Paris: In March of last year, Jean-RenE Fourtou, Vivendi’s chairman, wrote a letter to shareholders daring to ask something that investors had long wondered: “Should the scope of the group be kept as it is? Should businesses be sold or should the group be split into two, or even into three?”
More than a year later, Fourtou’s question at last seems to have a clear answer.
Over the past four months, Vivendi has embarked on a series of sales almost as impressive as the frenetic dealmaking that saw the company transform, under Jean-Marie Messier in the 1990s, from a boring water utility founded during the time of Napoleon III into a glitzy media conglomerate intent on world domination.
The disposals, which include its 53 per cent stake in Maroc Telecom for €4.2 billion and the sale of most of its majority stake in Activision Blizzard, the Californian gaming company, for $8.2 billion, are part of efforts to pay down the company’s large net debt of €13.4 billion at the end of last year.
But they are also part of what Fourtou has called a “no taboos” examination of Vivendi’s raison d’etre as it grapples with the now-apparent difficulties of realising synergies between media and telecoms businesses, but also of struggling with a share price that has long been discounted for being a conglomerate.
In September, Fourtou and the Vivendi board announced yet another big move in the direction of simplification when it confirmed that it was studying plans to spin off SFR, its telecoms business and France’s second-largest operator by sales.
Step back from all of this and, for the first time in years, the contours of Vivendi’s new and more slender profile come into focus. The question is, is it attractive?
Investors appear undecided. Shares have increased 28.4 per cent since June, just before the divestitures were announced. But taking a longer view, they have only risen 7 per cent since January, underperforming the 6.5 per cent rise in the Paris stock market’s CAC 40 index.
In a recent interview, Vincent Bollore, the group’s new vice-chairman and probable chairman when Fourtou probably retires next year, says that the new, smaller but more coherent Vivendi has the right shape.
“Now we have a financial structure which is healthy so we don’t need to sell anything and we don’t intend to sell anything,” he said. “We stop now to look at the price of the share and the short term, and we start to look at the long term.”
Assuming the group follows through on its plans to spin off SFR, which last year accounted for about 30 per cent of the group’s €5.4 billion operating profit, that future would leave Vivendi with Universal Music Group, the world’s largest recorded music group by revenues. Vivendi would also retain Canal Plus, the French pay television channel and GVT, its Brazilian telecoms and pay TV unit.
The result would be a vastly scaled down incarnation of its former self, with annual revenue at the new media and entertainment portion of about €12.5 billion compared with almost €29 billion for the group at the end of last year. Meanwhile, earnings before interest, taxes, depreciation and amortisation (ebitda), a measure of profitability, would be almost €2.5 billion a year.
The challenges at SFR, which is competing in France’s fiercely competitive telecoms market, are clear. Free, a rowdy mobile upstart controlled by Iliad, has forced other operators to slash their prices and make deep cost cuts.
But some analysts also question the attractiveness of Vivendi’s new media and entertainment line-up. They particularly question the growth prospects of European pay TV, which they argue is a mature market wrestling with inflation in the cost of producing content. Moreover, they point to problems in the global music industry with piracy, despite climbing digital sales.
On the financial side, if the company uses €1 billion to buy a remaining 20 per cent stake in Canal Plus, the new Vivendi could be left with a net debt of just €2 billion – assuming that SFR takes on about €5 billion of the group’s net debt, a level that analysts expect.
That would put net debt at the supremely comfortable level of less than one times net debt to earnings before interest, taxes, depreciation and amortisation. Yet it also suggests a challenge. Claudio Aspesi, a media analyst at Bernstein, argues that Vivendi’s status already as the world’s largest recorded music group leaves it with little regulatory headroom for acquisitions.
“There are no obvious places Vivendi can go,” he says. Besides, he points out that an attempt to build an additional leg in media would go against the flow of the industry trend away from conglomerates. Giving cash to shareholders through share buybacks or dividends could be another option.
Vivendi also faces a conundrum in Brazil, having failed to find a buyer for its Brazilian telecoms and pay TV arm GVT with an asking price of $8 billion earlier this year. The group says it no longer wants to sell. But Thomas Singlehurst, an analyst at Citi Research, says that without disposing of GVT, Vivendi would risk locking in the conglomerate discount that it has tried so hard to cast off.
“We are now looking at two companies – Vivendi telecom and Vivendi media – but there is a telecoms unit in the second. It looks awkward,” he says.
Aspesi of Bernstein agrees. “The true Vivendi will only emerge after the GVT divestiture,” he says.
Dealing with all of these questions will be a new management team and reconfigured board. The group confirmed recently that Philippe Capron, the group’s respected and powerful chief financial officer, would leave at the end of the year.
When Fourtou, 74, retires next year, he will doubtless be able to say that he saved Vivendi twice – once in the early 2000s when it came close to bankruptcy; and, though less dramatic, last year when it had heavy debts and no road map.
But for all the group’s hard work in recent months, there is a strong sense that Vivendi’s shape must continue changing even after Fourtou’s departure.