PARIS/BEIJING (Reuters) - China's Tencent Holdings Ltd 0700.HK is in talks to buy up to 20% of Universal Music Group (UMG) from Vivendi SA VIV.PA, valuing the music label of Lady Gaga, Ariana Grande and the Beatles at around 30 billion euros ($34 billion), as both firms look to expand in a recovering global music market.

While at a preliminary stage, the discussions highlight Tencent’s role as gatekeeper to China’s growing but tightly controlled music market and its interest in global expansion. It also highlights Universal’s ambition in new markets and embrace of online streaming.

Global music-streaming retail sales are expected to more than double to $45.3 billion by 2026 from $19.6 billion in 2018, UK-based media analysis firm Midea predicts.

French media group Vivendi, controlled by billionaire Vincent Bollore, said on Tuesday that Tencent would first buy 10% of Universal, the world’s biggest music label ahead of Sony Music Entertainment and Warner Music and home to artists also including Taylor Swift, Drake and Kendrick Lamar.

Tencent, which already holds stakes in the world's most popular music streaming service, Sweden's Spotify SPOT.N, India's Gaana, Tencent Music Entertainment Group TME.N, and owns Asian streaming app Joox, would also have an option to buy a further 10% of Universal.

Vivendi shares closed 4% higher at 24.93 euros as analysts welcomed progress on the sale of a stake in Universal.

“The valuation looks good, and the progress made on the UMG deal is also positive,” said Gregory Moore, fund manager at Keren Finance, which owns Vivendi shares. Both groups are also “considering areas of strategic commercial cooperation,” Vivendi said, raising questions among analysts over the scope of the talks.

Universal rivals Sony Music and Warner Music also have investments in Tencent Music Entertainment Group.

Jerry Dellis, an analyst at Jefferies, also said in a note to clients that U.S. political opposition to Chinese investment in what could be considered a strategic asset could obstruct a deal.

Lady Gaga arrives at the Metropolitan Museum of Art Costume Institute Gala in New York City, May 6, 2019. REUTERS/Andrew Kelly/File Photo

CHINA PAYWALL

A deal with Tencent could boost Universal’s presence and build on a partnership struck two years ago, under which Tencent can license Universal’s music for distribution over its streaming platforms.

Tencent’s music unit also owns exclusive rights to sub-license Universal’s content to other content providers in China. They worked together to build Abbey Road Studios, China, a recording studio named after the Beatles’ studio in London.

Tencent appears to be responding in part to slowing growth at home, wrote MIDiA analyst Mark Mulligan, who added that a deal would give Tencent investments in both music distribution and music rights holding, “backing both horses” in the music industry’s financial race.

Tencent also faces stiff competition from China’s privately held ByteDance, whose popular social media, video sharing and music sites include Toutiao and TikTok.

Universal still generates the bulk of its revenue out of the North America and Europe, which together represented more than three-quarters of the division’s recorded music sales in the first half, while Asia produced only 14%.

Recorded music revenue, however, grew twice as fast in Asia at 35% as in Europe at 15% over the period and TME boasted 654 million monthly active users on its platforms at the end of the first quarter.

Spotify’s monthly active users, which include its ad-supported free version, amounted to 232 million at end of June.

After a cash-burning competition among companies to snap up music rights, China’s content regulator last year demanded music streaming sites share 99% of their rights reserve with each other.

Unlike Western players such as Sweden’s Spotify, Tencent Music generates only a fraction of revenue from music subscription packages, and instead relies heavily on services popular in China such as online karaoke and live streaming.

Universal and Tencent both hold shares in Spotify SPOT.K, the world's biggest music streaming platform which has a market capitalization of about $27 billion, while the Swedish firm is a stakeholder in Tencent Music.

Tencent said at the time of its last earnings that it was adding more music behind a paywall, including popular Taiwanese singer Jay Chou, to raise revenue. But it said it might take time before Chinese users adapt to this relatively new approach.

STAKE SALE

Tencent shares closed 1% lower in Hong Kong and the company declined to comment.

Vivendi Chief Executive Arnaud de Puyfontaine said last month that proceeds of the sale of up to 50% of Universal would be used for bolt-on acquisitions and share buybacks.

The group first said it would sell part of Universal a year ago but had made little progress until announcing last month that it had selected investment banks to start a formal sale, which should be finalised by the start of 2020.

Vivendi also said it was continuing the process to sell further minority stakes in Universal to other partners.

Financial firms are being sounded on top of potential industrial partners, a source close to the matter said.