Vivendi Credit Rating May Be Downgraded on Strategy Review

Former Vivendi SA Chief Executive Officer Jean-Bernard Levy
Former Chief Executive Officer Jean-Bernard Levy left Vivendi last week after seven years leading the owner of the largest music and video games companies, following a clash with the board over strategy. Photographer: Fabrice Dimier/Bloomberg

Vivendi SA’s debt ratings may be cut by one level within three months depending on the outcome of its strategy review following the ouster of Chief Executive Officer Jean-Bernard Levy, Standard & Poor’s said.

S&P put Vivendi’s BBB credit rating, the second-lowest investment grade, under negative watch. “The group could decide to reshuffle its business portfolio, which might negatively affect our assessment of Vivendi’s business risk,” S&P said today in a statement.

Levy left last week after seven years, following a clash with the board over strategy. The company has hired a headhunter and started identifying external candidates, people familiar with the matter said yesterday, as Chairman Jean-Rene Fourtou, who now oversees strategy, bids to restore investor confidence. Vivendi had 12.5 billion euros ($15.7 billion) in net debt at the end of March.

“Bondholders have been worried since April by the lack of visibility on Vivendi’s perimeter and on group strategy,” said Malle Ba, a credit analyst at Aurel BGC in Paris. “The price of Vivendi bonds already reflects concerns that the market and ratings agencies have.”

Possible Breakup

The cost of insuring Vivendi bonds using credit-default swaps jumped 10.5 basis points, or 5.6 percent, to 197 basis points, the biggest intraday increase since May 14, according to Bloomberg prices. The insurance cost reached a record high of 251 basis points on May 18. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Vivendi is “committed to its current credit rating” and its “policy remains unchanged,” the company said in an e-mail.

The shares rose 0.4 percent to 14.93 euros at the close of trading in Paris, paring the drop to 8.8 percent this year.

Vivendi, owner of the largest music and video games companies, was criticized by investors when its share price slumped to a nine-year low in April. The Paris-based company has been considering a change in its structure, with scenarios ranging from asset sales to a breakup of the company, people with knowledge of the matter have said.

Ratings agencies have added pressure on the company. Fitch Ratings and Moody’s Investors Service both said last week that Vivendi’s debt ratings may be threatened unless the company shows it can reduce its liabilities.

Activision Blizzard

Vivendi’s current debt is at about the same level it reached a decade ago. An acquisition binge by former CEO Jean-Marie Messier, ousted in 2002, boosted net debt to nearly 30 billion euros in 2001, bringing the company close to bankruptcy.

As it considers options, Vivendi has decided to seek a buyer for its $8.1 billion stake in video-game company Activision Blizzard Inc., one person with knowledge of the situation has said.

Fourtou has concerns about Vivendi’s telecommunications businesses, which he believes require too much investment to be successful and lack scale, people familiar with the matter have said. A spinoff of pay-TV unit Canal Plus is among the options, they have said. Other Vivendi units include Universal Music Group and telecommunications providers in Morocco and Brazil.

French Wireless

Following Levy’s ouster, attention has focused on cost-cutting plans at French phone unit SFR. Stephane Roussel, Vivendi’s personnel chief and new CEO of SFR, met with unions yesterday to detail how he will cut jobs and reduce costs. The unit plans to reduce operating expenses by about 350 million euros ($439 million) in 2013, on top of the 450 million euros budgeted for this year, people with knowledge of the matter have said.

“We are still unclear about decisions that could be taken on SFR, Vivendi’s telecommunications subsidiary, to soften the impact of heightened pricing competition following the recent entry of a fourth competitor in France’s mobile telephony market,” S&P said.

SFR is Vivendi’s top contributor to earnings, accounting for 41 percent of first-quarter sales and 34 percent of earnings before interest, taxes and amortization.

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