(Editor's Note: Investors should be mindful of the risks of transacting in securities with limited liquidity, such as VIVHY. Vivendi's primary listing in France, VIV.PA, offers the best liquidity.)
Vivendi (OTCPK:VIVHY) investors are finally getting what they've long said (or most of them, at any rate) they want - management is unwinding the conglomerate, having sold down its stake in Activision Blizzard (NASDAQ:ATVI) and reached agreements to sell Maroc Telecom and SFR. The sale of the latter two will bring in close to EUR 17.2 billion, leaving the company's management with a lot of options regarding the future.
The company has already announced significant dividend payouts over the next two years, but between the remaining cash, additional asset sales, and levering up the business, Vivendi has billions to spend. The biggest question for investors now is whether management is likely to identify value-building acquisitions or whether it would be best (and/or likely) to sell even more.
A Smaller Crown, With Iffier Jewels
In my view, the Maroc and SFR transactions are largely converting future cash flows into present-day cash. In other words, I don't think Vivendi is getting bad deals, but nor do I believe they got bids that represented significantly higher values. What Vivendi did do, however, is de-risk those cash flow streams by converting them to present-day cash (though you can certainly argue that the earn-out and 20% stake in Numericable-SFR leaves some value at risk).
SFR was arguably a crown jewel asset. It wasn't a leader in either fixed-line or mobile telephony in France (trailing Orange (NYSE:ORAN)), but it did still contribute more than 40% of fourth quarter revenue and more than 50% of fourth quarter EBITDA.
With SFR now gone, I'm not sure I see a crown jewel asset at Vivendi. The company's Universal Music Group business has leading share in the U.S. recording market (just ahead of Sony (NYSE:SNE) and well ahead of Access Industries' Warner Music Group) and strong second-place share in music publishing. While streaming and subscription-based services may lead the record industry to a return to growth, it will be from a much lower level after years of punishing revenue declines.
Canal Plus Group would likely be the best candidate for crown jewel. This business will generate about 45% of the company's pro forma revenue and 40% of pro forma EBITDA, and it is still the leader in the French pay TV market. The problem is, I'm not sure that's a particularly good market in which to have leadership. Content rights (for soccer, et al) are getting more expensive and while France's peculiar regulations do create some challenges for would-be streaming media rivals like Netflix, Google, and Amazon, I suspect that digital competition to Canal Plus is a "when, not if" question.
If It Won't Build GVT, Will It Sell?
Vivendi management hasn't offered up total clarity on their plans for the company going forward, but they have said that acquisitions to build up GVT are not part of the plan. GVT is one of the players in Brazil's fixed-line, broadband, and pay TV markets and the Vivendi solicited bids for its back in 2013 but decided to keep it after seeing what companies like America Movil (NYSE:AMX) and DirecTV (NYSE:DTV) were prepared to pay.
Vivendi has said that it is not looking to acquire a Brazilian mobile phone business to pair with GVT (seemingly squelching the rumor that it might acquire TIM Brasil from Telecom Italia). GVT is only about one-quarter the size of America Movil's Brazilian fixed-line business, though its pay TV business could generate over half of the business's revenue by 2016 as it increases the number of homes passed and pay TV adoption grows in Brazil. All told, this business looks as though it could grow EBITDA at a low-to-mid teens rate over the next five years, likely generating more than 80% of Vivendi's incremental EBITDA growth and becoming the largest EBITDA contributor in 2015.
I don't know if a lack of mobile services to bundle with fixed-line, broadband, and pay TV will really constrain GVT's growth all that much; I lean toward the view that the value of bundled services is overrated, and particularly when pay TV businesses have less churn than mobile. What I also don't know is how much capital Vivendi is prepared to allocate and re-invest in Brazil to support the growth of GVT - if Vivendi doesn't want to support the business, soliciting another round of bids may make sense.
Rebuild, Remain, Or Reduce?
Investors are definitely going to be tuned into Vivendi's shareholder meeting in late June to hear what management's vision for the new Vivendi includes. The comapny has already announced around EUR 5 billion in cash returns to shareholders over the next two years (in the form of dividends and special dividends), but that leaves a lot of cash left to allocate when considering that the Canal Plus and UMG businesses can likely support at least EUR 2 billion in debt.
The question is whether Vivendi bulks up again, runs the business as is, or slims it down even further. If Vivendi won't buy assets to bulk up GVT, building up Canal Plus could be an option. Canal Plus has some operations in Poland, Vietnam, and North Africa and Vivendi could consider francophone Africa as a potential growth market.
On the slimming front, the Activision stake is likely to be sold fairly soon and the stake in Numericable-SFR could be sold somewhether down the line. Softbank once expressed interest in buying UMG, and I believe another auction process for GVT could result in bids (though whether they would be high enough to be acceptable to Vivendi management is a different question). In that scenario, Vivendi would ultimately become Canal Plus, a pay TV specialist shielded (at least in part) by France's media/broadcasting laws. I don't believe these sales would necessarily add value relative to their cash flow streams, but it would de-risk those cash flow streams and support large capital returns to shareholders.
The Bottom Line
I like GVT, but distilling Vivendi down to Canal Plus may be the surest way for Vivendi shareholders to get value. I think UMG has likely bottomed and could contribute reasonable cash flows from here without a lot of incremental investment, but investors may very well not to hear about plans to regrow the Vivendi empire given that it didn't really work out so well the first time.
I have no particular strong feelings either way about Vivendi shares. I think there's likely some value upside in the newly slimmed-down operations, but the uncertainty about whether Vivendi will grow again, shrink further, or try to maintain the status quo could limit that upside until the annual meeting this summer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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