Vivendi: Undervalued French Media And Telecom Conglomerate

| About: Vivendi SA (VIVHY)
This article is now exclusive for PRO subscribers.

Paris may be one of the most expensive cities in the world, but investing in the City of Light sure is not. For most U.S. investors, Vivendi (OTCPK:VIVHY) may not be a household name. But some of the businesses that underlie the Vivendi corporate umbrella are names that investors will recognize, including: (1) Activision Blizzard (NASDAQ:ATVI), the video game maker responsible for the Call of Duty franchise (60% ownership stake, currently valued at roughly $8.2 billion) and (2) Universal Music Group (100% ownership, plus Vivendi recently acquired EMI's recorded music division for $1.9 billion).

Astute investors will recall Vivendi's lengthy and complex corporate history, chock full of expensive acquisitions and a sprawling, unmanageable conglomerate structure, which culminated and ended with the largest recorded single-year loss for a French company, 23.3 billion euros in 2003. For a poignantly written history, please see The Lonely Value Investor's article here (including a lucid explanation in the comments section with respect to the unsponsored ADRs U.S. investors must buy for their equity claim on Vivendi's business).

In recent years, Vivendi successfully divested from many non core businesses, and focused itself in the media and telecommunications sector. I see a lot of value in creating a vertically integrated media business: control of content creation and distribution is a solid business model with extremely high barriers to entry, which will likely lead to superior business performance. Investors appear to have not noticed or cared, probably because U.S. investors are generally xenophobic with their geographic allocation of investment dollars.

Despite improving fundamentals and what should be a reduction to the "conglomerate discount", Vivendi trades at decade lows, and well below prices set by the market in March of 2009, the nadir of stock prices (see chart below) For contrarian investors, that is a winning value proposition.

(Click to enlarge)

(courtesy of Yahoo Finance).

But valuable U.S.-based businesses (video games and music) is not all the value investors acquire when they buy fractional interests in Vivendi, they also receive (see investor presentation [pdf] for complete details):

  • 53% stake in Maroc Telecom (IAM:FP), currently valued at about $7.3 billion, a telecom based in Morocco and owning assets throughout Africa;
  • 100% stake in SFR, a leading French telecom company (Vivendi recently acquired the remaining 44% stake it didn't own from Vodafone for $11.3 billion), implying a value of $25 billion for SFR;
  • 100% stake in Canal+, a leading French creator, publisher and distributor of television and film content;
  • 100% stake in GVT; a rapidly growing Brazilian telecom business Vivendi acquired in 2009 for about $4.2 billion, outbidding Telefonica (TEF).

To give you an idea about how astonishing the current $21 billion valuation is of Vivendi, we only need to look at the market value of Activision Blizzard and Maroc Telecom, the two controlled businesses that trade publicly (outlined above), totaling $15.5 billion. Throw in Universal Music Group and Canal+, which are very conservatively worth at least the remaining $5.5 billion (and realistically appreciably more) of Vivendi's market capitalization, especially considering the recent EMI music division acquisition valued at $1.9 billion for which Vivendi paid a reasonable multiple.

That leaves the remaining pieces of Vivendi valued at less than zero, zilch. That's right, you can pick up SFR and GVT for less than free. And those businesses represent quite a bit of value, indeed.

SFR, the French telecom business, is Vivendi's largest business both in terms of revenue (about $16 billion based on $1.3/euro exchange rate) and cash flow generation (about $5 billion EBITDA) in 2011. And GVT represents the most compelling growth opportunity for Vivendi, currently building out its telecom and Pay TV service in the emerging economy of Brazil. GVT recorded revenue of $1.9 billion (up 40% over 2010), and EBITDA of $780 million (also up 40% over 2010) in 2011. I don't know about you, but I like to own terrific businesses, especially when the market effectively pays me to take them off its hands.

If the market continues to ignore the value in Vivendi, you can continue to pick up undervalued shares and get paid handsomely for your trouble. Vivendi recently declared a new dividend program, targeting a 45 to 55 percent dividend payout ratio each year going forward. I expect earnings to grow considering Vivendi's robust cradle to grave content model along with prudent management of the enterprise, so dividends will probably continue to grow in lockstep (except for a hiccup this year; management reduced the dividend from 1.4 euros to 1 euro, reflecting expectations of slight margin contraction due to a new entrant in the French telecom market, Iliad) thereby increasing the already sizable yield from the current price level over time.

Could prices go even lower? Absolutely. But that would only make Vivendi a better buy. That's because the price decline would suggest even a larger discount to the underlying value Vivendi. Surely underlying business value is not as mercurial as irrational investor behavior.

If you pick up shares before May 4, you can expect a 1 euro dividend payment and a bonus (undervalued) 3.3% share dividend (one share for each 30 owned) deposited in your brokerage account on May 9. At current market prices, the cash dividend yields about 7.7% and because I think shares are at least 50% undervalued, the share dividend is probably worth something like 8-10% if you hold until fully valued.

That's a cool 15% return on investment in three weeks. La vie en Rose!

Disclosure: I am long OTCPK:VIVHY.