Outlook for Vivendi Universal Still Negative

Funding for its transaction with USA Networks will strain the company's already-weak balance sheet, says Standard & Poor's

Following the Dec. 17 announcement by French media and communications group Vivendi Universal (V ) that it has agreed to acquire the film and television arm of U.S.-based entertainment company USA Networks (USAI ) , Standard & Poor's said that it maintains its triple-'B' long-term and 'A-2' short-term ratings on Vivendi Universal on CreditWatch with negative implications.

At the same time, Standard & Poor's reiterated its indication that Vivendi Universal's long- and short-term ratings will be affirmed, with a stable outlook, upon the closing of the sale of the wine and spirits division for about $8 billion, expected by year-end 2001.

The Dec. 17 announcement follows one on Dec. 14 by Vivendi Universal that it has agreed to acquire a 12.5% stake in U.S.-based satellite pay-TV broadcaster Echostar for $1.5 billion in cash. The acquisition of the media assets of USAI will be financed by a combination of cash ($1.7 billion), preferred stock ($2.5 billion), common shares (worth about $1.6 billion), and certain put and call arrangements (currently valued at about $1.25 billion) through 2010. Upon completion of the acquisition, Vivendi Universal will hold 93% of an entity to be called Vivendi Universal Entertainment, which will encompass Universal Studio Group (Vivendi Universal's current television and film entertainment arm) and the media assets of USAI.

The acquisition will represent a significant inroad for Vivendi Universal into the U.S. television broadcasting market. USAI's media assets have sales of approximately EUR2 billion and EBITDA of about EUR650 million. Moreover, the combination of Vivendi Universal's entertainment content (primarily films and music) and USAI's distribution networks could create substantial revenue and cost synergies. Although Vivendi Universal owned 46% of USAI before today's announced transaction, it had very limited influence over latter's strategy or operations. The acquisition will give Vivendi Universal direct management of USAI's high-quality, mature cable networks--mainly USA Network and Sci-Fi, reaching about 160 million homes--which generate a sound EBITDA margin (about

32%, which is higher than that of Vivendi Universal's own television business) and solid free cash flows. While the acquisition of a 12.5% stake in Echostar will also secure distribution access with no entry fee to about 17 households in the U.S. (if the merger between Echostar and DirectTV is completed), potential profit margin and cash flow generation benefits are limited in the near term and uncertain in the medium term.

Financially, the cash and preferred-stock funding elements of the transaction will further weigh on Vivendi Universal's already weak balance-sheet structure and debt-protection measures. However, Standard & Poor's expects the weakening of the group's credit measures to be limited, for the following reasons:

-- The solid and relatively stable cash flow generation of USAI's media assets will mitigate the impact of the various cash payments.

-- Certain hybrid financial instruments used for the acquisition have credit friendly characteristics, including long-term maturity, a low coupon, and a high equity content. Wherever possible, Vivendi Universal is expected to use its existing treasury shares to repay these instruments upon maturity.

-- Vivendi Universal's debt level is expected to be reduced by at least EUR2 billion during the first quarter of 2002, through assets sales and other debt-reduction measures.

To maintain its ratings, Vivendi Universal is therefore expected to reduce debt materially and rapidly--with significant reduction occurring by end-March 2002--in order to reach a ratio of net debt to EBITDA below 3 times at year-end 2002. The disposal of the group's wine and spirits division (for about $8 billion) and professional and free press operations (estimated at about EUR1.5 billion) are already factored into the ratings and are therefore in addition to the debt-reduction expectations above.

From Standard & Poor's CreditWire

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