The past 12 months have been marked by turmoil for Vivendi (VIVHY.PK), sparking the ouster of its former CEO Jean-Bernard Levy and a strategic review of its businesses. The turmoil resulted in Vivendi trading to a 9-year low in April 2012. Vivendi has since signaled to the market that it is intent on selling off its telecom assets to become a media focused outfit, requiring far less capital expenditures to run the enterprise.
Since my last article on Vivendi in April 2012, there have been a number of positive developments at the holding company which I do not think are priced in yet.
Impending sale of Maroc Telecom and GVT:
For those watching the newswire, the financial press has reported a number of interested buyers in both businesses, which will hopefully mean for Vivendi shareholders that the holding company will receive management's desired price for each business.
At Maroc Telecom, the suitors include KT Corp. (KT), a South Korean telecom and Etilsalat, the second largest telecom operator in Africa, behind Maroc Telecom. The asset sale could garner Vivendi up to $8 billion, or roughly 30% of Vivendi's current $27 billion market capitalization.
GVT, the fast growing "crown jewel" Brazilian telecom unit, has been described as an "interesting asset" by DirecTV's (DTV) CEO Michael White. With revenue growth rates close to 40%, serving the expanding markets in Latin America, and Brazil in particular, GVT certainly contains a lot of value and growth potential. Three parties appear to have emerged as bidders for GVT: (1) DirecTV, (2) America Movil (AMX) and (3) a consortium of buyers including KKR, Apax Partners, JP Morgan Chase's (JPM) Brazilian asset management arm Gaveo Investments and Cambuhy Investimentos. Vivendi wants 8 billion euros for GVT, all offers appear to be less than that. For conservatism's sake, let's assume Vivendi receives 6.5 billion euros ($8.5 billion at $1.30/euro exchange rate), or roughly 32% of Vivendi's current market capitalization.
Undercover catalyst - Activision Blizzard:
The company is considering or may consider during 2013, substantial stock repurchases, dividends, acquisitions, licensing or other non-ordinary course transactions, and significant debt financings relating thereto.
ATVI sports a market capitalization of $16 billion, Vivendi's share is close to $10 billion based on the market's assessment of ATVI's value. That represents 37% of Vivendi's current market capitalization.
ATVI has close to $4/share of net cash on its books, or about 25% of its market capitalization. It is also growing its revenues (11% year-over-year on a non-GAAP basis) and earnings (27% year-over-year, again non-GAAP) in concert, making ATVI appear very attractively priced in its own right, but cheaper if you own it indirectly through the conglomerate discount ascribed to Vivendi's shares.
While the market continues to be cautious on video game makers due to the industry experiencing 14 monthly declines in sales (credit to Seeking Alpha contributor Vince Martin for the link), ATVI continues to plug along, growing sales on its leading franchise properties, including "Call of Duty", "World of Warcraft", among others, and extending its leadership to China with an exclusive agreement with Tencent to distribute an online version of Call of Duty to Asia's large and growing video game audience.
And now management appears to be drawing out a plan to alleviate the discount the market continues to apply to ATVIs equity. With free cash flow exceeding $1.2 billion in 2012, and likely improving as ATVI executes on its strategy, a number of catalysts could drive ATVI and/or Vivendi's value higher: (1) borrow against ATVI's pristine balance sheet and earnings power to buy out the remaining free float, bringing ATVI entirely under the Vivendi camp; (2) a management leveraged buyout of Vivendi's stake or (3) a large, special dividend to shareholders.
Whatever happens, 2013 appears to be a break out year for ATVI.
The Remaining Businesses: Canal+, SFR and Universal Music Group
Based on a rough, back of the envelope valuation of Maroc Telecom, GVT and ATVI, it appears that those businesses' underlying values alone make up roughly 100% of Vivendi's current $27 billion market capitalization. Of, course, there is risk that those transactions don't occur, and the sale prices must be adjusted for taxes, but Vivendi still appears extremely undervalued. And then there is the net debt situation, which management expected to be under 14 billion euros at the end of 2012.
