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UPDATE 3-Vivendi turns to Tencent to gain Universal foothold in China

Mathieu Rosemain, Sudip Kar-Gupta and Pei Li

* Would give UMG equity valuation of 30 bln euros

* Tencent has option to buy further 10% stake

* Raises questions on broader commercial deal

* Vivendi shares up 7%, Tencent rises 1% (Adds details, background,)

PARIS/BEIJING, Aug 6 (Reuters) - Vivendi is in talks to sell up to 20% of Universal Music Group (UMG) to Tencent, valuing its prized asset at around 30 billion euros ($34 billion), in an attempt to break into China's growing but tightly-controlled music market.

While at a preliminary stage, the discussions highlight Tencent's role as gatekeeper to China and the desire of Universal, whose revenues are surging as a result of online streaming, to expand beyond its traditional markets.

French media group Vivendi, controlled by billionaire Vincent Bollore, said that Tencent would first buy 10% of Universal and have an option to buy a further 10%.

Universal is the world's biggest music label ahead of Sony Music Entertainment and Warner Music, and is home to artists such as Lady Gaga, Taylor Swift, Drake and Kendrick Lamar.

Both groups are also "considering areas of strategic commercial cooperation," Vivendi said, raising questions among some analysts over the scope of the talks.

"It is unclear if the stake sale depends on the parallel commercial deal with TME (Tencent Music Entertainment) and what economic transfers this deal involves," said Jerry Dellis, an analyst at Jefferies.

"Accepting that TME is the gatekeeper for entry into China, we think clarification is required as to how any commercial deal with TME may constrain (or enhance) UMG's opportunities for value creation in China over the long-term."

CHINESE PAYWALL

A deal with Tencent would boost Universal's presence and fit well with the Chinese company's subsidiary TME, which tends to outbid its local competitors in acquiring music copy rights in mainland China.

After a cash-burning competition to snap up music rights, China's content regulator last year demanded music streaming sites share 99% of their rights reserve with each other.

Unlike Western players such as Sweden's Spotify, Tencent Music generates only a fraction of revenue from music subscription packages, and instead relies heavily on services popular in China such as online karaoke and live streaming.

Universal and Tencent both hold shares in Spotify, the world's biggest music streaming platform which has a market capitalization of about $27 billion, while the Swedish firm is a stakeholder in Tencent Music.

Tencent said at the time of its last earnings that it was adding more music behind a paywall, including popular Taiwanese singer Jay Chou, to raise revenue. But it said it might take time before Chinese users adapt to this relatively new approach.

STAKE SALE

Vivendi shares surged 7% as analysts welcomed progress on the sale of a stake in Universal and the implied valuation.

"The valuation looks good, and the progress made on the UMG deal is also positive," said Gregory Moore, fund manager at Keren Finance, which owns Vivendi shares.

Meanwhile Tencent, whose shares closed 1% lower in Hong Kong, after Vivendi's announcement, declined to comment.

Vivendi's Chief Executive Arnaud de Puyfontaine said last month that proceeds of the sale of up to 50% of Universal would be used for bolt-on acquisitions and share buybacks.

The group first said it would sell part of Universal a year ago but had made little progress until announcing last month that it had selected investment banks to start a formal sale, which should be finalized by the start of 2020.

Investment banks have estimated the business is worth anything between 17 billion to 44 billion euros.

Vivendi also said that it was continuing the process to sell further minority stakes in Universal to other partners.

Financial firms are being sounded on top of potential industrial partners, a source close the matter said. ($1 = 0.8926 euros) (Reporting by Mathieu Rosemain, Pei Li and Sudip Kar-Gupta; additional reporting by Brenda Goh Editing by Kirsten Donovan and Alexander Smith)