In an headline today Bloomberg wrote “Vivendi Punishes Shareholders Seeing Need for Breakup.” The French conglomerate has resisted a move to break up the company and follow in the paths of Kraft and Fortune Brands which are splitting up their businesses. Bloomberg points out that Vivendi should be valued 40% greater than what it presently is given the individual values of the subsidiary businesses.
If the shares are more valuable than what the market claims, why not buy the shares from the market? Henry Singleton, the founder and CEO of Teledyne answered this question many times over his illustrious career.
Singleton made it a policy of buying his company’s stock when it was cheap and using it as a form of currency for acquisitions when it grew expensive. Singleton, like Buffett, paid no dividend from his company and instead returned value to his shareholders by growing earnings per share along with the stock valuation at incredible rates.
If Singleton were managing Vivendi he would likely prescribe 2 actions:
1) Eliminate the dividend
2) Funnel the dividend money into purchasing shares of company stock
In reality such a maneuver would yield a horrendous outcry from shareholders; ironically the very same people that probably believe the stock is undervalued. But suppose for a moment such a maneuver was possible.
Vivendi generated €3 billion in free cash flow for 2011 and a similar figure in 2010 (when calculating free cash flow for French firms keep in mind interest is added back in cash flow from operations and deducted from financing activities). Vivendi then paid €1.7 billion in dividends to its 1.2 billion shareholders.
Lets say Vivendi steers that €1.7 billion to buying shares. At today’s price of €13 a share they could buy about 130 million shares eliminating some 10% of shareholders and thus letting the remaining 90% share in the profits for this year. As a shareholder I would love to share the ~ €2.5 billion or whatever the company makes this year with ever fewer shareholders. Earnings per share would rise or hold steady just as earnings would fall. The logistics of such an operation would naturally drive the price higher, but is that not what shareholders are clamoring about?
The CEO of the Vivendi, however, is not Henry Singleton and he’s certainly not Warren Buffett. He doesn’t have the track record to make such an audacious move. At the same time there is the risk the company may do something foolish in the period that it is cheap.
Kraft is a case study of what can go wrong with an undervalued stock. Back when Warren Buffett held many more shares of the company he knew the stock to be cheap and the board of directors agreed with him. So what did the firm do? It acquired Cadbury with its undervalued shares! It sold its shares when it should have been buying them. It pursued a tax inefficient strategy to sell its precious frozen pizza business and it gambled on the high growth Indian market which is starting to fizzle.
At a price to earnings of 6 the Vivendi management will have to do a lot to destroy shareholder wealth and its hands may be tied with investors currently livid. Vivendi will see lowered earnings in its SFR business this year, but even a substantial reduction in that business will leave the company at a still attractive p/e ratio.
If a breakup of the company is really what investors want then so be it. It will make their job easier of valuing the company and there is certainly some value in that. But if Vivendi management were to follow in the footsteps in Henry Singleton they could produce tremendous value for its shareholders.
My previous article about the businesses of Vivendi
Disclosure: Long Vivendi (vivhy)