Spotify, Tencent Music reportedly in talks on equity swap

Spotify and Tencent Music Entertainment are testing the notion that two heads are better than one. They’re reportedly entering into a stock-swap arrangement that should give the tech giants a stronger position at the content licensing table and open up new frontiers.

Sweden-based Spotify and China’s Tencent, one of that market’s leading music subscription platforms, are in talks to swap 10% of each other’s holdings, according to a report in the Wall Street Journal.

Why so? And why now? At a strategic level the arrangement has some rather obvious mutual benefits. Spotify would get a foothold in the nascent China market, perhaps completing another check in its to-do list as it preps to go public in early 2018, with multiple reports suggesting the streaming market leader would pursue a direct listing rather than a typical IPO, while Tencent gets exposure with the United States, the world’s biggest music market.

As U.K. analyst Mark Mulligan points out, the Chinese government put in place restrictions on its nation’s companies investing overseas in an effort to stem the outflow of capital. An equity swap is a shrewd work-around. Tencent, which boasts China’s biggest social network and gaming firm and recently became the first Asian firm to enter the club of companies worth more than US$500bn, is understood to be planning its own $10 billion flotation of Tencent Music.

The conglomerate operates multiple music streaming services in the world’s most populous market with a whopping 700 million combined monthly active users, according to estimates, thought only a small fraction of those users are said to pay for music streaming.

Mulligan goes deep into the permutations on a deal and how each party could benefit. And, scratching the surface, an alliance reveals just how critical China is to Spotify’s grand plan.

“Tencent Music has around a third of Spotify’s subscriber base, a fraction of its revenue and half of its market valuation. Yet a 10% swap deal is on the table,” muses Mulligan.

Spotify is chasing Apple Music, which launched in China in September 2015 with an offering priced at 10 RMB per month, or about $1.50 US per month.

At this point, the co-acquisition is a “win-win for both companies, as it achieves the strategic objectives of each,” notes tech author Bobby Owsinski, writing in Forbes. “The only difference is Spotify is looking short-term, while Tencent is looking much further down the line.”

This article originally appeared on The Industry Observer, which is now part of The Music Network.