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Vivendi - Hidden Value in París

July 25, 2013 | About:
Gabriel Canelli

Gabriel Canelli

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Vivendi SA (VIV)(current price: $15.98) is a French multination telecommunication company headquartered in París. It is one of the few multimedia groups in the world to operate across the entire digital value chain. Currently operates a number of companies that are leaders in content, media and telecommunications.

Content and Media

  • Canal+ Group, France’s leading Pay-TV channel and Europe’s largest producer and distributor of films.
  • Universal Music Group (UMG), the world’s leading music company, operating in about 60 countries and with a catalog of more than 2 million titles.
  • Activision Blizzard, the world leader in video games, with franchises played the world over, including Call of Duty, Skylanders and World of Warcraft.
Telecommunications

  • SFR, the No. 1 alternative telecommunications operator in France and Europe.
  • Maroc Telecom, the No. 1 fixed-line and mobile telecommunications operator in Morocco, also operating in Burkina Faso, Gabon, Mauritania and Mali.
  • GVT, the No. 1 alternative telecommunications operator in Brazil, with a high-performance broadband network and new generation services in fixed-line telephony, Internet and Pay-TV.
Vivendi also owns a number of other market-leading companies: Digitick and See Tickets (event ticketing), Wengo (expert phone counseling) and Watchever (subscription video-on-demand service in Germany).

Resume of Financial Description of the Whole Company:

(€M) 2012 2011 2010 2009
Revenues 28994 28813 28878 27132
FCF 2590 3495 3529 4704


(€ Millons) 2012 2011 2010 2009
Net debt 13,118 13,455 14,941 14,054


Net debt is 5 times free cash flow, and it is reducing debt over the past four years.

Management

Management is focused on creating shareholder value and eliminating the discount of their shares. They are in the middle of a restructuring process. Here is the descriptions from Morningstar:

“Following a long and complicated history as a conglomerate, Vivendi has emerged with a solid set of assets, and many of its businesses enjoy sustainable competitive advantages, in our opinion. Management has announced it is looking at all options in order to reduce the discount at which the company's stock trades in relation to those assets.”

On July 23 I read that Vivendi entered exclusive talks to sell control of African phone operator Maroc Telecom to Emirates Telecommunications Corp. for €4.2 billion plus debt. I realized that I could have enough information to valuate the different business separately, and later on we could compare it with the market cap.

The market cap of Vivendi is €22.1 billion.

Valuing each business:

- Activision: Current Market Cap = USD7 billion, or about €13 billion. Vivendi has 61.5% of the shares, about €8 billion for the company.

- Maroc Telecom: Vivendi is selling the company for €4.2 billion plus debt. These are the numbers for the last three years:

(€ M) 2012 2011 2010
Revenues 2689 2739 2835
FCF 1066 1035 1150


In conclusion, the company is selling at least for 4 times cash flow.

- SFR: (Vivendi owns 100% of the company) Managers said that this company is the next in line for restructure. Maybe it could be a spinoff or a sale. The importance rests on having a conservative attitude towards its numbers to valuate. This can be explained because we want to know how much (of the whole company) we have for the businesses that the managers have interest in. Here the numbers:

(€ M) 2012 2011 2010 2009 2008
Revenues 11288 12183 12577 12425 11553
FCF 693 2032 1978 2263 2752
Cap ex 2736 1800 1974 1700 1305


We can see that the company generates stable fee cash flows, but in the last year expended $1 billion more capital compared with previous years. For conservative numbers I am going to take FCF for the last year and the ratio of Maroc (4 times) which is extremely conservative. I like wide margins of safety.

So we could value SFR at about €3 billion.

Resume for the last: (€21.2 billion) Market cap – €8 billion (Activision) – €4.2 (Maroc) – €3 billion (SFR) = €6 billion

€6 billion for practically three businesses: Canal+, UMG and GVT. And these businesses are those which the management has interest in.

Canal +: (Vivendi owns 100% of the company)

This is a stable company that generates strong free cash flow and the subscriptions has been growing 5% per years for the last five years.

(€ M) 2012 2011 2010 2009 2008
Revenues 5013 4857 4712 4553 4554
FCF 476 484 410 328 383
Subscriptors 14,254 12,946 12,709 12,471 11,974


Canal + is “France’s leading Pay-TV channel and Europe’s largest producer and distributor of filmes.” Without a shade of a doubt it is an important company that has competitive advantages like brand and economies of scale.

UMG: (Vivendi owns 100% of the company)

It’s an important company, and leader in its industry.

And the numbers:

(€ M) 2012 2011 2010 2009 2008
Revenues 4544 4197 4449 4363 4650
FCF 472 443 470 309 521


It is a stable company that generates strong FCF and has competitive advantages: a strong brand that makes artists feel confident with the company (we can see this in their clients: Madonna, Rihanna, Lmfo,Justin Bieber, etc).

GVT:(Vivendi owns 100% of the company)

It’s a growth company that generates net income. The company is investing a lot of capital so it is very difficult to take the maintaining capex, so we take net income.

(€ M) 2012 2011 2010 2011 2009
Revenues 1716 1446 1029 571 443
Net Income 300 240 166 85 66
Nro. the lines services 9075 6358 4232 2817 1901


We see that is a growth company and its revenues are growing at 42%, net income at 48%, lines services at 48% per year. It has a strong position in Brazil and strong competitive advantages like economies of scale and brand.

Conclusion

We found it easy to valuate the three first businesses, and we followed the philosophy of maintaining conservative numbers. And we have €6 billion left for the last three business.

