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Here Is Why I Bought Vivendi

May 17, 2012 | About:
Chandan Dubey

Chandan Dubey

97 followers
This contest submission is going to be in a different format than what I generally write. We will first look at the business, the opportunities and the risks without throwing too many numbers. Then for people who are interested I also include the numbers in a different section.

1 Short investment thesis

Itemsin € million
Revenue/Net margin28,813/9.3%
FCF/RoIC3,495/7.13%
Cash/Debt3,782/15,710
Shares outstanding1,287
P/E6
P/B0.8
Market Cap/Yield16,760/10.3%


Vivendi is a French conglomerate with a long and diverse history. It holds stakes in varied sorts of assets and does business in video games, music, pay TV and telecommunications. The company is very cheap on several metrics and offers at least an upward of 35% margin of safety (calculated according to the DCF calculations). Going forward I see Vivendi as a very good term asset to have.

2 History



Vivendi started as a water supply company (called Compagnie Générale des Eaux) by an official degree of Napolean III in 1853. The company stayed as a water supply company for nearly a hundred years. In 1976, Guy Dejouany was appointed the CEO of CGE. He went on a buying spree to diversify the company into waste management, energy, transport, construction and property development. The company also founded Canal+, the first pay-TV channel in France. Jean-Marie Messier, the successor of Guy Dejouany, began expanding into mass media and telecommunications. In 1998, CGE changed its name to Vivendi and sold its real estate and construction business which later became Vinci. In 2000, the company de-merged to create another division Veolia Environment, a waste and water management company.

In 2006, Vivendi sold its 80% stake in the Vivendi Universal Entertainment unit to GE, which formed NBC Universal. In 2007, it merged its video game division Vivendi Games to Activision to form Activision Blizzard. Vivendi owns nearly 60% of this gaming company which rivals Electronic Arts (EA).

In 2011, Vivendi has done two major deals. It sold all its stake in NBC Universal and It bought the remaining 44% stake in SFR from Vodafone for about $11 billion.

The following is the set of assets they own and their market position in their corresponding segments.

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3 Risks



Two of Vivendi’s core businesses (Activision Blizzard and Universal Music) suffer from the issue of piracy. It is estimated that for every 20 songs downloaded from the Internet, only one song is legally bought. This is a serious concern and both these industries are trying to come up with innovative ways to block such practices. Obviously, the pirates become smarter and life goes on.

The profitability of the music industry depends on the its ability to attract, develop and promote recording artists, and the success and popularity these artist command in the general public. The current list of Universal Music artists is huge with almost all of the most famous names (Beatles, Lady Gaga, Eminem, Justin Bieber, Jennifer Lopez, U2, Nelly Furtado ... and many more).

Canal+ is a pay-TV subscription-based service. It is the largest Pay-TV in France with 12.9 million subscriptions. Canal+ also works as distributor and one of the best asset of Vivendi.

Vivendi is also exposed to anti-monopolistic regulations from the EU, which is considered stricter than the regulations in the U.S. Antitrust actions against Vivendi may limit further growth especially by acquisitions. Furthermore, Vivendi may also be forced to pass rights to key technologies, products or services to avoid prosecution.

Vivendi faces stiff competition from Sony and Time Warner in the music industry, Orange, Iliad and Bouygues in the telecommunications industry, and BSkyB, Sky Italia, Premiere, Sogecal, Bouygues and M6 in the Pay-TV space. Vivendi’s MarocTelecom controls 98% of the mobile market in Morocco and the competition there is negligible. Vivendi’s SFR is also competing with the French discounter Iliad and has said that the margins in this area will suffer until 2013.

4 Management



Mr. Jean-Bernard Levy is the CEO of Vivendi since 2002. He is also chairman and CEO of SFr, chairman of Activision Blizzard and chairman of the board of GVT. The CEO was paid €2.9 million and is something I do not dislike a lot. After the compensations practices seen in the U.S., I find that UK, Germany and France are a much better place in this respect.

I like the way the CEO has handled the business since 2002. He has sold non-core assets like Vivendi Environment (now called Veolia), and NBC universal in which it did not hold the majority stake. Vivendi also bought the rest of SFR, Canal+ and Universal Music so that it now controls 100% of these companies. It also merged Activision and Blizzard to create Activision Blizzard in which it holds 60% stake now.

The business has streamlined during his tenure and now is diverse and at the same time quite concentrated along six of the business lines described above. One may agree or disagree with the choice of assets Vivendi ended up owning, but I like the current business mix.

The CEO is known to be a very good negotiator. An example is the SFR acquisition.

