Vivendi’s Levy Gets Cash Cow With EU7.95 Billion SFR Deal

Vivendis Levy Takes Over Cash Cow With SFR Deal
An SFR logo is seen on a mobile phone at an SFR shop in Paris. Photographer: Antoine Antoniol/Bloomberg

Vivendi SA Chief Executive Officer Jean-Bernard Levy’s 7.95 billion-euro ($11.3 billion) SFR deal, his largest, gives him full ownership of the company’s biggest cash generator and completes a decade-long effort to break from its messy past.

Vivendi, which owns 56 percent of SFR, France’s second-largest mobile-phone operator, yesterday announced an agreement to buy Vodafone Group Plc’s 44 percent stake, giving it full control of the steady, subscription-based business that has 21.3 million users.

Vivendi “can now run the operation single handedly and milk the cow that represents” the biggest cash-flow provider for the company, said Neil Campling, an analyst with Aviate Global LLP in London.

While former Vivendi CEO Jean-Marie Messier went on a $77 billion acquisition binge to transform the 150-year-old water utility into a global media giant, Levy, 56, has sought to make more selective purchases, including Brazilian phone company GVT Holding SA in 2009, to drive growth. Since taking over as CEO in 2005, he has both dismantled Messier’s empire and expanded in new directions.

The SFR deal will enable the company to add “in excess of 600 million euros” to adjusted net income each year in 2012 and 2013, Levy said on a conference call today. It “allows us to increase the dividend,” he said.

Restoring Stability

Vivendi shares rose 0.6 percent in Paris at 20.64 euros. Vodafone, which plans to use 4 billion pounds ($6.4 billion) of the net proceeds to repurchase its stock, slid 0.1 percent, to 178.85 pence in London.

The deal to take full control of SFR may be Vivendi’s biggest move yet to restore stability after Messier’s tenure.

“Vivendi has become a much more straightforward company, much more centered on France, compared with Messier’s very ambitious, very seductive vision,” said Alain Busson, an affiliate professor of media economics at Paris’s Ecole des Hautes Etudes Commerciales.

The SFR buyout will be partly funded by the $5.8 billion sale in 2010 of Vivendi’s stake in entertainment group NBC Universal to General Electric Co., which ended a decade-long foray into Hollywood initiated by Messier.

Cash Generator

SFR, which vies with France Telecom SA and Bouygues SA for French mobile and broadband customers, may be a less glamorous asset than NBC Universal, whose film and TV titles include “The Bourne Identity” and “Saturday Night Live.” Yet it generated 3.95 billion euros in cash in 2010, about half Vivendi’s total. At $12.6 billion, it accounts for almost 50 percent of revenue and brought in about 2.5 billion euros in earnings before interest, taxes and amortization.

Vivendi hasn’t made a major external acquisition since late 2009, when it took control of GVT -- now the company’s fastest-growing unit -- for $4.2 billion. Levy has said Vivendi’s priority is taking full control of existing assets, including SFR and Canal Plus, France’s largest pay-TV operator, along with “organic growth,” especially in emerging markets, where acquisition targets are increasingly rare.

The SFR accord dwarfs Levy’s 4.5 billion-euro deal for control of French broadband operator Neuf Cegetel in 2008. It’s still far less aggressive than Messier’s signature deals, which often involved totally new business areas and enormous sums.

Growth Drivers

The former CEO’s transformation of what was once water utility Cie. Generale des Eaux included a $34 billion takeover of Seagram Co. along with dozens of other debt-fuelled acquisitions.

At its Messier-era peak, the Vivendi included some 6,000 consolidated companies, which former CEO Jean-Rene Fourtou cut down with more than $11 billion in asset sales in the first year after Messier’s ouster in a 2002 boardroom coup. That year, Vivendi posted the largest annual loss in French corporate history.

Levy’s past acquisitions, which rebuilt the stripped-down Vivendi the former Oddo & Cie banker inherited from Fourtou, are driving current growth. GVT, which Vivendi bought after outbidding Spain’s Telefonica SA, boosted revenue last year by 72 percent as members of Brazil’s burgeoning middle class signed up for Internet services.

Activision Blizzard, the video-game publisher Vivendi created in 2008, has also added to profits thanks to hits like “Call of Duty” and “Guitar Hero.”

‘Too High?’

Those activities helped Vivendi increase profit by 4.4 percent last year, to 2.7 billion euros, even as it faced sharp declines at its Universal Music Group unit, the world’s largest record company.

With SFR, Levy may be paying too high a price in a market that is gearing up for a new mobile-phone rival with the entry of Iliad SA next year, some analysts said. Including SFR’s debt, Vivendi’s purchase price represents 6.2 times 2010 earnings before interest, taxes, depreciation and amortization.

“The price is too high,” Sanford C. Bernstein & Co. analysts including Claudio Aspesi wrote in a report today. Typical valuations for mature telecommunications markets are about 5.1 times to 5.3 times, according to Bernstein estimates.

Still, with demand for data-hungry devices such as Apple Inc.’s iPhone and iPad and devices based on Google Inc.’s Android software surging, mature markets are expanding. The number of mobile-data connections in Europe is set to rise by an average of 15 percent a year to 270 million in 2014, according to market researcher IDC.

Third Major Disposal

“Risks coming from competition and regulation,” have been exaggerated, Levy said on the conference call. The long-term outlook is ``very exciting.”

For Vodafone, the SFR sale is the third major disposal of a minority asset by CEO Vittorio Colao, and the largest since he took charge in 2008. Vodafone sold its 3.2 percent stake in China Mobile Ltd. last September for $6.5 billion, and a 3.1 billion-pound holding in Japan’s Softbank Corp. in November.

The sale of the SFR stake brings the total value of Vodafone’s disposals to about $22.8 billion since September. The company said March 31 it will acquire an additional stake in its Indian venture for $5 billion after partner Essar Group exercised an option to sell down its holding.

Colao is also seeking the resumption of a dividend from its Verizon Wireless joint venture. Vodafone hasn’t received a dividend from the U.S. operator since 2005 as partner Verizon Communications Inc. focused on repaying debt.


The SFR deal “is a win-win for all the participants,” said Emmanuel Soupre, helps manage $6.6 billion at Neuflize Private Assets in Paris. “For Vodafone, it is exiting a minority stake at a good price. For Vivendi, it means taking control of the most important asset and reducing the holding discount.”

Vivendi’s majority stakes in Activision Blizzard, SFR and Canal Plus have earned it a “holding company” label, weighing on its shares.

The SFR agreement moves Levy a step closer to achieving his stability goal, with a pledge for an increase in dividends beyond 2010’s 1.40 euros a share.

“The main thing is that this means full access to the cash generator within the Vivendi group,” said Alex Wisch, an analyst at Standard & Poor’s Equity Research in London. “In the more mid- to long-term, it secures Vivendi’s status as a very good dividend-paying company.”

Lazard Ltd. and BNP Paribas SA are advising Vodafone on the transaction. Rothschild is Vivendi’s adviser.


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