Introduction
Vivendi (VIVHY, Financial) is a French conglomerate active in music (with Universal Music Group), television & cinema (via Canal+ Group), publishing (Editis), advertising (through Havas) and video games (with Gameloft). In addition, it also has equity stakes in various other media companies.
The conglomerate had originally been a water utility for a very long time. In the 70's, it started to acquire companies in other industries like waste management, construction and media. It has since then subsequently separated its waste management and construction businesses, which are today known as Veolia Environnement (VEOEY, Financial) and Vinci (VCISY, Financial).
Universal Music Group and its planned IPO
With Vivendi continuing on its more recent kick of spinning off some of its businesses, the present article will focus on Universal Music Group, or UMG, specifically on its value in relation to Vivendi and to the recently announced IPO. As we'll see, this is sufficient to generate an investment thesis for Vivendi in my opinion, which I found surprising.
UMG is considered to be the largest music label in the world, owning more than 30% of the music produced and distributed in Europe and America. The label is engaged in music recording, publishing, distributing and merchandising in more than 60 countries.
The company currently produces, distributes and promotes eight of the top 10 global recording artists, including names like The Beatles, Queen, Taylor Swift and Lady Gaga, among others. Just recently, UMG acquired Bob Dylan's whole catalog of songs, which represent 60 years of a priceless music (and literature) treasure.
Valuing UMG
Let's now see which is the best way to value UMG. One of the most common (and simplest) ways to do it is to look at a comparable company that was sold for a known purchasing value. Actually, here we can have an even more precise measure of value, as we already know how much is a piece of UMG worth.
In 2019, Vivendi announced that it would sell 10% of UMG to a consortium of companies led by Tencent (HKSE:00700, Financial) for 3 billion euros ($3.63 billion), giving UMG an enterprise value of €30 billion. The deal was closed on March 31 earlier this year.
They also signed a separate agreement which enables Tencent Music Entertainment (a Tencent subsidiary) to acquire a minority share in UMG's Greater China operations. This is important not only for Tencent, but also for UMG, as it would allow the company to further develop its business in China. Tencent and its partners have also the option to increase their stake to 20% of UMG at the same price until Jan. 15th, 2021. I think it is likely they will.
Now here comes the catalyst that the company announced during the most recent third quarter results:
"Following the success of this significant strategic transaction, Vivendi is pursuing its plan to sell additional minority interests in UMG with the assistance of several mandated banks. An IPO is planned for 2022."
The company intends to sell up to an additional 40% share of UMG (10% of which could go to the above mentioned Tencent-led consortium) and reserve the remaining 50% to the IPO. However they will do it, that's approximately €27 billion for Vivendi's shareholders.
It's worth considering that Streaming and Subscriptions already constitute more than 50% of UMG's revenues, and this segment is set to grow more in the future (see the picture below).
Source: Vivendi´s Q3 presentation
Margins will also likely be higher in the future, as streaming songs is practically costless for the company but produces a quite stable cash flow, especially from subscriptions. Music streaming is not the same as, for example, television streaming: you don't have to continuously produce new content in order to sell it.
Valuation
As Vivendi now owns 90% of UMG, that translates to €27 billion of value left for the comany to sell today.
Vivendi is currently selling for around €25 per share, with a market capitalization of €27.7 billion. This means that, if the IPO will take place at the same price Tencent and its partners paid, an investor in Vivendi would get the rest of the company (Canal+ Group, Editis, Havas, Gameloft and the equity stakes) almost for free.
The rest of the business
How much are Vivendi's other pieces worth? To help put an estimate on this, let's look at its most recent acquisitions.
The purchase of Editis (the second largest French language publishing group) was completed on Jan. 31, 2019 for a price tag of €900 million.
A 60% majority stake in Havas, an advertising and communication company, was acquired in June 2017 for an estimated €2.3 billion, and the rest of the company was purchased by October 2017, resulting in a total consideration of €3.9 billion.
Canal+ Group, Vivendi's second-largest contributor to revenues, showed strong resilience this year. In spite of the pandemic, it managed to increase its revenues by 6.6% in the first nine months of 2020, compared to last year. If we value the business with a quite conservative 10 times multiple of operating income, it would be worth around €4.3 billion.
Looking at the equity assets, Vivendi owns stakes in two of the biggest Italian communication and media companies. Specifically, it owns 3,640 million ordinary shares of Telecom Italia, for a current value of around €1.4 billion, and 29% of Mediaset, valued today at around €0.7 billion.
Let's be conservative and choose to assign a value of zero to the remaining minor businesses and equity stakes.
Finally, net financial debt at the end of September 2020 was €3.1 billion.
Adding up all the components and subtracting the debt, we reach a value of €35.1 billion, which is 27% bigger than the current price.
One of the risks associated to the music business is represented by the tendency, especially related to small (or emerging) artists, to auto-produce their albums. This could be a problem for UMG in the future, but if we think about the already acquired music rights, including timeless artists, and the fact that they will expire 70 years after the artist's death, it's clear that UMG will be streaming music and cash flows for music aficionados and investors for many years to come.
Conclusion
Vivendi is a well-diversified media conglomerate which owns 90% of Universal Music Group. The recent Tencent-led consortium acquisition of 10% of UMG unveils a realistic intrinsic value for its music business subsidiary.
Vivendi is selling for slightly more than UMG´s value by my calculations, with the market assigning a value of zero to its remaining businesses. That results in a (conservative) margin of safety of 27%.
The upcoming UMG IPO creates a catalyst which could help Vivendi's shareholders to fully realize the value of he company.
Disclosure: The author owns shares of Vivendi.
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