Commentary: Memo to Jean-Marie Messier

Sure, Vivendi is getting a bum rap on a few counts. But there are plenty of legitimate reasons why investors are nervous

By Carol Matlack

Dear Mr. Messier: New York's a tough town, huh? When you moved into your $17.5 million Park Avenue apartment last fall, you were hoping to turn your media and communications company into the toast of Wall Street. But the reception on the Street has been decidedly cool.

Shares are down 30% since Jan. 1. You tried to halt the slide by going on U.S. TV shows and talking up Vivendi (V ) at investor conferences. Then, in February, when U.S. Securities & Exchange Commission "quiet" rules barred you from communicating with shareholders before the release of annual results on Mar. 5, you posted a letter to employees on the company's Web site, saying that Vivendi was a victim of "rumors and manipulation."

Sure, your company's getting a bum rap on a few counts. For example, some people have warned of a nasty surprise when the company switches from French to U.S. accounting standards this spring. Though in your letter you reported a lower number, some analysts reckon that under U.S. generally accepted accounting principles, Vivendi's debt could hit $28 billion, as much as $9 billion more than would be reported under French standards.

No matter. Analysts and credit-rating agencies are well aware of the issue and figured the differential between French and U.S. accounting into their own estimates months ago. Indeed, analysts say Vivendi's investor relations staff helped them sort through the accounting questions. You yourself feel a lot will be cleared up when the accounting switch is complete.

But, Mr. Messier, you must admit investors still have a right to be nervous. How many media and communications companies pipe water in Paris, and haul garbage in Bogotá? Those are some of the activities of Vivendi Environment. That's a separately listed utility company--but it's also 63%-owned by Vivendi Universal, which folds the results of Vivendi Environment into its numbers.

The utility biz generates approximately $25 billion in revenues, and it contributes to Vivendi Universal's earnings before interest, taxes, depreciation, and amortization. You love to talk about EBITDA, Mr. Messier. But do steady utility revenues mask weaknesses in more volatile Vivendi units? You say no. But that's hard to verify since Vivendi doesn't break out the numbers.

Are you in the mood for more advice? Come clean about operating earnings. All last year you boasted that Vivendi's EBITDA was on course to meet your annual growth target of 35%. But what you didn't say was that one of your fastest-growing businesses, French phone company Cegetel, is only 44%-owned by Vivendi. Even so, Vivendi books 100% of Cegetel's operating earnings when it compiles EBITDA.

True, Vivendi controls Cegetel through a complex share arrangement. And this accounting practice is perfectly legal: The European Aeronautics Defense & Space Co. consolidates 100% of Airbus Industrie's operating earnings, even though it owns only 80% of Airbus. Besides, Vivendi doesn't count 100% of Cegetel when it reports net profits. Still, if you'd counted 44% of Cegetel's operating profits, the EBITDA for your telecom division in 2000 would have been $537 million instead of $1.2 billion.

By the way, shareholders could also use some help sorting out the performance of your core holdings. The film and TV division lumps together the financials of Universal Studios, European pay-TV company Canal+, and other operations ranging from theme parks to hotels. You recently hired a new investor relations chief, former securities analyst Laura Martin, who is expected to push for more detailed financial reporting. Let's hope she works fast.

Most of all, investors want reassurance that you will stick to your strategy. In your recent letter to employees, you wrote: "Our priority for 2002 is internal growth," and you said there were no major acquisitions in the pipeline. You made similar statements after buying textbook publisher Houghton Mifflin for $2.2 billion in June. Then in December, you plunked down $10.3 billion to buy USA Networks Inc.'s entertainment business and laid out $1.5 billion for a stake in EchoStar Communications Corp.

You also spent more than $2 billion last year for a stake in a Moroccan phone company, Maroc Telecom. These deals not only drive up debt, they also make it even harder to figure out how all the pieces fit together and whether they are creating value for shareholders. We know you're eager to attract more U.S. investors. But winning them over will require straight talk and hard numbers.

Matlack covers French business.

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