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

By Pierre Briancon

LONDON, April 7 (Reuters Breakingviews) - Bill Ackman may soon run into the problem he thinks he can solve: Vincent Bolloré. The hedge fund manager’s Pershing Square Capital Management is bidding for Universal Music Group UMG.AS, the world’s largest music company and home to Taylor Swift and Kendrick Lamar, in a cash and share transaction he values at $64 billion. Ackman, who owns 10% of UMG, says he wants to tackle the group’s low valuation, with a share price down more than 30% since its October 2021 spinoff from French media group Vivendi VIV.PA. The French billionaire, who controls directly or indirectly more than a third of the music giant, may require more cash to play ball.

In a four-page letter to UMG directors on Tuesday, Ackman states he has no issue with the way CEO Lucian Grainge. Instead he intends to keep him on with a new compensation package due to his “excellent” job, and a new chair in one-time Disney president Michael Ovitz. But the U.S. investor thinks UMG is poorly valued because of lingering uncertainty about Bollore’s stake, an underleveraged balance sheet structure and the lack of a New York listing. UMG last month put the latter, a long-term Ackman objective, on ice.

Pershing is offering the music company’s shareholders 5.05 euros in cash and 0.77 shares in the future "New UMG", a merger with its SPARC Holdings vehicle. Ackman’s offer also values UMG at 30.4 euros a share, a 78% premium to its April 2 price. Yet on Tuesday, the music company's shares were only trading at 19 euros.

Part of the scepticism may be that investors need to take a few things on trust. Ackman's numbers assume a UMG valuation of 25 times earnings at the end of the year. Yet the music company currently trades at 16 times this year’s forecast earnings, and its smaller rival Warner Music WMG.O is on 19 times. Pershing says that taking on 5.4 billion euros of extra debt will allow more acquisitions and increased returns to shareholders, but net debt at 2.5 times adjusted EBITDA represents a tangible jump from the current 0.7 times.

A bigger question mark is Bollore's capacity to become a party pooper. As a result of the 2021 spinoff, his family vehicle owns more than 18% of UMG. Vivendi, the media group he controls, holds another 13%. Assuming Bollore doesn't wish to accept a stake in New UMG, Ackman is dangling an alternative cash offer of 22 euros per share. That is however still below the original IPO price of 25 euros, and way below its 29 euros high in February last year.

It would not be in Bollore’s nature to accept that sort of deal without a spirited fight. With Ackman conditioning his offer to a two-thirds shareholder approval, the French mogul is not far from the threshold where he could scupper things. That might mean Ackman needs to find much more than the 9 billion euros of cash he's currently penciling in.

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CONTEXT NEWS

Bill Ackman's Pershing Square on Tuesday proposed merging its acquisition vehicle ‌with Universal Music Group, with a plan to list in the United States in a deal aimed at reviving the world's biggest music label's value.

Pershing Square's cash-and-shares offer values Universal Music at around 30.40 euros per share, representing a 78% premium to its last closing price at ​17.10 euros and making the deal worth 55.8 billion euros ($64.3 billion), according to Reuters calculations.

UMG shares were trading at 19.1 euros as of 1132 GMT, up 11%.