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Vivendi SA ADR (OTCPK:VIVHY) is a bloated French juggernaut. Because of this the stock of the company is suffering from the conglomerate discount. Management is starting to dismantle the conglomerate. My reasoning is the conglomerate discount will disappear. Resulting in an appreciation of 40% over the next fifteen months.

Business Summary

Vivendi Société Anonyme produces, publishes, and distributes digital products and services primarily in France and rest of Europe, the United States, Morocco, Brazil, and internationally.

The company operates in six businesses: Activision Blizzard (ATVI), Universal Music Group, SFR, Maroc Telecom group (OTC:MAOTF), GVT, and Canal+ Group (OTC:CNPLF).

The Activision Blizzard business develops, publishes, and distributes interactive entertainment software online or on other media, such as console and PC.

The Universal Music Group business is involved in the sale of recorded music; exploitation of music publishing rights; provision of artist services; and merchandising.

The SFR business provides mobile, broadband Internet, and fixed telecommunications services in France.

The Maroc Telecom Group business operates as a telecommunication operator in Africa, which provides mobile, fixed telecommunication, and Internet services.

The company’'s GVT business offers fixed telecommunication, broadband Internet, and pay-TV services in Brazil.

The Canal+ Group business publishes and distributes premium and thematic pay-TV channels and free-to-air channels; and produces and distributes cinema films.

In addition, it provides expert advisory services by phone; and ticketing and Web ticketing services, as well as sells digital content on the Internet and mobile phones under zaOza brand Source: Yahoo Finance

I think I heard that story before?

Just on Seeking Alpha you may have read these articles or headlines:

Vivendi's Asset Disposals And Undervaluation Scream Buy

An Undercover Media Conglomerate And 6.5% Yielder With Catalysts

Vivendi: Extremely Undervalued, Long-Term Winner Could Unlock Value Through Spin-Off Or Asset Sale

What's different this time?

Two things.

The chairman of the company has said in an interview in Le Monde he wants to stay until a spin-off the telecom unit: SFR is complete. He indicated he wanted to see Vivendi off as a healthy flexible company. He also said Vincent Bolloré who took a 5% stake in Vivendi with intent of breaking the company up, could succeed him at the head of the board of the media company Vivendi would turn in.

From the 2012 annual report:

Despite delivering very satisfactory results in 2009, 2010 and especially in 2011, Vivendi's share price performance over this period was disappointing. It was primarily for this reason that, in April 2012, the Supervisory Board embarked on a strategic review of the Group's assets. The purpose of the review is to examine all options available for creating more value for Vivendi's shareholders. The review focuses on three facts:

✱ Vivendi's share price has been impaired by a conglomerate discount, which clearly raises questions about the Group's scope;

✱ Vivendi has all of the necessary attributes to bolster its status as a European, if not world, leader in content and media, a growth market driven by the unprecedented boom in major global digital distribution platforms; and

✱ telecoms activities are perceived as "mature," with increased competition and strong tax pressure forcing operators to adapt their positioning and offerings.

Management's goals are aligned with minority shareholders.

Second is that it is no longer just talk. Deals are being struck and almost every large unit of Vivendi has surfaced in the financial media with news regarding a possible sell-off. The bids enable us to better value the company using real world figures.

Sale of Maroc Telecom

Near the end of July, Vivendi stated it had entered into exclusive discussions with Etisalat for the disposal of its 53% stake in Maroc Telecom and expects to receive about EUR 4.2 billion

Sale of Activision Blizzard

The firm also agreed to sell 85% of its stake in Activision Blizzard to various entities for $8.2 billion (EUR 6.1 billion). It keeps 15% of Activision Blizzard which if sold after 15 months at current market prices is worth: $2.835 billion or EUR 2.09 billion.

This stake is in a 15 month lock-up.

Study to Spin-of SFR

Vivendi is mounting an internal feasibility study how to spin off French telecommunications company SFR without upsetting the company's credit rating-or tanking its stock price. Such a deal could take place as early as fall 2014, according to people familiar with the matter. source: WSJ

Possible Sale of GVT

Vivendi also floated the possibility that it could restart the auction of Brazilian phone operator GVT. If all four parts of the company were disposed of the company would become much smaller but also easier to value and management at individual units - that have very little synergy - would not need to be concerned with capital allocation strategies from the conglomerate's management.

