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Seth Klarman's Vivendi Investment Is Still Attractively Priced
Posted by: Josh Zachariah (IP Logged)
Date: November 14, 2012 04:51PM

The French conglomerate Vivendi (VIVHY) has been busy trying to lift its undervalued stock price. The undervaluation stems from the hodgepodge of divergent companies it carries with few if any synergies. Consequently, management is shopping many of the subsidiaries and has named valuations on a couple they are willing to part with. GVT and the stakes in Activision-Blizzard and Maroc Telecom have been thrown around to potential bidders.

Below are valuations the company offered for the three subsidiaries. I provided an approximate valuation for SFR based on France Telecom’s market cap of roughly 3x EBIT. The €7 billion valuation is substantially lower than the €18 billion Vivendi valued SFR in 2011 when it bought the stake it didn’t already own from Vodaphone. There aren’t any public record labels to compare Universal Music Group to nor am I aware of any similar French cable companies for comparisons of Canal+.

Vivendi's valuation of GVT
Vivendi's valuation of Maroc Telecom

On first glance the valuations of the just the handful of companies already exceed the €19 billion market valuation making Vivendi look attractive at its current price and debt load of around €15 billion. But will Vivendi be able to get these asking prices? GVT is certainly on the high end and as the article notes there are few potential buyers. Another consideration is taxes. If Vivendi is able to nab €7 billion for GVT then it will get hit with a large capital gain tax bill as the price has doubled from what Vivendi initially paid in 2009. Capital gains taxes for corporations in Brazil run near 34%. If Vivendi can’t get sell at an exceptional price it may be better just to hold on to the subsidiary rather than see so much of the proceeds go to the Brazilian treasury.

Vivendi’s price to earnings gives it the look of a telecom. It currently has a P/E of 7.6 based on 2012’s expected earnings which is barely higher than that of France Telecom which has a P/E of 6.4 for 2012 earnings. But if we look at the composition of Vivendi it is really only half telecom with the remainder of businesses in industries that command much higher premiums to earnings.

(weighting is based on 2011 EBITA as a percentage)

Vivendi has a 61% stake in video game developer Activision-Blizzard which has a P/E of 12 on the open market. The conglomerate also owns a Brazilian telecom that has been growing revenues at above 20% per year and earnings faster yet. The value of these assets is diminished because of its mature French telecom SFR.

The 56% of mature telecom also includes Vivendi’s stake in Maroc Telecom. Maroc Telecom derives most of its revenue from Monaco, but it does have stakes in growing telecoms in many African countries. If Vivendi sells the subsidiaries to pare back debt and outstanding shares, the conglomerate will earn the love of Wall-Street as it has come to hate diversified conglomerates. It was likely by the motivation of investment bank advisers to merge and acquire businesses as investment banks make money from mergers and acquisitions. Now the analysts of these very investment banks are pushing companies to break up their business.

Instead of listening to Wall Street, maybe for once Vivendi should take the advice of its shareholders that actually knows how to add value. Earlier this year Seth Klarman took a 2% in the business by buying shares (see Vivendi annual report for Baupost Group's stake as it is a foreign holding for Klarman). If Klarman and Vivendi management seem to agree shares are undervalued, why not direct strategy to buying these cheap shares first, then start thinking about breaking up the business?

If Wall Street still doesn’t respond by bidding up the shares then the company can move forward with the parceling of subsidiaries. For the investors seeking a catalyst, breaking up the conglomerate is certainly one. But for those investors wanting to get the best return, share repurchases would prove a better option and would avoid the costly incurrence of capital gains taxes.

Disclosure: Long Vivendi

Guru Discussed: Seth Klarman: Current Portfolio, Stock Picks
Stocks Discussed: VIVHY,
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Re Seth Klarman s Vivendi Investment Is Still Attractively Priced
Posted by: vgm (IP Logged)
Date: November 15, 2012 04:17AM

Nice article. I agree about the buybacks. On the other hand I wonder if the decision to sell at the moment is to try to take advantage of surplus cash on buyers' balances, as well as the availability of low-cost debt.

I also agree it's still cheap.

Disclosure: long Vivendi

Guru Discussed: Seth Klarman: Current Portfolio, Stock Picks
Stocks Discussed: VIVHY,
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