Universal Music Group

Told you so. Lower free cash flow (and debatable definition) now in focus

This is the first of three articles over the next few days focusing on using free cash flow (FCF) analysis to briefly evaluate companies: this one where I believe investors have paid too little attention to the issue resulting in (past) excessive optimism and the two following where there is inadequate recognition of positive FCF attributes.

On 4 June I suggested that the Pershing Square puke of its stake in UMG may not be a reasonable entry to this highly regarded business. The reasoning was that it should be priced on free cash flow yield, not multiple of “adjusted EBITDA” as implied by the Ackman analysis (he is too smart for that rubbish).

Today’s results contain a new company calculated sheet with FCF as an alternative performance measure. That’s good BUT it is highly contentious since it excludes “catalogue investments” which in the past two full years amounted to €266mn and €345mn in FY24 and FY25 respectively. It’s the difference between my 4 June comments on free cash flow and the new company sanctioned version:

I would argue these investments are NOT discretionary as the company believes. Continuing to invest and build the catalogue is essential to maintaining the strength of the business. Hence, in evaluating the company, I postulated that at the “puke” price of €18, the equity FCF yield was around 3.2% - too low in my opinion. I felt I needed something closer to 4.25%, which equated to a equity price around €13.50/share.

The results show a first half (always far lower) FCF on the UMG definition collapsed from €163mn to only €24mn; on MY basis, its far less stark, noting the massive negative working capital in H1 which works its way out by year end. H1 FCF on my basis is (€126mn) versus (€90mn). Catalogue investments were only €46million, over €100mn less than the corresponding period. Post buyback activity, with net debt at €4.1billion, that looks very skinny. A good job there’s €2.2bn of stakes in Spotify and TenCent Music.

Whilst investors fret over slowing revenue growth, I’m more interested in the development of my definition of free cash generation. Allowing for an EFCF yield of 4.25% to 4.5% suggests a mid-price of ~€12 versus my earlier postulation of €13.50.

The shares have fallen by 26% today to just above €14 at time of writing. There’s no question the debt is a little more unnerving as is the fact the company’s sense of investor thinking was so way off beam as to aggressively fill the €500mn buyback at an average €18.70 a share - €117mn more expensive than today.

With such adverse sentiment, there’s a chance the shares may get close to our range. Who knows, maybe Bill will come back.

Andrew Brown

31 July 2026

Andrew Brown does not hold a relevant position in the securities of UMG

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