Canal+ and UMG are leaders in their markets and generate strong FCF. On the other hand we have GVT which is a growing company. If we sum up FCF of the two first companies and the net income of GVT we have earnings of about €1.250 billion (€476 million + €472 million + €300 million). For being ultraconservatives we can valuate these companies at 10 times earnings and we have a market cap of €12 billion, double what Mr. Market currently values these companies at.

We have a margin of safety of 50% being ultraconservative. Everyone knows that SFR doesn’t value 4 times FCF, and Canal +, UMG and GVT, don´t value 10 times earnings and cash flows. We can valuate these companies in wider earnings.

Dividend yield aprox: 6%, The company has been paid aprox €1200 M to € 1700 M in dividends each year for the last 3 years and generate € 2500 M in FCF. I think is enough margin of safety and excelent dividend return.

About the author:

Gabriel Canelli
I am from Uruguay and I am 24 years old, with an almost finished grade in the area of Economy. Since 2009, I specialize in value investing.

Rating: 3.9/5 (17 votes)

Comments

Cornelius Chan
Cornelius Chan - 8 months ago
A very condensed article.

I have to admit to just skimming it... but I do have a question.

Can you confirm that Vivendi has paid continuous annual dividends since '05? This stock should be in my watchlist of blue chips or emerging blue chips, but the stock chart for the ADR showed no dividends.

(is this not the dividend-investor's dream stock? flat price since 2003 w/ a 6% yield) LOL!!

Gabriel Canelli
Gabriel Canelli premium member - 8 months ago
Yes the company has been paying dividends since 2005. Thank you for your comment. I edited some information about dividends. For the last 3 years the divdends were: €1.721M (2010), €1.731M (2011), €1.240M (2012), €2500M in FCF i think it is a good margin of safety. We have keep in mind that in restructurations situations the managers have the intention to create value for the shareholders, i do not think that the dividends has risks.
cdubey
Cdubey premium member - 8 months ago
You have ignored the €13 bn debt from your valuation ! Taking that into account - you have €21 bn market cap + € 13 bn net debt, which equals €34 bn in EV. This is what you are paying for the company. I will take the rest of your calculations.

By your calculations, GVT, UMG and Canal+ are worth at least €12 bn. But keeping the debt in mind, you are not paying €6 bn but € 19 bn for them ! There is no margin of safety here, at least by your valuation.
Gabriel Canelli
Gabriel Canelli premium member - 8 months ago
Cdubey thanks for commenting. But I disagree with you. The EV is useful if you compared it with profits. Lets do it:

EV: 21 +13 = 34 for Vivendi

FCF for Vivendi 2.5 B is EV / FCF= 13.6

UMG + Channel + GVT today generate 1250M FCF, EV = 13 +6 = 19B. EV /FCF = 15. The companies are growing: UMG has competitive advantages to grow in next future. The managers salid that UMG is the main business of Vivendi, Y think they belive that the company has good qualities to grow. Canal + increases its suscriptions 5% per year, GVT growth 40% a year. I think its really cheap. plus dividend yield 6%.

I am being very conservative because Maroc is selling 4.2 plus debt (Vivendi has 53% of Maroc and Maroc has 4B in debts so, we take 2B) and I valuated SFR in 4 times FCF to mantein the ratio of Maroc, but without debt and i think 4 times is ultraconservative so we can valuate at 6 or 7 times perfectly. If we take this UMG+Canal+ GVT is 19-2-2=15, 12 times FCF. Its really cheap
cdubey
Cdubey premium member - 8 months ago
@Gabriel: Paying 12xFCF means, without going into too much detail, you are paying for future growth.

I don't know what you mean by margin of safety. In my opinion, a margin of safety will mean that I get the growth for free i.e., if the growth does not come, I still get 10% or so compounded return. This would mean paying less than 10xFCF for Vivendi.

At current prices, the company is fairly priced in my opinion. Paying EV/FCF=15 is not cheap.

Regarding management, it is a hard sell. Most managers see their business through rose tinted glasses. They think that their business will grow faster than it actually does and they also think that it will be effected less in case of crisis than it actually does. If management of Vivendi thinks that UMG is a great business ... I will check it out for myself.

Gabriel Canelli
Gabriel Canelli premium member - 8 months ago


Margin of safety is the diference between intrinsec value and what you are paying for. Growth is part of value. Its practically impossible pay 10 times earning for a company which is growing 40% annual.

This investment is an special situation, and we have to see the managers with other eyes than other companies. They are restructuring the company so they are interesting to create value for the shareholders, they want have those business that create value. And if you see the clients, position in the market and FCF of UMG you have to know is a good business.
Adib Motiwala
Adib Motiwala - 8 months ago
Hi Gabriel,

Good post. Very timely with the sale of the Activision stake.

Just a couple of points.

Last year SFR spent 1 billion euro on acquisition of spectrum. This was one off. Hence FCF is likely to be higher than what we saw in 2012. Vivendi acquired the Vodafone owned partial stake for 8 billion euros or so. They likely over paid and the circumstances have worsened due to competition in french mobile industry since then. However, SFR is easily worth more than 3billion euro ( i know you were taking conservative multiples of a depressed FCF).

One point. You did not consider net debt in your valuation. In a sum of parts, you add up the value of the individual parts and subtract the net debt to arrive at equity value.

thanks
Adib Motiwala
Adib Motiwala - 8 months ago
.....
Adib Motiwala
Adib Motiwala - 8 months ago
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Disney
Disney - 8 months ago
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