valuation at about $25.1 billion.
But even though Spotify's shares have fallen 12.5% since its flotation in April with a market cap that has dropped to $23.3 billion as of Wednesday, it is still about 8.5% more valuable than its Chinese counterpart.
The result suggests that the valuation gap between the two music streaming giants has not narrowed since December 2016, when the companies entered into an uneven share swap. That saw Spotify swap a 7.5% stake for a 9% stake in Tencent Music.
It is, of course, true that Tencent Music pushed the button on its IPO while the global equity markets are relatively volatile and marred by trade war fears. In fact, the group had planned to launch the share sale in October but was waiting for a better window to start the process.
But even though the IPO process resumed immediately after the announcement of a truce in the potential trade war between China and the US, the market remained cautious.
VALUATION DEBATE
Some market participants believe that Tencent Music is worth a higher valuation because it has a more comprehensive product offering and is already profitable.
The Chinese music group generates the bulk of its revenue from music-centric social entertainment services such as interactive karaoke and live streaming, while Spotify relies largely on subscription payments from customers. These are less likely to increase as its user growth slows.
Tencent Music’s $1.7 billion revenue last year, however, was less than 40% of Spotify’s. This suggests that it has less room to monetise its products further with its current user base.
And while Tencent Music faces significantly weaker competition than Spotify, it is not completely dominant.
Last month, NetEase Cloud Music raised $600 million Series B funding led by tech giant Baidu, a move that suggests the two could join forces on music streaming in a strategic move to challenge Tencent Music's dominant position in the online music sector.
In any case, the listing of Tencent Music will open the door for another level of competition in market valuation between the two music streaming giants. And with Tencent Music’s dominance in China and Spotify’s in Europe and the US, their duopoly in the world’s streaming industry is unlikely to be challenged anytime soon.
Joint bookrunners on the deal are Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, JP Morgan and Morgan Stanley.
