PAG-backed Tencent Music files for US IPO

The size and pricing of the offering have yet to be established, but TME was previously reported to be seeking to raise $2 billion at a valuation of $25-30 billion. Spotify completed a share swap with TME last December, acquiring a 9% stake at a valuation of $12.3 billion, while the Chinese company acquired a combination of new and existing shares in Spotify equal to a 7.5% interest.

A spate of Chinese technology companies already gone public on US bourses this year – there have been 14 PE-backed offerings so far, up from 11 for the whole of 2017 – led by Baidu-backed video streaming website iQiyi, which raised $2.4 billion IPO in March.

However, unlike many of its newly-listed peers, TME is a profitable enterprise. Revenue reached RMB10.9 billion ($1.66 billion) last year, up from RMB4.36 billion in 2016, while net profit rose from RMB85 million to RMB1.32 billion. For the first six months of 2018, profit came to RMB1.74 billion.

TME makes its money through subscriptions, virtual gifting sales, and sub-licensing to other online platforms that want to stream music owned by one of the record labels that work with the company. However, in terms of revenue split, TME is very different from the likes of Spotify. While the latter primarily relies on subscriptions, the former generates most of its revenue from gifting sales – for example, karaoke social community app WeSing, which allows users to tip performers they like.

Revenues from these social entertainment services came to RMB60.7 billion in the first six months of 2018, accounting for around 70% of the total revenue. Online music services, which mainly comprise subscription fees, reached RMB25.5 billion for the period.

TME had 800 million unique monthly active users (MAUs) as of June who spend an average of 70 minutes per day on the platform. The company’s main products are: online music streaming services QQ Music, Kugou Music, and Kuwo Music; live streaming services Kugou Live and Kuwo Live; and WeSing, which connects to Tencent-owned social networking assets like WeChat. It also has a library of over 20 million tracks licensed from 200 domestic and international music labels.

PAG’s involvement came through its acquisition of China Music Corporation (CMC), owner of the largest library of music broadcasting rights in the country. The PE firm nearly passed on CMC because the check size was below its usual minimum deployment requirement, but eventually decided that the growth opportunity couldn’t be ignored.

In 2016, Tencent purchased a majority stake in the company at a reported valuation of $2.7 billion, far higher than that PAG paid on entry. The deal brought together China’s three leading mobile music apps – Tencent’s QQ Music and CMC’s Kugou and Kuwo. PAG swapped its shares in CMC for a stake in the new entity.

The private equity firm now holds a 9.8% stake in TME, while Tencent and Spotify have 58.1% and 9.1%, respectively, according to the prospectus. China Investment Financial Holdings Fund, which is controlled by China Investment Corporation, is another significant investor with 7.2%.

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• Topics
• Greater China
• IPO
• Media
• Technology
• China
• PAG
• Exit
• TMT
• Tencent