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Vivendi Punishes Shareholders Seeing Need for Breakup: Real M&A

Vivendi Punishes Shareholders Seeing Need for Breakup
A sign hangs outside the headquarters of Vivendi in Paris. Photographer: Antoine Antoniol/Bloomberg

Vivendi SA would stand to boost the lowest valuations of Chief Executive Officer Jean-Bernard Levy’s seven-year tenure by breaking up businesses ranging from phone providers to video games and pay television.

The owner of the world’s largest music company was valued in the last month at 3.1 times earnings before interest, taxes, depreciation and amortization, the cheapest since Levy became CEO in April 2005 and added video games and doubled its mobile-phone investment. Paris-based Vivendi’s multiple is lower than 93 percent of telecommunications carriers with market values of at least $5 billion, according to data compiled by Bloomberg.

While Vivendi for years has defended the benefits of owning diverse businesses, investors have only placed a deeper discount on the shares. As the $23 billion company considers overhauling its structure, one option is to split its media assets from the telecommunications and content distribution units, people with knowledge of the matter said last week. Dividing Vivendi into its six main businesses would value the combined entity at about 19.35 euros ($25.44) a share, 46 percent higher than the stock’s 20-day average, analysts’ estimates compiled by Bloomberg show.

“Vivendi has been a business that’s lacked focus for many years,” Chris Marangi, a portfolio manager at Rye, New York-based Gamco Investors Inc., which oversees almost $37 billion including about 4 million Vivendi shares, said in a telephone interview. “Something drastic needs to be done to surface the value that’s there.”

‘Very Bleak’

Vivendi’s internal review is at an early stage, the people said last week, declining to be named because the talks were private. The board is due to discuss its options during a three-day summit with top executives in June, one person said. On April 26, the shares rose as much as 8.1 percent on the news.

A spokesman for Vivendi declined to comment in an e-mail.

The company is weighing alternatives as the stock is down 33 percent since Levy announced his latest deal in April 2011 -- the 7.95 billion-euro purchase of the rest of French phone company SFR. Cheaper phone packages from new competitor Iliad SA have since cut into SFR’s profit forecast, and now Vivendi doesn’t expect earnings for the entire company to grow again until 2014.

“What’s happening in France is an extremely competitive situation,” said Alexander Wisch, an equity analyst at S&P Capital IQ Equity Research in London. “SFR is definitely the trickiest in the short- and mid-term, and it’s the biggest unit. The guidance was very, very bleak.”

‘Substantial Discount’

After posting the second-biggest decline in France’s benchmark CAC 40 Index this year, Vivendi now has an enterprise value of almost 32 billion euros including 12 billion euros of net debt. At 3.6 times its Ebitda in the last 12 months, the company is cheaper than 68 of the 73 other telecommunications carriers with market capitalizations of at least $5 billion and half the average multiple, data compiled by Bloomberg show. Vivendi fell to 3.1 times on April 19.

“Vivendi’s stock market value shows a substantial discount relative to the company’s assets, and there’s a clear consensus that it’s too bad the company bought SFR at what today looks like a high price,” said Dominique Daridan, a credit analyst at Aurel BGC in Paris. “This has got investors asking questions about how long Vivendi will keep its current structure.”

Vivendi’s shares began trading without the rights to their dividends today. Excluding the 1 euro dividend, the stock rose 1.6 percent to 13 euros, the second-biggest gain in the CAC 40 Index.

‘Not Taboo’

While analysts estimate the shares should trade at between a 10 percent and 20 percent discount to the sum of Vivendi’s parts, the disparity has been growing. Last month Chairman Jean-Rene Fourtou said the “conglomerate discount has become gigantic, close to 40 percent.”

In a March 27 letter to shareholders, Fourtou and Levy said it’s a misconception that Vivendi is a portfolio of businesses that have no connection. Still, questions about whether units should be sold or the company broken into pieces are “not taboo,” they wrote.

