On Sept. 3, 2003, Standard & Poor's Ratings Services placed its long-term credit ratings--including its 'BB' corporate credit ratings--on Vivendi Universal S.A. (V ) and its U.S.-based media subsidiary Vivendi Universal Entertainment LLLP (VUE) on CreditWatch with positive implications. At the same time, Standard & Poor's affirmed its 'B' short-term rating on Vivendi Universal.
The ratings actions follow the announcement on Sept. 2 that Vivendi Universal had reached a preliminary agreement with General Electric Co. (GE ; AAA/Stable/A-1+) to merge its approximately 86%-owned subsidiary VUE with GE's fully owned media subsidiary NBC to form one of the largest media groups worldwide.
The CreditWatch placement primarily reflects the positive impact that the transaction would have on Vivendi Universal's debt protection measures and liquidity. If executed according to the terms announced Sept. 2, VUE and NBC will merge, forming a new GE subsidiary. VUE's shareholders will receive $3.8 billion in GE shares--which Vivendi Universal expects to monetize--and about $1.67 billion of VUE's debt will be transferred to the new entity.
The transaction would therefore result in a significant reduction of approximately $5 billion (4.62 billion euros) in Vivendi Universal's consolidated net debt, which was estimated to be about 13.5 billion euros at end-June 2003. At the same time, Vivendi Universal will retain a 20% stake in the newly formed subsidiary.
For Vivendi Universal, these benefits may well offset the effects of disposing of a relatively strong business like VUE. Nevertheless, Standard & Poor's estimates that Vivendi Universal's credit metrics will remain relatively weak, and that its reduced business scope and uncertainties over its future business strategy would likely limit any ratings upgrade to one notch.
The resolution of the CreditWatch placement of the long-term corporate credit rating on VUE will occur upon closing of the transaction. The resolution of the CreditWatch placement of the long-term corporate credit rating on Vivendi Universal will occur once its agreement with GE is binding and the main antitrust hurdles have been removed.
However, given that the finalization of the negotiation process and antitrust review is likely to be a lengthy process, Standard & Poor's will seek to indicate rapidly whether its corporate credit rating on Vivendi Universal is likely to be upgraded or affirmed, assuming the transaction is closed according to the terms disclosed yesterday.
To do so, Standard & Poor's will examine the following:
• The conditions and timing of the monetization of the GE shares that Vivendi Universal will receive, and the future status of its stake in the newly formed entity;
• The pro forma credit metrics of Vivendi Universal after the closing of the transaction, including the treatment of VUE's existing preferred shares, which will remain Vivendi Universal's liabilities, and related 56.6 million shares of InterActive Corp. (IACI );
• The business strategy that VU's management will follow after the closing of the transaction--including the review and likelihood of any pending and future asset disposals and acquisitions (such as any transactions regarding Elektrim and Maroc Telecom);
• Confirmation that no support for the new entity should be expected from Vivendi Universal; and
• The use of the cash proceeds from the deal, which could reduce the degree of subordination of Vivendi Universal's outstanding bonds.
The future ratings on VUE will depend notably on pro forma credit metrics and on the degree of support that can be expected from GE if the deal goes through. The ratings on VUE could be upgraded several notches to reflect GE's 80%-ownership in the new entity.
Although significant financial support may be forthcoming from GE, at this point Standard & Poor's does not expect to equalize the corporate credit rating on VUE with that on GE, given the partial ownership structure of the new subsidiary and given Standard & Poor's current lack of information concerning GE's long-term strategy for the new media entity.