The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jeffrey Goldfarb

NEW YORK, May 20 (Reuters Breakingviews) - As the music business changes key, it’s important for investors to stay on the beat. A spate of chunky deals, paired with fresh evidence about the impact of artificial intelligence, is helping recraft the industry’s blues into something livelier. There’s a lack of harmony, however, with the valuations of mega-producers Universal Music UMG.AS and Warner Music WMG.O.

A record scratch from BNP Paribas Exane analyst William Packer stopped the dancing about three years ago. He downgraded Universal Music stock to “underperform” from “outperform,” blaming his reversal mostly on the threat from then-fledgling AI. Since then, worries have spread, with an earworm lingering from the Napster-induced existential crisis.

The industry's response this time has been swifter and stronger. Although AI is far from being crossed off the danger list, some early indications are encouraging. More than a third of what’s delivered to Apple Music is completely machine-generated, but the streaming service stripped some 2 billion fraudulent tracks of royalty payments last year. Synthetic tunes also attracted less than 0.5% of listeners. This, and similar data from peers Deezer and Spotify SPOT.N, implies that users prefer human-created bops.

It’s more than just defensive maneuvering, too. AI-powered discovery algorithms augur a revenue boost for older tunes while new tools help mine song vaults and upgrade the archaic process of collecting royalties. New services like Suno and Udio may be more helpful than harmful. Universal boss Lucian Grainge touts “unprecedented commercial opportunities," including by producing existing hits in different languages using AI models trained on artists' voices.

Acquisition activity turns up the volume even more. Hedge fund manager Bill Ackman is trying to capitalize on Universal Music’s slumping share price with a $65 billion takeover bid. Sony’s 6758.T music publishing division agreed to buy Recognition Music and its vast library from private equity firm Blackstone for $4 billion, a vote of confidence in the lasting value of proven stars like Justin Bieber and Fleetwood Mac. Bertelsmann-owned BMG and Concord are merging to create an independent producer worth some $15 billion. The combo suggests there are AI-related opportunities for cash-generative companies to exploit with a larger portfolio of such intellectual property.

With an anticipated 33% EBITDA margin, the merged BMG-Concord outpaces its three larger peers, partly because it focuses less on the costly nurturing of new musicians and songwriters. The deal also values the enterprise at more than 20 times the same measure of earnings. Even after factoring in cost savings, which the companies did not disclose, the multiple almost certainly exceeds the roughly 14 times at which Universal and Warner trade. It leaves the publicly listed duo's minor scale sounding discordant.

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CONTEXT NEWS

Sony Music Publishing said on May 11 that it had agreed to buy Recognition Music, which owns a catalog of 45,000 songs including hits by Madonna and Bruno Mars, from private equity firm Blackstone. The purchase price was $4 billion, according to multiple media reports.

Music companies BMG and Concord said on April 28 that they had agreed to merge. BMG's parent, German media conglomerate Bertelsmann, will own 67% of the combined company and Concord backer Great Mountain Partners will have 33%, with the investment firm also receiving a $1.2 billion cash payment. The enlarged independent music enterprise is valued at about $15 billion, according to Bloomberg and other news outlets.