Vivendi Feeling The Heat Over UMG Music Vault Fire As Shares Tumble

Despite a valiant effort to brush off the 2008 UMG music vault fire as just “noise,” parent company Vivendi is feeling the effects of the story as shares dropped 2.8% today on fears that the company’s plans for a partial sale of the major record label are in jeopardy.

Universal Music Group (UMG) had been valued in the $40 to 50 billion range prior to a story in the New York Times that an estimated 100,000 or more music master tapes were lost in the 2008 fire of its media storage vault in Hollywood. Vivendi was said to be in the middle of negotiations to sell up to 50% of the company, but the sale had been slow to take shape even before the story broke.

Since the extent of the vault fire was uncovered, many artists and managers have come forward saying that they had no prior knowledge of the situation, and at least one class-action lawsuit against UMG has been initiated as a result.

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To be fair, UMG has made an effort to address the issue, with statements by current CEO Lucian Grange stating the need for transparency, and Senior Vice President of Recording Studios and Archive Management Pat Kraus sending a memo to the company staff announcing the creation of a 70 person team involved in an investigation of the incident.

That said, a statement by Vivendi CEO and chairmain Arnaud de Puyfontaine stating that the story was just “noise” and any lawsuits against the company would be easily countered came across as tone-deaf to the situation rather than reassuring to investors, as the current market downturn seems to have indicated.

The company was hoping for a windfall from its partial UMG sale thanks to the recent upturn in music business revenue with UMG having the largest market share. Indeed with many challenges that streaming music may face on the horizon (market consolidation, subscriber attrition, slowing growth), this may be the ideal time to sell, but prospective buyers now also know that they’d inherit a controversy as well.

Not previously considered by many is the fact that how UMG treats its past artists when dealing with their fire loses may very well influence its current crop of artists on the roster or the artists it hopes to sign in the future.

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If a legacy artist that current artists look up to feels that they’ve been mistreated or unheard during this process, that could affect the confidence in the company by new artists going forward.

As a result, a prospective UMG buyer may wish to sit on the sidelines for a while to see how the controversy shakes out, and that could make a sale at the company’s current valuation increasingly difficult.

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UMG leadership has said all the right things, but it will take actions rather than words to resolve the situation. Don’t be surprised if the company’s valuation and sale depend on its next moves.

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