Shares of Square Inc. were off more than 4% in morning trading Thursday after the company announced that it plans to take a majority stake in streaming-music service Tidal.
expects to pay $297 million in cash and stock in exchange for “a significant majority ownership stake” in Tidal, which is affiliated with Jay-Z. Jay-Z will join Square’s board of directors upon the close of the deal, which is expected in the second quarter.
Square Chief Executive Jack Dorsey acknowledged the apparent strangeness of the deal on Twitter, asking “Why would a music streaming company and a financial services company join forces?!” He argued that Tidal aligns with Square’s mission as he sees opportunities for Square to help “mak[e] the economy work for artists” just as it did for merchants.
“It comes down to a simple idea: finding new ways for artists to support their work,” Dorsey said. “New ideas are found at the intersections, and we believe there’s a compelling one between music and the economy.”
Square plans to run Tidal independently within the business, alongside the seller and Cash App branches of Square. The company doesn’t expect a material impact on revenue or gross profit from the deal during 2021.
Square said in the release that Jay-Z, along with all of Tidal’s current artist shareholders, will continue to own part of the company after the deal closes.
Mizuho analyst Dan Dolev argued that the Tidal deal makes sense for Square and called it a “free call option” that represents less than 0.5% of the company’s market capitalization.
“Square is positioning the acquisition as a path for economic empowerment to musicians,” he wrote in a note to clients. “But we believe Square thinks bigger and longer-term, expanding social commerce capabilities and seeing the potential as a first mover in the beleaguered post-COVID music industry as it searches for a new direction.”
Given Dorsey’s interest in bitcoin and the world of cryptocurrencies, the Tidal acquisition might represent an opportunity for Square to play into non-fungible tokens (NFTs), or crypto tokens that can hold assets like music and art. The band Kings of Leon plans to release its next album as an NFT, an episode that shows “how crypto and music may be coming together,” Dolev wrote.
Barclays analyst Ramsey El-Assal wrote that while the deal “is unorthodox at first glance,” it could allow Square to drive greater engagement within its broader ecosystem.
“Additionally, we remind skeptical investors that sentiment was similar when the company launched Cash App several years ago, but today we expect that business to be >50% of total company gross profit in fiscal 2021 and still grow nearly 70% year over year,” he said.
Shares of Square have nearly tripled over the past year, as the S&P 500
has risen 27%.