Why’s Believe’s going public? And what it’s going to spend $600m on?

The last time there was a headline-grabbing music industry IPO attempt in France, it was a flop.

When Deezer tried to float and raise around $400 million on the Paris Euronext back in 2015, its bid crashed and burned.

Now, for the first time in six years, the music industry’s gaze is switching back to the Paris Euronext… and the smart money is on a very different narrative playing out.

Earlier today (May 10), Believe – TuneCore owner and indie artist/label services powerhouse – fired the starter pistol on a big-money Paris IPO.

When we say ‘powerhouse’, we mean it: Believe revealed today that it generated some €728 million in gross digital revenues in 2020 – which weighs in at over $880 million at current exchange rates.

(This figure included the money collected by TuneCore and then paid out to indie acts. Believe’s consolidated revenues last year stood at €441 million, or around $535 million.)

By floating a chunk of its company on the Euronext, Believe now hopes to raise €500 million (just over $600 million).

Believe’s IPO bid is strengthened by two key factors: (i) The buoyancy of the global paid music streaming market, which Goldman Sachs now forecasts with be worth over $50 billion a year by 2030; (ii) Believe’s success within the growing global independent sector – particularly when it comes to working with independent artists.

Operating in more than 50 markets, Believe has multiple tiers to its business, depending on the requirements of the artists and labels it serves.

This hierarchy starts with the DIY distributor TuneCore, which sources suggest that Believe bought for a now-tiddly-looking $40 million in 2015.

In addition to offering more hands-on services deals with artists and labels, Believe also owns (or co-owns) a family of indie record companies, including All Points, Naive, and metal specialist Nuclear Blast (which Believe acquired in 2018 for an eight-figure price).

Believe was founded in 2005 by ex-Vivendi executive Denis Ladegaillerie, who continues to run the business today as its CEO.

Here in a fresh interview, MBW quizzes Ladegaillerie on Believe’s decision to go public (rather than sell up to a major music company), plus the challenges and opportunities for the firm in the years ahead…

Why was the option of an IPO attractive, as opposed to taking on private investment – or, indeed, selling some equity to a major music company?

To sum it up, I would say, in 10 years from now, [almost] the entire music market is going to be digital. And when the world is digital, we operate at a competitive advantage.

We’re already taking more and more top artists away from majors – artists looking for different deals and expertise – so there is a clear opportunity there. And we feel pretty good about our ability, from a technology standpoint, to serve artists and labels.

So why would we do a strategic combination [with a major] when we have this opportunity ahead of us?

“We’re already taking more and more top artists away from majors – artists looking for different deals and expertise.”

With regards to the funding itself, we’ve weighed both options [private and public]. Our thoughts are that going public is good for a couple of reasons.

M&A is going to be a key driver for us in the future, as it has in the past. The music business is very much about people, and [not necessarily acquiring 100% of equity on every deal] can align owners of businesses with Believe on value creation. It’s much easier to do those types of deals being public rather than with private [capital].

Also when you are at the stage of growth where we are, going public probably preserves independence more than going the private route.

You released some top-level financials today that reveal 68% of your revenues are generated in Europe, with 18% in Asia-Pacific & Africa, and just 14% in the Americas. Is there an opportunity for you with this proposed €500m (around $608m) raise to increase your presence in the US?

Every year we project global market growth. What we’re currently [forecasting] is the largest music market in the world by 2028 is going to be Asia – that’s China, India, and South-East Asia [combined]. The world’s No.2 largest music market is going to be continental Europe plus the UK. And the US is only going to be the third largest market.

So to answer your question: there are faster growing markets than the US, that are going to be larger than the US in the future, that are less expensive to invest in at this point in time. That makes them more attractive opportunities.

“There are faster growing markets than the US, that are going to be larger than the US in the future, that are less expensive to invest in at this point in time.”

On top of that these are heavily digital markets. So let’s continue investing in Europe, in Asia, in emerging [territories] – in Russia, Brazil, etc. – because these are digital markets where our competitive advantage plays [out].

That being said, in the US there are plenty of M&A opportunities. We’re being approached by top labels and other music companies, who are coming to us and saying, ‘I’m being approached by all major record companies, but they already have their [own] imprint. I’d rather do something with a company that has got a similar platform, but where I don’t compete.’

In future I think we’ll see in the US the exact same thing that we’re seeing in Europe right now – which is less dependency upon radio, less dependency upon TV, for the top [chart positions]. From that standpoint, I think the US is a little bit behind some of the some of the other markets today.

Why did you pick €500 million as your target for the raise? And if all goes well, what kind of valuation will that give Believe today?

Our target goal is to be about to be able to do around €100 million (around $120 million) of M&A per year. That’s really how we built that €500 million number.

My gut sense is that we’re probably going to go faster than [spending] €100 million per year in the short term, because there are so many opportunities.

“Our target goal is to be about to be able to do around €100 million of M&A per year… we’re probably going to go faster.”

We’ve done 18 acquisitions in the past six years, and our teams on the ground know the type of [acquisition] targets we should be looking at.

