Wall Street (and, really, the finance industry in any country) appears to have an allergy to companies that are hard to analyze and do not have an exciting "sexy" story to tell investors. Vivendi certainly does not have a great story. It's a hodgepodge collection of assets rammed together under the umbrella of a French holding company. Many of the asset purchases were funded by debt, leaving present day Vivendi with too high a debt burden. (Vivendi assets still far outstrip the debt as we will see in the valuation section.) Vivendi is also hard to analyze (at least by Wall Street standards) since it is really six different companies.
On the valuation aspect, we disagree with Wall Street. Given the plethora of private party transactions surrounding many of Vivendi's assets and comparable companies as well as the publicly traded nature of two of the subsidiaries, we believe it is not hard to come up with a reasonable approximation of Vivendi's worth.
Universal Music Group ("UMG")
Universal Music Group ("UMG") is one of the "big three" music recording and publishing companies in the world, along with Sony (SNE) and Warner Music Group. Since the debut of Napster in 1999 and the rise of digital music, music companies have struggled with falling sales. The practice of purchasing entire albums at $15.99 has given way to purchasing individual songs for $.99 to $1.29, or users are illegally downloading the music for free from numerous file sharing websites. The media has also proclaimed that the Internet would democratize the recording and publishing process for artists and that major studios would be relegated to history's dustbin.
The entertainment industry is characterized by, if nothing else, extreme hard-headedness to changes in consumers' consumption habits. In the 1920s, the record industry complained about radio. Then, movie studios whined about being forced to divest their theater businesses. In the 1950s, we saw broadcast TV fight against subscription cable TV. The 1970s brought "Armageddon" in the form of the VCR. In the 1980s, we were told the cassette tape "was killing music." The 1990s and early 2000s brought music to the Internet with Napster (a file sharing program) and the DMCA (Digital Millennium Copyright Act), and the record industry deciding it was a fantastic idea to sue their own customers. Now, we have home- and cloud-based DVRs and Internet radio.
In each new incarnation, the entertainment industry stayed profitable. Despite this they see every new media format on the horizon as a potential threat (usually largely imagined) to the industry's existing profitability. The industry fought the changes tooth and nail through advertising campaigns and copious lobbying, but lost every battle - and will continue to lose. When people want to consume content a certain way, they will do so no matter what the entertainment industry, or the government says. Each time, though, the entertainment industry bravely yet stupidly stood in front of the freight train of change.
Right now, we seem to be approaching the end of the fight-the-Internet stage. Record companies have stopped suing their own customers for downloading songs illegally. (I'm not condoning illegal behavior; I'm simply pointing out that suing your customers or potential customers is a poor way to get them to buy your products in the future.) The a la carte consumption of music has breathed new life into the previously dormant singles market. And record companies are finally figuring out that rather than suing everyone and anyone, they can change tactics and actually make money (lawsuits *cost* money) by licensing content to services that provide music in formats consumers want, such as free advertising-supported digital radio. We are not all the way through this transition, since media companies are still pursuing some questionable strategies, such as the Copyright Alert System that monitors peer-to-peer file sharing. We are, however, closer to the end of era of media companies fighting the Internet than the beginning.
As far as the other argument that the Internet has thoroughly democratized the recording, production, and distribution processes of releasing and promoting music, I find that doubtful.
"People don't turn down money. This is what separates us from animals."
- Jerry Seinfeld from Seinfeld
The major record labels still employ glad-handing executives who walk around with giant bags of cash to grease the wheels and get things done. Only now, instead of getting an artist featured on MTV or a song played on the radio, they are getting a song featured in a commercial or used on a TV show.
I found this quote by Casey Rae, the deputy director of the nonprofit Future of Music Coalition in Washington, D.C. illuminating: "People keep saying that the major labels are dead, or dying, but if that's the case, it's more like the walking dead. It seems like they might be irrelevant to the average person, but they still have tremendous influence over the contours of this developing digital marketplace."
It's the behind the scenes influence that matters when promoting artists, and you still need the cash that the major labels have to make that happen.
We believe Universal Music Group is worth approximately EUR 4.7B. For a more detailed discussion of how we arrived at that value, please see the valuation discussion at the end of this article.
