What’s Going On With Tencent Music’s Potential IPO?

Morning Report: Tencent wants to list its music in the United States. Here’s what you need to know.

Over the weekend, Tencent Music made its intentions to list in the United States formally known. Tencent, which wants to spin off its music efforts, said the following in its filing:

[T]he Company has submitted a proposal to […] spin-off by way of a separate listing of its online music entertainment business operated by its majority-owned subsidiary, Tencent Music Entertainment Group […] on a recognized stock exchange in the United States through a registered public offering[.]

That’s explicit and simple enough. Now, the obvious questions: How mature is the Chinese music industry and what is Tencent Music worth?

First, China’s music industry is relatively immature compared to the United States and Europe. The International Federation of the Phonographic Industry’s “Global Music Report 2018” lists China as the world’s tenth largest music market. However, it is not hard to find optimism regarding China’s potential for continued rapid music revenue growth. So while China isn’t precisely a leading music market today, by revenue, it’s certainly expected to become one.

What this tells us is that Tencent Music, which presumably has a good chunk of its domestic market under its economic control, has room to grow.

Now, the valuation question (which will help us understand the scale of Tencent Music’s service). Per CNBC, here are some brass tacks:

Tencent Music is seeking an initial public offering worth up to $4 billion, valuing it at about $25 billion, IFR reported in April, citing people familiar with the plans.

But TechCrunch has rival notes:

Past reports have suggested that it could raise as much as $1 billion and give TME a valuation of $30 billion. That would be quite a jump from its most recent $12 billion valuation[.]

In either case, the offering should be enormous. That implies a huge revenue pool and workable margins. Per the Spotify direct listing, investors have working measuring sticks for streaming companies’ revenue, gross margins, and the like. Tencent Music will, therefore, have to abide by Spotify’s multiples, unless it has certain metrics (growth, for example) that are sufficiently attractive for it to break free from the market precedent.

Spotify is worth just over $31 billion today and Apple Music is right behind it in terms of paid U.S.-based subscribers. Spotify claims over 75 million paying customers globally. If Tencent Music is worth $30 billion itself, it’s probably in the same ballpark—presuming it is not mispriced.

That means that there’s nearly $100 billion in streaming music market cap out there. Interesting.

From The Crunchbase Daily:

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