Why so cheap?
Like many European companies, valuations are particularly depressed because of a looming recession. Vivendi is firmly planted in the European market and pulls in some 70% of its revenues from the continent. The remainder of revenues come from the company’s subsidiaries including another telecom in Brazil, the record company Universal Music Group and also a substantial 60% stake in the video game developer Activision-Blizzard. These gems make the price look all the more attractive, but I’ll return to them later.
Vivendi owns the French telecom SFR. Last year it had bought the 44% of SFR shares it didn’t already own from Vodaphone for $11.3 billion in cash. The French telecom market had until recently been shared by three companies with SFR included. A new entrant named Iliad introduced much lower pricing and is threatening the incumbent telecom providers. Investors are concerned this new and low-cost competitor will erode the pricing power of the existing telecoms and potentially poach many of their subscribers.
Certainly there is logic to the argument, but the concern is likely overdone as this Morningstar analyst will testify. As Mr. Nichols notes, the experience with new cellular companies in Europe tend to show that they have little impact on the incumbents. One of the more successful new entrants was that of Novator in Poland. This cellular operator was able to extract a 11% market share over a four-year time, but the existing incumbents sustained their subscriber bases as the market penetration of cellular subscribers in Poland increased from 100% to 120%.
Like the Polish market prior to the entrance of Novator, the French cellular market currently has a penetration rate of about 100%. This, the Morningstar analyst writes, is among the lowest in all of Europe and will likely allow for growth in the market with the fourth cellular carrier.
However, the latest news has not played into the analysts' projections. Iliad had rolled out cellular plans starting at €2 a month for 60 minutes and 60 text messages. As Bloomberg reported, French consumers have scooped up these deals and Iliad has grown much faster than comparable European mobile start-ups. Iliad was able to notch a 3% market share within two months of operation, but with lower profits than expected.
The Gems of Vivendi
Despite the challenges in the French market, Vivendi has a number of high quality assets on its balance sheet. Vivendi owns the record company Universal Music Group which holds the rights to a collection of artists ranging from the Beatles to Rhianna and is represented in over 50 countries. Universal Music produces 14% of Vivendi’s total revenue and holds some 26% of the market share in the music industry. Given the difficulties of the industry that may not sound impressive, but when you consider the quality of the assets – royalties from some of the most recognizable artists and the fact that only 1 in 10 digital songs is paid for, there can certainly be room for growth.
In a Bloomberg article today Napster founder and one-time record industry archenemy Sean Parker remarked that the record labels were “dramatically undervalued.” The article went on to say he believes the record labels will thrive with the help of Internet applications. In my opinion as governments clamp down on piracy, record companies will be one of the first to benefit as consumers move to more legal acquisitions of music.
Activision-Blizzard is another piece to the Vivendi conglomerate and it produces 11% of the company’s revenue, but 17% of its operating profits. The business landed on its balance sheet when in 2007 Vivendi Games merged with Activision and the merger was subsequently christened Activision-Blizzard. Vivendi has sold some of its stake, but still claims 60% of the video game maker.
For the uninformed, Blizzard is arguably one of the most successful video game makers of our time (I should know as I spent my high school years behind the glow of Starcraft). Blizzard developed the Starcraft and Warcraft series with the former being the fourth best-selling PC game of all time at 11 million units sold. The company continues to put out hits and as South Koreans can attest Starcraft is not just for the video game enthusiast, but a national phenomenon as video game matches are televised and watched by millions in the country.
The Activision segment has also been successful, but has produced games geared towards console video games rather than the PC. Such games as Call of Duty have pushed Activision Publishing to the No. 1 spot for console and handheld publishing. Activision-Blizzard (ATVI) currently sells for a price to earnings of 13.5 and is likely deserving of such a multiple.
The last notable asset on the Vivendi balance sheet is its Brazilian subsidiary GVT. GVT is a high speed Internet provider and fixed line telecom in Brazil and has grown operating profits from €20 million in 2009 to €396 in 2011. Consistent with this growth, revenues for the subsidiary have grown by a factor of 14 during the same period. In contrast to the French market where Vivendi is fending off a more nimbler start-up, Vivendi is the start-up in Brazil poaching telecom and Internet subscribers from incumbents (and surely creating new ones) through its GVT holding. GVT offers a “one-stop” shop consisting of fixed-line telecommunications, Internet and pay TV for the fast-growing Brazilian economy.
Of the many stocks Seth Klarman has stakes in, Vivendi is one of the few where the price to earnings multiple (at 6) looks cheap. The best part is that the margin of safety has grown (price has declined) since the time he made his investment. He likely made it no later than the first quarter of this year depending on when Vivendi last took count of major shareholders. It was also possible that at the time of his investment this was the largest single holding in the Baupost Group.
Seldom do you have the opportunity to pick up a stock for less than what Klarman pays. If you’re a value investor then it's probably a good idea to take a good look at this pitch before it passes you by.
Disclosure: Long vivhy