On the question of valuation, quite frankly, it’s too early to tell. We don’t know yet what the size of the round is going to be. You will get that answer in probably two or three weeks when we [announce] the pricing of the offering.

what typifies Believe’s m&a targets as a business in 2021?

Our priority is really frontline labels, across two categories: (i) Traditional labels with catalogs who are looking at accelerating their transformation to digital, so typically Nuclear Blast-type companies; or (ii) Very digital-savvy new labels, who understand how to leverage TikTok, Spotify, YouTube to develop artists and do it well.

This is the opposite [strategy] to just buying catalogs. We’re not we’re not super interested in catalogs because we think they’re quite expensive. We cannot add value as much to catalogs as we can to accelerating the growth of frontline labels.

We’ll also look at smaller distributors in some territories, as well as tech – ad tech, music marketing tech – mostly with a view to [doing] acqui-hires, buying smaller businesses and integrating them fully into our teams.

I’m thinking about what might be your risk factors as a public company. One interesting trend in the industry is SoundCloud moving into offering more of a distribution and services model. Then Spotify invested in DistroKid not so long ago – before launching direct distribution, then shutting it down. And Apple just invested in Unitedmasters. Are you keeping a watchful eye on the activities of DSPs?

Yes, of course. I’m still a strong believer in the fact that there’s a conflicting interest there [in cases when a DSP acts a distributor].

Every time we negotiate with Spotify, we’re trying to extract the best rates for artists and labels; they’re trying to minimize them. There’s tension. So I really don’t see [Spotify doing direct distribution] in the long term; it’s not logical.

However, I think what Spotify is doing with artist discovery – better monetizing their ability to help us develop artists on their platform – is super-smart. I think that’s something Spotify should monetize, and it is logical.

Do you have concerns over deals being done between Spotify and major record companies, whereby when those majors have on-platform marketing credits thrown in as part of their agreements?

The reality is that it’s a blurry line already. Our deal with Spotify includes marketing spend, which we are passing on to artists and labels. I believe it’s the same situation at Merlin, and with the major record labels.

So you already have a rate payout from Spotify that mixes an [agreed royalty payout rate, minus an agreed amount of on-platform marketing credits], which in my own view is not super healthy.

“We need to keep transparency and the best way to [achieve that] is to keep these things separate.”

The discussions we’re having with Spotify and the other DSPs at the moment is really, ‘Hey, in the next negotiation of our deals, we would like to split these two [things].’

Because ultimately a label that doesn’t use any of that marketing capability should get the benefit of a full rate. While someone who invests in [marketing on Spotify] should pay for that investment.

That for me is a more healthy and transparent way of managing it than bundling everything into one deal.

You’ve done a number of acquisitions but TuneCore stands out. You bought it in 2015 when it looked like a distressed asset; now it’s in the center of the DIY artist sector, which is one of the industry’s fastest-growing segments.

We’ve been quite disciplined on M&A, so all of our large acquisitions have been successful. Nuclear Blast is a good example: it was a 70% physical business two years ago, it is now a 60% digital business.

TuneCore has been a super successful acquisition, because we saw the potential of that market before anyone else. When we acquired TuneCore, all the majors had looked at it, and all of them said, ‘This is not interesting. We don’t want it.’

“All the majors looked at TuneCore, and all of them said, ‘This is not interesting. We don’t want it.’”

TuneCore was a distressed asset when we bought it; the company was not [at] break-even, still burning cash, and had limited cash on the balance sheet. We hired more people, invested in it, and we’ve continued to invest.

There’s plenty of potential ahead of us on TuneCore. With that part of the music market – building automated solutions for artists – I think we’re just at the beginning.

TuneCore is still only a very small fraction of our revenues; it’s a large fraction of digital music sales, but it’s less than 10% of our [consolidated] revenues. But it’s a great business, and we’re going to continue investing into it.

Our last question involves your former employer! Vivendi is spinning out Universal Music Group onto the Amsterdam Stock Exchange in the months ahead. With your news today, plus UMG’s plans, what does this tell us about the health of the recorded music industry?

It tells us a great story. I admire the work that Lucian [Grainge] has done in positioning the UMG business; the deal with Tencent was super-smart. I admire Universal Music for its execution capabilities.

However, I do think [UMG’s] business will face many challenges in the next 10 years from the transformation of the market. And I think [Believe] will play a role in that via the tension that we’re putting into the market, taking artists away from Universal.

“The music industry is not a winner-takes-all business; you need different businesses and different services.”

Two years ago, one of the questions I kept getting was: How will you retain your existing artists from [leaving for major label signings]? But now there are plenty of examples where we are the ones taking away Top 10 or Top 20 Billboard-charting artists from major record labels.

Universal has great scale, it’s not going to go down; it has a smart management team. The music industry is not a winner-takes-all business; you need different businesses and different services.

I think our DNA makes us smarter in the digital world and better than traditional labels, and that’s what we’re going to push on with over the next 10 years.Music Business Worldwide