Global Village Telecom ("GVT")
Vivendi owns 99.71 percent of GVT, a Brazilian telecommunications company. Emerging markets are all the rage now for good reason. (Incomes in these countries are rising and that means demands for more goods and services.) The attractiveness of emerging markets in particular applies to telecom companies. With higher incomes, more people can afford more expensive TV and Internet access as well as more expensive mobile phones.
Almost every developed market telecom company faces the twin problems of intense competition and a largely static market of potential customers. For example, in the United States just about everyone who wants and can afford high speed Internet, cable or satellite TV, and smartphone with a data plan already has one. Growth is limited to roughly same rate as the adult population or stealing customers from competitors. Against this backdrop of intense competition and limited growth, telecom companies are forced to spend massive amounts of money on continual upgrades of their infrastructure to support higher speeds and keep up with competitors.
In emerging markets, the dynamic is usually different. There is competition but it tends not to be as fierce since there is an ever-growing piece of pie each company can get. Once the market is not emerging and becomes saturated, growth and returns on capital will mirror developed markets. We have no idea how long this will take and are happy Vivendi is actively shopping GVT. Let some other shareholder roll the dice on when the telecom market in Brazil will become saturated.
Initial media reports quoted Vivendi as wanting EUR 8.9B for GVT and expressed some skepticism that Vivendi would get that price. The latest reports now quote Vivendi as looking for a lower price of around EUR 7.0B to 8.0B. The highest bid Vivendi received was almost EUR 6.0B from DirecTV (DTV) with a lower offer from KKR. Vivendi decided to end the auction after no bids met their price requirement. Both sides now seem intent on trying to wait each other out. DirecTV, KKR, and other potential bidders seem to think Vivendi might be forced to sell GVT sooner and that they can pick it up at a fire sale price. Vivendi is betting it can monetize other assets to pay down its debt and sell GVT later. We decided to use the EUR 7.0B figure as our best estimate of the value of GVT.
Canal Plus Group ("Canal+")
Canal+ is a film and television studio and distributor. The company consists of Canal+, a pay TV channel in France, the Netherlands, and Poland. The Canal+ channel airs original programming, first-run movies, and third-party programming. Canal+ also owns StudioCanal, a film production and distribution company that has the third largest film library in the world. The final piece of Canal+ is CanalSat, a satellite and IPTV provider.
Canal+ has reported steady increases in revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization) over the past three years, and we believe that Canal+ is worth approximately EUR 8.0B.
SFR is a French telecommunications company that provides mobile phone, landline, Internet, IP television, and mobile Internet services. In 2011, Vivendi purchased the remaining 44 percent of SFR that it did not already own from Vodafone. SFR is Vivendi's most valuable asset and, unfortunately, has a difficult market environment. SFR is facing increased competition from low-cost telecom provider Iliad SA, in addition to the recession that is currently gripping the Eurozone. French unemployment recently hit a 16-year high. Although French President Francois Hollande has so far resisted calls to implement widespread austerity, it is doubtful the French economy will thrive until the Euro elite pull their collective heads out of their rear ends and cease austerity efforts. As we have seen countless times throughout history, high budget deficits are necessary to spur economic growth. (If this seems odd to you, I have written two articles explaining how government sector debts and deficits work for currency issuing nations. You can read them here and here.)
Vivendi and SFR have responded by trying to cut costs, specifically announcing plans to close 150 of SFR's 850 total stores. Vivendi is also pursuing several strategic alternatives, such as a merger with Iliad (unlikely to pass regulatory scrutiny) or Numericable.
We estimate that SFR is worth approximately EUR 15.0B. For a more detailed discussion of how we arrived at that value, please see the valuation discussion at the end of this article.
Activision Blizzard is one of Vivendi's most valuable assets. Vivendi owns 61 percent of the company. If you are an adherent to modern portfolio theory (a.k.a. the market is always right and reflects all available information), then valuing the company is as straight forward as taking 61 percent of the company's current market cap of $15.84B. Of course, I'd also recommend you read this excellent blog post by Mark Cuban to disabuse you of the notion that the stock market is in any way efficient or rational. (I also want to highlight how Mark Cuban chose a young investment advisor and had a good experience with him.)
