Commentary: Why Vivendi Should Hang Up on Cegetel

Once again, Vivendi Universal's bankers are calling the shots. In June, French banks forced the ouster of Vivendi Chief Executive Jean-Marie Messier by shutting off credit to the debt-burdened company until he stepped aside. Now, the new CEO, Jean-René Fourtou, wants the banks to help finance a Vivendi bid for Cegetel, the French telecommunications company that runs the country's No. 2 mobile-phone operator, SFR. If Fourtou can raise $4 billion by Dec. 10, he can boost Vivendi's current stake in Cegetel above 50%. That would frustrate Britain's Vodafone Group PLC, which wants to grab Cegetel to gain entree to the French market.

Alas, for Fourtou, the banks will probably say no. Sources at BNP Paribas and Société Générale, two of Vivendi's biggest lenders, tell BusinessWeek that the bankers think Vivendi should sell its 44% stake in Cegetel to Vodafone. With Vivendi already $19 billion in debt, the bankers are skeptical about Fourtou's plan to buy the 26% of Cegetel now owned by Britain's BT Group.

Fourtou should listen to his bankers. In fact, he must. The banks could block a Cegetel bid by refusing financing. The bankers' worries are well-founded. Vodafone has offered to buy Vivendi's Cegetel stake for $6.8 billion. That would take a healthy bite out of Vivendi's debt--nearly as much as the $7 billion Vivendi expects to raise from selling its publishing business, utilities, and other assets.

Sure, Cegetel is a choice morsel. As majority owner, Vivendi could get its hands on Cegetel's estimated $1.3 billion-a-year cash flow--tempting indeed, since most analysts believe that the rest of Vivendi will not produce any free cash flow this year. Cegetel sales are forecast to grow 9% this year, to $6.96 billion, with operating results up 30%, to $2.2 billion. But Cegetel's cash torrent will start tapering off next year as it starts building a next-generation mobile network that will cost $5 billion, according to estimates by wireless consulting group Northstream.

Moreover, Cegetel's margins will be increasingly squeezed as it competes against the bigger Orange, which has 50% of the French mobile-phone market, to SFR's 35%. "Cegetel is at a disadvantage as a one-country operation in a market that's increasingly consolidated around strong regional players," says Bob House, vice-president at Adventis, a Boston consulting firm.

Besides, there's no strategic reason for Vivendi to cling to Cegetel. With its recently announced asset disposals, Vivendi's core holdings now are the Universal film, music, and theme-park businesses, and French pay-TV company Canal+. As long as Vivendi keeps Cegetel, investors will view it as a holding company, not a coherent entity. And its share price, already down 80% this year, will stay depressed.

Of course, Vivendi's bankers aren't looking out for investors. They're trying to protect their money. But this time, they know best.

By Carol Matlack

With David Fairlamb in Frankfurt

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