A Bright Future In Africa Makes Vivendi A Long-Term Buy

Aug. 8.14 | About: Vivendi SA (VIVEF)

Summary

Vivendi and its pay TV subsidiary Canal+ could get hit hard by Netflix in France.

However, Vivendi has a massive expansion opportunity in French-speaking Africa.

The market could focus on the short term without seeing the big picture.

Vivendi (OTCPK:VIVHY, OTCPK:VIVEF) is now a global media company that operates on three main segments:

  1. Canal+ (Premium pay TV in France and overseas), $5.3b revenue in 2013 (+5.9%)
  2. Universal Music Group, €4.9b revenue in 2013 (+7.5%)
  3. GVT (Telecom and Pay TV in Brazil), €1.7b revenue in 2013 (-0.4%)

In 2013, the Group managed to refocus its strategy on media as Vivendi sold 88% of Activision Blizzard for $8.2b, 53% of Maroc Telecom for $5.7b and acquired 20% of Canal+ France for €1b. In the beginning of the year, the Group finally sold its main telecom subsidiary SFR to Numericable (OTCPK:NUMCF) for a total value of €17b. Finally, Vivendi announced that the board is currently analyzing the €6.7b offer made by Telefonica to acquire GVT. The Group is now sitting on a pile of cash and should invest in the media industry over the next years. I believe that the switch of strategy is a strong bull argument and should produce lots of value for the shareholders. Vivendi should maintain its leadership in the music industry, expand its pay TV services worldwide and enter the digital age.

However, Vivendi could get hit hard by Netflix (NASDAQ:NFLX) in France as the US company is going to start operating in September 2014. The problem for Canal+ is that the Group offers a global and diversified TV service to its customers. You need to subscribe to the whole package in order to have access to sports, movies, TV shows etc. As a consequence, the company could have difficulties to counter new niche competitors such as Being Sport or Netflix and lose a significant part of its clients. Moreover, Netflix will be the first company to provide a large scale "low cost" streaming service in France. Recently, Canal+ lost the exclusivity of the French rugby championship TV rights.

The share price has been rallying over the last year thanks to the asset disposals but the stock now looks sluggish. Vivendi is down 11.5% since February 2014.

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Source: Yahoo Finance

I believe that the stock price is still supported by the asset disposals (and especially by the Telefonica offer) but the downtrend could keep going on if Netflix succeeds in launching its operations in France.

Vivendi should benefit from skyrocketing revenues from Africa in the medium and long term!

According to OIF (International Organization for "Francophonie"), French speakers should increase to 715m in 2050 from 220m today. Moreover, the number of French speakers will skyrocket in Africa in the upcoming years. French is the official language of 21 African countries and commonly used in 5 other countries including Maghreb states (Algeria, Morocco and Tunisia).

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Source: OIF

This increasing number of people will definitely need to have access to information, entertainment and especially television programs in French. According to a Natixis analyst, "this prospect represents a major opportunity for French media".

Moreover, a large part of African French speakers are urban and educated citizens. As a consequence they should quickly become part of the middle class and a natural target for Vivendi's pay TV services.

Vivendi is already well implemented in Africa and generating nice results.

The French Group is already well implemented in Africa thanks to its subsidiary Canal+ Afrique. The company already operates in more than 30 African countries including Congo, Rwanda and Burundi since 2012. Canal+ Afrique also produces and helps financing African movies (42 movies since 2005), which increases the image and value of the brand in Africa.

Revenues from overseas increased by 26.1% to €1,122m ($1,548m) in 2013 and the number of African subscribers skyrocketed to 1,1m in March 2014 (+51% yoy).

I expect the company to be able to maintain this pace in the upcoming years as the market is huge and growing quickly.

Finally, Universal Music plans to open an office in Senegal in order to expand its operations in Africa. It will be the first major to expand in occidental Africa.

Vivendi is expanding quickly in Africa and should benefit from a skyrocketing customer base. If the French company manages to make Canal+ Afrique the main pay TV of the continent and starts financing the local music industry, the revenue flow could be pretty nice.

The downside is mainly based on the evolution of the consumers' habits and the rise of new actors.

  1. New media such as Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Apple (NASDAQ:AAPL) or Amazon (NASDAQ:AMZN) could directly compete with TV players in the upcoming years. The new African Middle Class could easily skip the TV step and directly get access to news and entertainment through online content.
  2. New digital supports such as applications, smart phones or tablets are a growing threat to the old media companies. As most of African people have cell phones instead of fixed telephones, they should start using massively these channels instead of television.
  3. The competition could increase as other French actors could invest in Africa in the upcoming years. TF1 and M6, the other main private French TV players, already have numerous programs and could expand quickly. Moreover, if French groups don't act quickly enough in Africa, the main US media majors could easily develop French programs…

Conclusion

The markets could only focus on the short term in the upcoming months and be scared of the arrival of Netflix in France. However, the big picture includes a massive opportunity in French speaking Africa that should drive the revenues in the upcoming years. If the share price keeps decreasing in the upcoming months, there could be some interesting opportunities for long-term investors.

Disclosure: The author is long VIVEF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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