The problem with valuing video game companies like Activision is that they need to continually reinvent themselves. The videogames that are popular now won't be in the future. One wrong move and a "triple A" franchise like World of Warcraft can crash and burn. A company such as Coca-Cola (KO) does not face the same pressure of constant evolution. Even other software companies such as Microsoft (MSFT) do not face as much pressure. While Microsoft must continually update its software offerings, it at least knows what the software will be: The next version of Windows will be an operating system. Sure, it will have to add new features and make it more tablet-friendly but at least Microsoft knows what it needs to make. In contrast, Activision needs constantly to come up with new, innovative games. Sure, they can milk franchises like Warcraft or Call of Duty for a while, but all good things must come to an end (see: the Duke Nukem franchise).
Indeed, numerous video game publishers and studios have gone bankrupt (the latest is THQ) or out of business when they were not able to produce financially successful follow-ups to hit titles or the public's taste in gaming changed. I believe that the video game industry parallels the movie industry. Small movie studios face great financial risk from a high-budget "blockbuster" movie that fails. These box office flops could, and often did, put a studio in financial peril. So studios consolidated under large corporations that had the balance sheets to withstand several dud pictures per season, providing the financial ability for owners and investors to withstand strings of poor box office performers. Likewise, the video game industry faces similar sets of risks.
In any case, since Vivendi owns 61 percent of Activision Blizzard, then the value ascribed to Vivendi's stake in Activision right now should be 61 percent of the value of Activision right now. The value can, and will, no doubt, change in the future. But for now, Vivendi's stake is worth EUR 7.2B.
Maroc Telecom ("Maroc")
Maroc Telecom is the main telecommunications company in Morocco. The company was privatized in 2001, and Vivendi now owns 53 percent of it. Like ATVI, Maroc is also publicly traded, in this case on both the Euronext Paris exchange and the Casablanca Stock Exchange, which makes estimating the value of the company easier. As of the end of February "the market" valued Maroc Telecom at approximately EUR 8.3B, making Vivendi's 53 percent stake worth EUR 4.4B.
Strategy Going Forward
Vivendi's previous CEO of 10 years, Jean Bernard Levy, announced his decision to depart in June of 2012. Levy and current Vivendi chairman, Jean-Rene Fourtou, had disagreed about the company's strategy with Levy preferring to keep the company together and Fourtou wanting to sell or spin off some of Vivendi's assets. We believe Fourtou's strategy will be much more beneficial to shareholders, as Levy's empire building has led to a high debt burden, the waste of shareholders' money on deals like the purchase of the remaining 44 percent of SFR from Vodafone (VOD), and a stock price at almost a decade low.
As assets begin to be sold off and debt reduced, the value of Vivendi's stock should begin to rise. In the meantime, stockholders are getting paid an attractive dividend yield to wait. Although the company currently pays a dividend of EUR 1.0 per share (down from EUR 1.4 per share), the dividend may decline further if Vivendi holds off on asset sales.
How Much Is This French Mess Worth?
The table below shows our estimates of the value of Vivendi.
Activision Blizzard (61%)
Universal Music Group
Maroc Telecom (53%)
Less: Corporate overhead
Add: Cash and cash equivalents
Less: Financial debt
Value of Vivendi equity
Recent market value of Vivendi equity
For my more financially inclined readers, continue on for details on how we estimated Vivendi's value.
UMG Valuation Notes
To estimate the value of UMG, we assembled a list of transactions involving music companies and the prices at which those transactions occurred.