Separating Vivendi into its six primary assets -- SFR, pay-TV operator Canal Plus, Universal Music Group, video-game maker Activision Blizzard Inc., Maroc Telecom in Africa and Brazilian phone company GVT -- would yield a combined enterprise value of about 38.8 billion euros, according to the average of six analysts’ sum-of-the-parts models compiled by Bloomberg.

It would be worth 19.35 euros a share, eight estimates compiled by Bloomberg show, which is 40 percent higher than Vivendi’s closing price of 13.79 euros yesterday.

‘Music is Music’

“Telephony is telephony, music is music, gaming is gaming,” said Wisch of S&P. “I see very little, if any, synergies between the units that Vivendi owns. I don’t think having a conglomerate structure is adding any value, and I’m not alone in this view.”

Still, a split of media and distribution businesses is unlikely to happen soon because of the slow growth confronting SFR, Wisch said. The unit accounted for 42 percent of Vivendi’s 28.8 billion euros in revenue last year.

“It’s very complicated,” Wisch said. “To separate one from the other could mean you’re left with a very slow-growth company and a very high-growth company. Maybe in the short term it’s wise to keep things as they are.”

While dividing media and telecommunications businesses could boost shareholder value by as much as 40 percent, the odds of a split are at most 20 percent because the media assets don’t fit together and would trade at a discount, according to Julien Roch, an analyst at Barclays Plc in London.

Media Assets

Vivendi has maintained its wide range of business units as others have split apart. Rival phone companies in Europe including Deutsche Telekom AG and France Telecom SA have de-emphasized media assets in favor of core telecommunications businesses. In the U.S., Time Warner Inc. spun off its cable-television business three years ago to focus on content.

“If you look at the number of companies that have that construction that Vivendi has worldwide today, it’s quite limited,” said John Strand, owner of Copenhagen-based Strand Consult, which advises telecommunications carriers. “There’s a list of conglomerates around the world which should be broken up, and Vivendi’s probably on the top of that list.”

Levy joined the company in 2002 as chief operating officer after an acquisition binge under former CEO Jean-Marie Messier left Vivendi on the brink of collapse with 19 billion euros of debt. After rising to CEO, Levy blocked Norwegian investor Alexander Vik’s attempt to break up the company in 2006.

Breakup Attempt

Instead, Levy bought a controlling stake in the video-game maker now known as Activision Blizzard, acquired GVT Holding SA and purchased the rest of wireless venture SFR that Vivendi didn’t already own.

Last year’s deal valued all of SFR at 18 billion euros, more than Vivendi’s entire market value of 17.2 billion euros as of yesterday’s close. Analysts estimate a standalone enterprise value for SFR at about 13.7 billion euros in a breakup scenario.

“The most pressing matter for Vivendi is to define a clear strategy for SFR,” Arnaud Scarpaci, a Paris-based fund manager at Agilis Gestion SA, which owns Vivendi shares. “If they can’t find answers to SFR’s problems, they could very well decide to refocus on units that are doing better: Activision and Universal. That could mean parting from SFR or Canal Plus.”

An alternative to splitting Vivendi’s communications units from its content production may include a partial or complete spinoff of Canal Plus, which is 20 percent owned by publisher Lagardere SCA, the people said last week. Analysts on average estimate Vivendi’s share of Canal Plus is worth about 5.1 billion euros on a standalone basis.

Canal Plus

Arnaud Lagardere, CEO of Lagardere, said this week a public listing of its Canal Plus stake is the main scenario for the company to exit its investment and may happen in the coming months.

If Vivendi were to sell assets, Activision and Maroc are the most obvious targets, Barclays’ Roch wrote in an April 27 note. Selling the Activision stake of about 60 percent is the most likely scenario and could boost Vivendi’s stock price by as much as 20 percent, Roch wrote.

Activision, which is based in Santa Monica, California, has a market value of $14.2 billion. Maroc, which is 53 percent owned by Vivendi, has a market value of 113 billion dirhams ($13 billion).

“It doesn’t appear that Vivendi has demonstrated that there are enough synergies between their various businesses to justify keeping them together,” said Gamco’s Marangi. “The situation is in a state of disequilibrium. The pieces would command higher prices apart than together.”

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