Commentary: How Vivendi Should Clean Up Messier's Mess

By Carol Matlack

We've had enough. That's what shareholders have been telling Vivendi Universal (V ) Chief Executive Jean-Marie Messier as they've driven Vivendi shares down 40% since June 1. The embattled CEO still has the support of the board. But whether he stays or goes, the market is signaling it wants Vivendi to take a blowtorch to the global conglomerate Messier tried to weld onto the chassis of an old French water company. "There is no logic holding Vivendi together. It is only a series of mistakes," says Michael C. Kraland, a fund manager at Trinity Capital Partners in Paris who dumped his Vivendi stock several weeks ago.

The company urgently needs to reduce its $19 billion debt and simplify its structure. That means selling off a big pile of assets Messier spent billions acquiring--and, in effect, admitting his vision was all wrong. After Messier bought Seagram Co. from Edgar Bronfman Jr. and his family, the company was supposed to be a happy marriage of content and distribution. Vivendi units such as European pay-TV group Canal+ and French mobile-phone group Cegetel would provide new outlets for Seagram's Universal film and music properties. But Canal+ is losing money and retreating from markets, and snazzy new mobile-phone services remain a distant dream.

Vivendi needs to dump most of its distribution holdings and reemerge as a media content company focused on its Hollywood business and French publishing outfits. It shouldn't be hard. French media groups such as Lagardère and TF1 are already circling Canal+, and Vodafone is eager to get its hands on Cegetel. True, Vivendi won't be able to command great prices: Most analysts reckon Cegetel's value at about $6.5 billion, half what it was a year ago. It's a shame--but there's no good reason to hold onto these businesses.

There's plenty of other baggage to unload. Analyst Mark Harrington of J.P. Morgan Chase & Co. in London figures Vivendi could raise at least $5 billion by selling off properties ranging from phone companies in Morocco and Poland to Canal+ Technologies, a business that develops software for TV set-top boxes. And Vivendi can continue reducing its stake in the utilities business, Vivendi Environnement. Recent share transactions have lowered its stake to 42%, meaning Vivendi Universal no longer has to carry the utility's nearly $15 billion debt on its books.

This is no ordinary restructuring, of course. Vivendi not only needs to make smart moves but explain them to the markets. There, Messier has repeatedly come up short. In March, he surprised investors by announcing a $14 billion asset write-down. He stumbled into yet another firestorm on June 12, when Vivendi raised $1.3 billion by parking a 12.6% stake in its utilities division with Deutsche Bank, in exchange for a loan. The deal made sense because Vivendi could avoid paying taxes on the money raised. But Messier made no announcement of the deal: After it was disclosed by French regulators on June 20, Vivendi shares swooned because investors feared the company was desperate to raise cash.

Given Messier's tin ear for investor relations, he may well not be the best man to oversee a radical restructuring. It could make more sense for the board to install someone else--most likely a respected French banker or business leader, since naming a non-French CEO would certainly spark a political firestorm in France.

For now, Messier is hanging on. The most recent board meeting was on June 25, a day after Vivendi shares plunged 23% on investor fears over its cash position. Although some of the seven non-French directors want Messier removed, a majority led by the eight French directors outvoted them. Even the patience of the French directors is wearing thin. Messier was clearly shaken when his close ally, LVMH Moët Hennessy Louis Vuitton's Bernard Arnault, quit the board on June 25.

Certainly, Vivendi is correct in arguing that it has been caught in a market downdraft and isn't entirely to blame for its recent market woes. Shares in its bigger rival, AOL Time Warner Inc., have performed just as badly, and kept right on sliding after CEO Gerald M. Levin resigned. But as Messier himself is fond of saying, "The market is always right, even if it's not right on every single day." Vivendi's shares have been sliding relentlessly now for more than six months. It's high time for a change.

Matlack covers French business and politics from Paris.

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