EV/EBITDA (some measures use OIBDA) Multiple
Price to Sales Multiple
Vivendi acquisition of EMI Recording
Warner EMI Recording bids
EMI Publishing bids
Sony EMI Publishing winning bid
Access Industry's acquisition of Warner Music Group
Parlophone Label Group final sale price
Parlophone Label Group consensus valuation
Warner Music Group at time of EMI acquisition by Terra Firma
EMI value estimate in Terra Firma letter to partners
Most deals have been done at about 9 to 10 times EBITDA for mixed publishing and recording businesses and at 12 to 14 times EBITDA for the higher margin publishing companies versus 5 to 7 times EBITDA for lower margin recording businesses. For the base case estimate, we valued UMG at 9 times EBITDA, which is admittedly on the lower end of historical valuations. For the aggressive case, we valued UMG at 1.17 times revenue, which is on the higher end of historical revenue multiples. For our conservative case, we split UMG between its recorded music and publishing divisions* and valued each on the lower end of comparable EBITDA multiples (6 times for recorded music and 13 times for publishing).
*We valued EBITDA classified as "other" at 9 times.
SFR Valuation Notes
Valuing SFR is rather straightforward, if you assume Vivendi's previous management knew what they were doing. In 2011, Vivendi owned 56 percent of SFR and purchased the remaining 44 percent from Vodafone for EUR 7.75B, which would value all of SFR at EUR 17.6B. Considering SFR is facing increased competition from low-cost telecom provider Iliad SA and profits at SFR are falling, it is probably prudent to assume Vivendi management overpaid for SFR when acquiring the remaining 44 percent stake.
The following table shows the EV/EBITDA multiple of comparable telecom transactions.
Price to Sales Multiple
Vivendi Purchase of remaining 44% of SFR
US Market Average
Swiss Orange sale to Apax Partners LLC
Average Western Europe telecom services companies
For our base case, we valued SFR at EUR 15B, which is at the lower end of the reported value of SFR being discussed in the Numericable bid or merger discussions. The reported range of values being discussed was EUR 15B to EUR 20B with most analysts agreeing SFR was worth 15B. The 15B figure would value SFR at 5.2 times 2013 estimated EBITDA, which is at the lower end of comparable transactions. For our aggressive case, we assumed that Vivendi did not overpay in the Vodafone transaction and SFR is worth EUR 17.6B. For the conservative case, we valued SFR at 4.5 times 2013 estimated EBITDA.
GVT Valuation Notes
For our conservative case, we valued GVT at the highest bid Vivendi has received to date, EUR 6B. For our base case, we used the lower value in the range of prices Vivendi is looking for (EUR 7B to 8B). For our aggressive case, we assumed that Vivendi got the higher end of that valuation range, EUR 8B.
Canal+ Valuation Notes
For our base case, we valued Canal+ at 8.25 times 2012 EBITDA, which is the blended average current multiple for cable TV and entertainment companies. For our conservative case, we valued Canal+ at 7 times 2012 EBITDA, which is the current average multiple for cable TV companies. For our aggressive case, we used 9.5 times EBITDA, which is the average of recent transactions and valuations involving mostly European media, broadcasting, and pay TV companies (shown in the table below).
News Corp purchase of Shine Group*
Zodiak Entertainment purchase of RDF Media
Time Warner purchase of Shed Media
10-Year Western EBITDA multiple
US Entertainment Sector
US Cable TV Sector
SBS Broadcasting acquisition by Sanoma, Corelio & Talpa
Edda Media acquisition by Mecom Group
Stella European Media Index Average
Stella European Digital Media Index Average
*Shine Group was owned by Rupert Murdock's daughter, analysts characterized the deal price as high but not over the top.
Activision Blizzard Valuation Notes
For our aggressive case, we took 61 percent of the current market value of Activision and then added an additional 20 percent. The additional 20 percent could represent a control premium since Vivendi controls a majority of ATVI and ATVI's current market value is based on an outside passive minority shareholder, or the 20 percent premium could represent undervaluation (after all, ATVI does appear on Joel Greenblatt's "magic formula" screening tool).
For our conservative valuation, we reduced the market value of 61 percent of Activision by 20 percent to represent an overvaluation of some type.
Maroc Telecom Valuation Notes
For Maroc Telecom, we applied the same methodology as Activision. For the aggressive case, we added 20 percent to the current market valuation to represent a control premium. For the conservative case, we subtracted 20 percent to represent an overvaluation of Maroc by the market.
Corporate overhead was based on corporate and holding company costs of EUR 115M in 2012 multiplied by the average EV/EBITDA multiple for the entire US stock market of 7.37.