The Conglomerate Discount

A conglomerate discount exists in part because it's harder to value the company. It's harder than putting a value on a number of companies equal to the number of units within the conglomerate because there still is a relationship between all the units. Capital can be shifted from the cash cow parts of the company to the rising stars. Taxes can also add a layer of complexity, not to mention international operations.

The good news is that a price has been put on Maroc Telecom and the stake in Activision Blizzard by the market. Even when these sales ultimately don't go through - the bids put a price on the units.

UnitValue EUR
Maroc Telecom4.2 billion
Blizzard Activision Stake8.19 billion

Value SFR

Comparing Vivendi's latest quarter's financial statements with financial numbers of Orange (ORAN) formerly known as France Telecom helps to put a value on the SFR business. Orange is one of the four big telecom firms that operates in France - and 29 other countries. It's bigger but otherwise comparable to the SFR segment.

Given the market's valuation of Orange's operations at $33 billion and its larger scale of operations SFR is worth around a third of that. Because this valuation number is the least accurate, I value it conservatively at $10 billion or EUR 7.38 Billion.

Value GVT

The Brazilian phone and Internet unit is easier to value because Vivendi tried to sell it for EUR 8 billion or $10.4 billion in March 2013. Vivendi bought the unit for $4.18 billion in 2009.

After acquiring the GVT unit Vivendi allocated additional capital to expansion of GVT's network. Revenue of the unit increased from EUR 1029 million (2010) to EUR 1716 million (2012).

Unfortunately everyone knows Vivendi is having a yard sale. Perhaps it will be hard to realize a sale at $10.4 billion but given the successful expansion of the business and Vivendi's unwillingness to take a bid below $10.4 billion, the unit is likely to be worth more than $7 billion. If the company fetches less than $8.5 billion or EUR 6.27 billion for the GVT segment that will surprise me.

UnitValue EUR
Maroc Telecom4.2 billion
Blizzard Activision Stake8.19 billion
SFR7.38 billion
GVT6.27 billion

The total sum of these parts is EUR 26.04 billion. Currently the conglomerate holds long term debt of 16.5 billion Euro. To make sure the slimmed down company will retain its credit rating or improve on it, the company will want to retire some debt.

Retiring 3/4 of the current outstanding debt should accomplish that. That means retiring EUR 12 billion of debt. If we use the proceeds from the sales to retire debt, the sales still yield EUR 14 billion while debt has been significantly decreased.

The current market cap of Vivendi is 22.94 billion euro. This implies you can buy the business that will remain - burdened with a similar level of debt - in 15 months for 8.9 billion Euro.

The significant units of the remaining company will be the Canal+ group and the Universal Music Group.

  • Canal+ Group, France's leading Pay-TV channel and Europe's largest producer and distributor of films.
  • Universal Music Group (UMG), the world's leading music company, operating in about 60 countries and with a catalog of more than 2 million titles.
Unit / Year201220112010
Canal+ Group663701690
Universal Music Group525507471

Ebitda in Million Euros

You can buy this media business paying ~8 x Ebitda.

To put that into perspective Twenty-first Century Fox Inc (FOX) trades at 12.9 x Ebitda, Time Warner Inc (TWX) trades at 9.2 times Ebitda, Walt Disney Co (DIS) trades at 11.5 times Ebitda. Vivendi can be acquired at a discount of 40% to the average of these numbers.

Synopsis

Vivendi is trading at a conglomerate discount. The company has started selling of assets to improve the price of its stock. During this process - which is likely to take place within 15 months - the stock price can appreciate 40%. When possible I used real world figures to value the parts.

If you have any questions or comments feel free to share them here or on Twitter.

Additional Sources:

Vivendi Annual Report 2010
Vivendi Annual Report 2012

Source: Conglomerate Discount Offers Opportunity: 40% Upside Over 15 Months