Vodafone and Vivendi have both been interested in buying each other out of SFR since the French company paid 4 billion euros ($5.3 billion) in January 2003 to gain control of the company that owned SFR, trumping an offer from Vodafone. Arun Sarin, Colao’s predecessor, sought to buy the rest of SFR during his tenure between 2003 and 2008, with Vivendi refusing to sell.- Bloomberg


Vivendi finally bought Vodafone's 44% stake for €8.3 billion.

5 Business in numbers



The company has shown good growth in revenue and the income has been improving since 2009. I don’t see Vivendi as a huge grower but as a nice undervalued dividend-paying stock. It has diverse interests and many income sources, which some sense gives the company stability.

20072008200920102011
Net Margin12.1210.253.067.619.3
Income€3,769m€2,603m€830m€2,198m€2,681m
FCF€3,447m€3,637m€4,704m€3,529m€3,495m
RoIC9.568.42.396.167.53


-MtZ-whJ7Tu2cO4rGB6gMdSxAosrLQEr845G74-6*
PkhA6BL68cauzdIN6hbAtNL1LYYA_aIlNBtyCzvg*
ftQ80QztNqiCQtvmu9G0K6b2awpO0-CD8p1ZKF6s*
DavcoJPeFETWaeccfcckmzu6xTB2MbHhyHU7PmD9*


As we see, the debt as well as the cash has been going up. The company paid €529 million in taxes for the year 2011 and with income being €2,681 million, the interest cover is nearly 5, which is quite safe.

Last year the debt situation deteriorated because the company bought SFr from Vodafone for $11 billion. Here is the situation with debt in the last year.

QExNxTLFI0u5wNFyCr2eXDRMlLR8UusQTLkCyN9A2MhmNuqDqew7hB-Lk7HcbEABUbIBh6WBIpGreHgY

Given that the debt is less than 1.8 times the EBITDA, I don’t see this company facing any issues with its balance sheet in the short term. The management has reiterated its position on debt and they are working towards decreasing it. Following is the debt maturity profile of Vivendi, and it is not overly problematic for it.

u8wL-FGFKA4Atife7mnxWWrRbGqQiECV2aG4xDQR

6 Valuation



Vivendi is cheap on several metrics. The current (market cap + debt - cash) is €28.2 billion.

Vivendi bought 44% stake of SFR from Vodafone for $10.6 billion. This values the SFR stake at €18 billion. The current market value of the 60% stake in Activision Blizzard is worth another €6.53 billion. Maroc Telekom’s market cap is €10 billion and a 53% stake is at least worth €5 billion. The total value of these three comes out to be more than €29 billion. This gets you Canal+ and Universal Music stake for free!

Additional disclosures

I am long Vivendi. Figures are taken from the Vivendi's annual reports, presentations and some from ft.com.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 4.5/5 (25 votes)

Comments

yams4112
Yams4112 - 2 years ago
chandan, how old are you?

you say you want to have invested income by age 40.

I am 28 and I would also like to have financial independence.

i'm just curious.
Josh Zachariah
Josh Zachariah premium member - 2 years ago
Great article and I agree with you on the cheapness of the stock, but just to play devil's advocate the SFR business is probably not worth €18 billion today. When Vivendi purchased Vodaphone's stake I don't think the parties expected Iliad (SFR competitor) to perform as well as it has of late.

Josh Zacharah
cdubey
Cdubey premium member - 2 years ago
@Yams: I am 28 too !

@Pepper: Probably. But as you point out, I do not have to be correct. I am sure the value of Canal+ and Universal music will cover the gap and some more.

donale
Donale - 2 years ago
I'am also long vivendi (nice CF, nice dividend)

but im not a fan of levy's work...

while he sold some non-cores he managed to make more debt.

he bought SFR at a way to high price, and is struggeling now with FREE's low-price politic.

(FREE from Iliad has the same Moat as GEICO at BH - low price)

SFR is about 38% (!) of the EBITDA of vivendi ... and they look to me, as they realy dont know how to handle competiton ...

Levy fired the CEO and set hisself in charge. looks a bit narcissistic to me... but ok...

Good thing is, a Vodafon Manager whil be the CEO of SFR next.

on the other hand side, if everything would be nice and bright, the price wouldnt be that low
cdubey
Cdubey premium member - 2 years ago
It will be interesting to find out why Iliad has such a low price. Orange, Bouygues and Vivendi are all struggling because of the upstart. I should look into the business model of Iliad in more detail. Given that the other three have a very diverse business (well except maybe Orange), I don't see why they can't compete with Iliad.
balajisridharan
Balajisridharan - 2 years ago
It is interesting to see everyone justifying Vivendi after Seth Klarman reveals a stake...
cdubey
Cdubey premium member - 2 years ago
@Balaji: There is no shame in coat-tailing after doing your own research ... :)
zwiphy
Zwiphy - 2 years ago


Henry Schacht was there before Seth Klarman...

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