Vivendi's Messier Looks Boxed in

Debt weighs on the company, but he can't sell off many units

How much worse can it get at Vivendi Universal (V )? On Apr. 24, Jean-Marie Messier, its beleaguered chief executive, seemed poised for a rebound, after facing down protests at the company's annual meeting and winning a vote of confidence from the board. But since then, the slide in Vivendi's share price has only accelerated. The stock has lost almost one-third of its value in just the past month. Here's a look at some forces driving the stock price down, and Messier's take on the situation.

Why are Vivendi's shares taking such a beating?

That's a good question, considering that the fundamentals look pretty good: Vivendi reported a 27% rise in first-quarter operating earnings, to $399 million, on sales of $6.5 billion. Part of the problem is that Vivendi is a far-flung conglomerate. Even experts have trouble picking apart its financials. But a bigger problem could be Messier himself. While shelling out more than $50 billion for Seagram Co. and other acquisitions over the past two years, he rhapsodized about creating a digital powerhouse, streaming entertainment over cell phones and TV sets. But the dream hasn't materialized. Vivendi recently wrote down $13 billion in assets and is struggling to pay down an $18 billion debt.

Now, Vivendi shares are caught in a downward spiral. Messier hedged some past transactions with off-balance-sheet agreements, wagering that Vivendi's share price and debt rating would stay high. But the downdraft worried Standard & Poor's, which recently lowered Vivendi's credit rating after determining that at its current share price Vivendi will have to pay out nearly $1.1 billion by next January to cover options agreements. In addition, S&P reckons Vivendi will face upwards of $4 billion in extra liabilities if its credit rating drops another notch, to junk level.

With the stock this low, isn't Vivendi vulnerable?

The immediate risk is that it will be broken up. Vivendi's market cap now hovers around $27 billion, which most analysts figure is about half the book value of its combined holdings. Indeed, analysts say that Vivendi's U.S.-based entertainment assets alone, including Universal Music Group, Universal Studios, and the recently acquired cable-TV properties of USA Networks, have a book value close to $30 billion.

So what's stopping a breakup?

Pulling Vivendi apart would be devilishly complicated. On paper, Universal Music is a gem: the world's biggest music company, with a market value of close to $9 billion. But antitrust regulators would almost certainly bar another music major from acquiring it. Meanwhile, French government authorities would most likely block a foreign company from acquiring French assets such as pay-television company Canal+ or utilities unit Vivendi Environnement. Because of such political considerations, even Messier has not been able to lighten his stake in Vivendi Environnement as fast as he would like--a predicament that has complicated his drive to cut the debt.

But couldn't a determined raider find a way to overcome such obstacles?

Perhaps, but who would it be? Most leading media and communications companies are in no shape to go on the prowl. Most likely a takeover would require a team effort. There has been speculation that Hollywood mogul Barry Diller, who now heads Vivendi's U.S. film and television unit, could join forces with outside investors to break up the company. But Diller says he has no interest in such a deal. "There will be no split-off," he told Reuters on May 7.

Can Messier hold on to his job?

At its meeting in April, insiders say, the board gave Messier until the end of this year to get the company back on track. Apparently, board members are still prepared to abide by that deadline, although some are feeling the pain of the share slide. Among the worst hit are Edgar Bronfman Jr., along with other members of the Bronfman clan, who, following Messier's acquisition of Seagram Co. in 2000, own 6% of Vivendi. The value of their combined stake has fallen by two-thirds since then. Other major shareholders, including executives of big French companies such as Saint-Gobain and bank Societe Generale, are hurting, too. "Our patience is wearing thin," says one board member. That's understandable. But no matter how precarious his position looks, neither Messier--nor Vivendi--will be easily toppled.

What does Messier say?

Messier points out that Vivendi's share price decline, while sharp, is in line with that of Vivendi's rivals. Hedge funds, he says, have been ignoring Vivendi's strong fundamentals and playing games with the stock. And the prospect of more accounting surprises? "We have disclosed all the off-balance sheet items," he says, "but not all of them were understood." Messier stresses that Vivendi's finances are sound: "We have taken steps to reduce debt, so we have no liquidity risk if we are downgraded." And he pleads for patience: "We need five to seven years to implement [our strategy], but the market changes its mind every six months." To break up the company, he adds, would take years too. Meanwhile, he says, the vast majority of the board supports his strategy and his team. If he's right, the Messier saga is far from over.

By Carol Matlack in Paris, with John Rossant in Paris, Tom Lowry in New York, and Ron Grover in Los Angeles

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