Spotify to post “significant” gain from Tencent’s IPO
Tencent Music went public last week after a pause due to market volatility
TL;DR
- After a two-month delay due to market volatility, Chinese behemoth Tencent Music made one of the largest public debuts of the year
- While the company was once valued at ~$30 billion, it has settled around just above $21 billion, somewhat tempering expectations around the music tech market
- One of the biggest beneficiaries of this IPO is Spotify, which owns a minority stake in Tencent
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For for those that don’t know Tencent Music, think of it as China’s Apple Music: a wildly successful music streaming service created by a wildly successful internet giant.
Last December, after talks of an acquisition broke down, Spotify and Tencent Music conducted an equity swap to trade shares in each other’s businesses. The logic seemed to be that Spotify, as shown below, has its success concentrated in Europe and the Americas. Whereas Tencent is dominating China.
Since both companies don’t expect to be making considerable dents in each other’s markets any time soon, the equity swap would help them take part in each other’s success.
Another upside of this agreement would be to secure licensing deals. The way Spotify provides users with music is by entering into licensing deals with labels (eg. Warner Music, Sony Music, Universal Music, etc.) and paying them to stream their artists’ catalogues of music (ever wonder why Jay Z isn’t available on Spotify? Because of licensing deals). With Tencent’s presence in China, it has deep, existing relationships in place with its most prominent labels. A truce between the companies could open up these relationships on both sides, thus expanding the streaming services’ music catalogues.
Now, with the IPO, Spotify is raking in a healthy return. The company purchased Tencent shares last December at $6.52 and they’re now trading at around $12 (see below), essentially doubling in value.
The partnership has the potential to bear greater fruit into the future and should be something we pay attention to.
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