So, in exchange for taking on their pro rata share of the 14 billion euros in net debt, the savvy investor gets the following:
Vivendi's French telecom cash cow generated 12.2 billion and 3.8 billion euros in revenue and EBITA, respectively in 2011. The entrance of a new competitor in 2012, Iliad, pressured SFR, but its financial performance through September 30, 2012 was decent as it adjusted to the changing competitive landscape, with revenues and EBITA down 7 and 8%, respectively. Management informed the market that it has a plan in place to remove 500 million euros in fixed costs by the end of 2014, which will meaningfully improve profitability.
When Vivendi purchased the remaining stake of SFR it didn't own from Vodaphone in early 2012, it paid an implied $25 billion for the business which likely included a control premium in the valuation. If we conservatively assume 2013 EBITA will be 3.5 billion euros and apply a 5x multiple, we arrive at a valuation of 17.5 billion euros for SFR, or $22.75 billion.
UMG was also involved in a restructuring in 2012, acquiring EMI's recorded music division for $1.9 billion, and recently sold its Parlophone music label to Warner Music for $765 million as part of a deal with EU regulators to alleviate anti-trust concerns. UMG is the worldwide leader in music content creation and distribution, and generated 4.2 billion and 507 million euros in revenue and EBITA in 2011, respectively. In 2012, the addition of EMI should be accretive to both sales and profits, to go along with a growing revenue stream from digital music platforms. Let's conservatively assume UMG (ex-EMI) records 500 million euros in EBITA, and apply a 7x multiple and a $1.30/euro exchange rate, and we arrive at a $4.6 billion value for UMG (ex-EMI). Now let's assume Vivendi over paid by double for EMI ($1.9 billion), yielding a value of $1 billion for EMI, or $5.6 billion for both music businesses combined.
Canal+ Group is Vivendi's Pay-TV business with operations in France, Poland, Vietnam, Africa and French overseas territories. It also owns the second largest film library in the world through its subsidiary StudioCanal. It generated 4.9 billion and 701 million euros in revenues and EBITA in 2011, respectively. Through Q3 2012, Canal+ grew revenues and EBITA modestly (not considering higher VAT tax levied in 2012). Canal+ also acquired two free-to-air channels Direct 8 and Direct Star from the Bollore Group (more on Vincent Bollore below). In addition, recently Canal+ Group through Vivendi management exhibited strength with respect to an apparently specious lawsuit brought by Lagardere, a 20% minority owner in Canal+ France, citing a breach of contract as it relates to Canal+ France's and Canal+ Group's cash management agreement. Lagardere's claims appear to be motivated to agitate Vivendi to buy out its 20% share of Canal+ France at a premium valuation, which Vivendi has balked at before. Investors should applaud Vivendi's vigorous approach, and unwillingness to overpay for assets.
Let's apply an 8x multiple to 725 million euros EBITA at $1.30/euro, which implies a value of $7.5 billion for Canal+ Group.
Vincent Bollore and the Value Crowd:
The smart money is betting on Vivendi's new strategy and catalysts to push the stock quote higher. Astute value investors including Seth Klarman's Baupost Group, Asset Investors Limited and David Marcus have established meaningful long positions in Vivendi on recent price weakness. So too has Vincent Bollore, who has been described as Europe's Warren Buffett. Mr. Bollore now controls 5% of the equity, and was awarded a seat on Vivendi's board last fall.
My assessment of Vivendi still holds: Vivendi is clearly undervalued when looking at the holding company on a sum-of-the-parts basis. And investors don't need to apply ultra sophisticated valuation models to make an investment case for Vivendi. With a number of value unlocking transactions on the cusp of being executed, the discerning investor should be a contrarian and buy Vivendi while the conglomerate discount continues to make the equity undervalued. To boot, investors get paid to wait for that discount to disappear: Vivendi is mandated to distribute between 45% and 55% of its adjusted net income each year to shareholders. In its Q3 earnings release, it upgraded its guidance for 2012 adjusted net income to 2.7 billion euros. With 1.3 billion shares outstanding, I expect management to announce a 1 euro/share ($1.30) dividend, yielding about 6.5% at current prices.
Vivendi releases full year earnings on February 26, 2013, and hopefully will update patient investors on its progress to divest of its telecom properties, meanwhile giving a glimpse of what the future Vivendi will look like.