Tencent hires banks to list music unit in New York

Tencent Music and Entertainment has appointed Goldman Sachs, Morgan Stanley and Bank of America Merrill Lynch to lead a highly anticipated initial public offering that bankers expect will value the Chinese streaming group in excess of $30bn, according to two people close to the matter.

TME is being spun out of Tencent, the Chinese social media group, which created the music unit by acquiring and rolling up a number of competitors. Last year it arranged a stake swap with Spotify, giving Tencent and TME a 7.5 per cent holding in its New York-listed peer.

The company is aiming to list in New York, having spurned Hong Kong as the stock exchanges recent acceptance of dual-class shares only applied to founders, not institutions.

The ambitious valuation marks a big jump from the $12.3bn implied by its reciprocal share swap with Spotify, as revealed in the latters exchange filing. Bankers believe TMEs stranglehold on the Chinese market and growing subscription base justified the price tag. Theyre trying to hit $30bn at least, said one person familiar with the process, adding that the valuation would depend in part on where Spotify was trading at the time of IPO pricing. The valuation suggests a fundraising of up to $4bn.

Another banker said that Tencent was pushing for a more modest price tag to ensure a solid after-market performance. They are asking how to make sure there isnt a feeding frenzy out of the box and then it doesnt trade well, he added. Goldman Sachs declined to comment. Morgan Stanley and Bank of America Merrill Lynch did not respond to requests for comment.

Tencent had a 78 per cent share of Chinese music streaming revenues last year, according to Soochow Security, a Chinese brokerage. That market dominance and a fat wallet enabled the group to outbid rivals for distribution agreements with western labels a practice that Chinas copyright watchdog has since cracked down on.

Beneficiaries of the IPO will include international record labels such as Warner Music, which have exposure to the company via convertible instruments, according to people familiar with the matter. Other banks playing a supporting role on the offer are JPMorgan Chase and Deutsche Bank.

After listing its music unit in New York, Tencent is considering the creation of an investment portfolio with four stocks with the following characteristics.

Stock	No. of share	Market Price	Expected return	standrad deviation	Bata
A	100	70	5%	4%	1.10
B	100	60	5%	4%	0.80
C	1,000	7	6%	5%	1.30
D	100	80	6%	5%	1.05

In addition, ten-year Hong Kong Exchange Fund Notes currently yield 1% annually. The Hang Seng Index generates a market return of 5% annually.

a Based on the above information, evaluate which of the stock(s) is (are) appealing to Tencent.

b If the four stocks are included in a portfolio as described in the above table, determine the beta and expected return for this portfolio.

c Analyse how much Stock C must be sold and reinvested in Stock B so that the beta of the portfolio can change to 1.00.