Vivendi lit up the industry rumor mill by announcing that it will look for a strategic partner, or possibly two, to sell up to 50% of the Universal Music Group, igniting a firestorm of speculation on who likely suitors could be, even though the company has yet to begin the process.

In making that announcement, Vivendi said that it would look for strategic partners rather than spin off a stake in UMG through an initial public offering, because the latter route would prove too complicated, without explaining further on why it was foregoing that avenue.

Instead, it plans to sell, depending on which valuation you believe, a stake that likely would be worth more than $10 billion; and would use the proceeds for a significant share repurchase…and bolt-on acquisitions,” according to a comment made by Vivendi CEO Arnaud de Puyfontaine during a call with Wall Street analysts on the company’s financials, issued Monday (July 30). “We know there is a growing interest in the music industry. We do think that there is a favorable momentum and the process that we are getting into is really to be able to crystallize the Universal Music Group's value in that context; and also to find the right partner of right partners to be able to accelerate this trend in the best possible way for Universal Music, for Vivendi and for all its shareholders.”

Within that response, the executive didn’t expand on any planned acquisitions, if they would be made on behalf of the music companies or other Vivendi subsidiaries. But de Puyfontaine did say that that after it hires an investment bank, the process to find an investment partner could be launched in Q3 or Q4 and take up to 18 months to be completed.

Looking at the company’s results, it will have a good story to tell potential suitors. In the first six months of the year ended June 30, the Universal Music Group say revenue grew 6.8% on a constant currency basis, but fell 1.4% on an actual basis to 2.628 billion euros, which is down from the 2.666 billion euros the company reported in the first half of 2017. Using an average exchange rate of one euro to $1.217 in the first half of this year and one euro to $1.078 in the second half of this year, that means that revenue translated to $3.198 billion this year, versus $2.874 billion in the first half of last year.

Operating income showed a stronger improvement growing to 355 million euros ($432 million) in the first half of this year, versus 311 million euros ($335.2 million last year, which represents 14.1% growth in actual euros). When profit grows faster than revenue, that means the company is achieving synergies and improving margins. For example, the company’s operating margin improved to 13.5% of revenue in the first half of 2018, versus 11.7% in the first half of 2017.

With the music industry comeback powered by the growth of streaming and UMG showing improving profit margins, it could be an attractive company for suitors, although with Vivendi looking to partner but apparently retain control of the company, that likely would cut down the list of potential partners. Also, Vivendi would scrutinize potential suitors to make sure any new partner is aligned with the goals of UMG management.

“With regard to the UMG strategic aims, it is clearly those defined by [UMG chairman/CEO] Sir Lucian Grainge and his team, which is to make UMG a key player in the reformat of the industry,” de Puyfontaine said, according to a transcript supplied by an analyst who listened on the call. "With UMG’s successful pursuit of its goals, it will show talent that it is the best place to be able to have worldwide success.”

While analysts peppered Vivendi with questions on the potential for a UMG deal, they never focused in on what type of company would be best suited to fit the role of “one of several strategic partners." Usually, strategic implies another industry player like a major, but in this case that type of deal is doubtful because its hardly likely that the regulatory agencies in Europe and the U.S. would approve of a merger between UMG and another major, the way they last did when Universal acquired EMI Recorded Music and had to sell of about one-third of it to the Warner Music Group.

That leaves many to speculate that Vivendi may be looking to partner with one of the Internet/digital music giants, either Spotify, Google/YouTube, Apple, Amazon, or one of the Chinese internet behemoths like Tencent. Certainly, it might make sense from Spotify’s point of view, since they are paying out 64% of their revenue to major labels and publishers. If they were paying a third of that to its own partner in UMG, it would certainly help Spotify’s financial position.

But de Puyfontaine practically answered that question of whether Spotify or one of those other companies would make sense when he answered a different question posed by one of the analysts on whether the digital service providers were trying to dis-intermediate the artists away from the labels. “We do think that competition is a great equalizer; and with competition, it's not in an artist's interest to align with just one platform," he said. “So, our view..if any artist wants to break on a global scale and develope a multi-album, long-term career path as a recording artist major labels remain the only partners in the industry with the expertise and the resources to consistently create and support this possibility,” and he is no doubt biased in thinking that label would be UMG.

But just as an artist would alienate the other digital services if it were to do a deal with just one of the big companies, the same would hold true for UMG. If it partnered with Spotify, UMG’s music would still be carried by other services, but it likely would lose favored real estate positions at Apple, YouTube and Amazon.

So that may leave a Hollywood film studio or private equity as the main potential suitors. It seems obvious that UMG would prefer to have two potential investors, if it is selling up to 50% that way it could remain in control of UMG and its strategic direction. But private equity, even the most patient investors, eventually want to cash out and show a profit. So the danger with taking on a private equity partner or two, is that the deal likely would have to be structured with a timeline so that the partners can cash in their chips. When that happens, unless Vivendi buys back the stake, it risks putting the whole company up for sale: or more likely it would mean that’s the time to finally do the IPO (initial public offering).

Getting back to the results, a break out of revenue by operation shows the recorded music company produced 2.121 billion euros ($2.58 billion), down slightly under 1% from the 2.141 billion euros ($2.31 billion) last year, while publishing grew to 408 million euros ($497.8 million) from 400 million euros ($431 million in the first half of 2017; and merchandise and other revenue streams fell to 107 million euros ($130.2 million) from 135 million euros ($145.5 million), with intercompany sales eliminations tallying 9 million euros so that the total adds up to $2.628 billion euros.

Breaking out recorded revenue, digital downloads suffered a nearly 33% drop to 237 million euros ($288.4 million) from 353 million euros ($380.5 million) in the first half of 2017; while physical fell to 369 million euros ($449.1 million), a 23.8% drop from 484 million euros ($521.8 million); and licensing fell to 328 million euros ($400.3 million), a 4% drop from 342 million euros ($368.7 million) in the year-earlier corresponding six-month period. But the saving grace was streaming, which grew 23.4% to 1.187 billion euros ($1.444.6 billion) from 962 million euros ($1.037 billion). As a percentage, that means streaming accounted for 56% of revenue in the first half of 2018 versus 45% in the year earlier corresponding period, while physical fell to 17.4% from 22.6%; and downloads fell to 11.2% of revenue, versus 16.5% in the earlier period; and licensing comprises 15.5% of revenue down slightly from 16%.

Looking at recorded revenue another way, North America accounted for 991 million euros ($1.2 billion), or 46.7% of overall recorded music revenue, versus 1.023 billion euros ($1.1 billion), or 47.8% of revenue. Europe generated 678 million euros ($825.1 million) or 32% of revenue, slightly more than half a percent growth from the 674 million euros ($726.6 million), or 31.5% of revenue; Asia totaled 273 million euros ($332.2 million), or 12.9% of revenue, which was down from the 278 million euros ($300 million), or 13% of revenue, reported in the first half of 2017; while Latin America was down slightly to 74 million euros ($90.1 million), or 3.5% of revenue from 75 million euros ($80.9 million), the same 3.5% of revenue in the corresponding period last year, while the rest of the world contributed revenue growth to 105 million euros ($127.8 million), or 5% of overall recorded music revenue, versus 91 million euros ($98.1 million) in the first half of 2017, or 4.25% of revenue.