Description

Thesis and Overview:

Bollore is a collection of high-quality assets, most notably Universal Music Group (which was spun out of Vivendi) and Global transportation and logistics (including its African Logistics business, which is in contract to sell for €5.7 billion). The company is managed by an owner-operator, Vincent Bollore, who has a long-term track record of shareholder returns. The stock has produced a total return of 17.6% annualized, compared to 7.6% for the MSCI EAFE Index, going back to 1985 (the earliest I have data).   

I estimate that Bollore is worth €12.50 per share, with 137% upside to intrinsic value. I value Bollore on a look-through basis, based on my forecasts of long-term normalized earnings power for each business line. I then apply Bollore’s proportional ownership of each business to derive my estimate of intrinsic value.

As you can see in the table below, I segment the value of Bollore into four parts.  

1.       Cash from Pending African Logistics Sale. Bollore is in contract to sell its African Ports and Logistics businesses for €5.6 billion (net of tax). Following the sale, I estimate that Bollore will pay down €2.5 billion of debt, leaving a cash surplus of €2.29 per Bollore share. This makes up 18% of my estimate of Bollore intrinsic value.

2.       Universal Music Group (UMG). Bollore owns 21.0% of Universal Music Group, through a combination of both its direct ownership in the shares and indirect ownership, through Vivendi. I estimate that Universal Music Group is worth €5.48 per Bollore share, based on my estimate of long-term earnings power (as discussed later in this memo). This makes up 44% of Bollore's intrinsic value.

3.       Bollore’s Remaining Operating Businesses. After the sale of its African assets, Bollore will have remaining operations, including Bollore Logistics, Oil Logistics, Electricity Storage & Systems. I estimate that these businesses are worth €2.61 per Bollore share, or 21% of Bollore intrinsic value.

4.       Vivendi Stake, excluding UMG. Bollore owns 29% of Vivendi stock. Excluding, Vivendi’s 10.0% stake in UMG, I estimate that the asset is worth €2.12 per Bollore share, or 17% of Bollore intrinsic value.7.4.

Quality:

Universal Music and Bollore’s Logistics businesses have each generated attractive returns on capital over the past 5-10 years of 35% and 18%, respectively. While they are much different businesses, they both own assets that are either difficult or nearly impossible to replicate. Universal Music is the leading music label with more than three million recordings, while Bollore Logistics is comprised of its African operations and the 10th largest freight forwarding business globally. With wide moats, both businesses naturally lending themselves to a consolidated market structure with pricing power. Universal has scale and a roster of artists, including 8 of the 10 most influencers on social media in 2021, including Rihanna, Katy Perry, and Ariana Grande. Bollore Logistics has an entrenched infrastructure base, that would take years to replicate, and contracts with governments that typically last 15-25 years.

Analyzability:

Bollore’s corporate structure is complex, but the underlying businesses are simple. Universal Music is a predictable and free cash-flow-generative business. And Bollore’s Logistics business has grown sales at a 4% compounded rate with stable margins, particularly in its freight-forwarding business, which will make up the majority of Bollore’s ongoing operations, once it sells its African business. 

The corporate structure is complicated but understandable. The company uses a share structure, which results in Bollore’s net share count being about 46% of the reported gross share count (through year-end 2021). I explain this structure, known as “Breton Pulley” in more detail below, but it effectively helps the Bollore family to maintain voting control despite owning a minority of the shares. Importantly, I believe that Vincent Bollore may soon collapse the share structure, which would remove confusion and likely highlight, more clearly, the intrinsic value of the shares. About 4% of net shares have been retired over the past 3 months, and the coming proceeds from the African Logistics sale could spur a simplification of the structure.

While Bollore trades at a massive discount to clearly identifiable intrinsic value, one may question whether this value is ever unlocked given the holding company is effectively controlled by Vincent Bollore. I take the opposite view, and I have data to back it up. Bollore has already unlocked significant value by pursuing the UMG spin, the Africa sale, and the recent repurchases. As long-term shareholders, I like to align ourselves with owner operators like Bollore.

I believe Bollore fits well into a category of stocks that has significant outperformed over time; those run by owner-operators. When I study the returns of these stocks, the results are impressive. Companies where the chairman or CEO owns at least 5% of the company or the family owns at least 20% have outperformed the MSCI World Index by 1,000 bps, annually, from 1998-2018, looking at a global group of diversified holding companies.

Universal Music Group Overview

Universal Music Group accounts for 44% of my estimate of Bollore’s intrinsic value or €5.48 per share. Over the next five years, I estimate that Universal Music Group revenues will grow to €15.6 billion, from €10.5 billion expected in 2023 and that EBITDA margins will expand to 25% from 22%. This growth and profit expansion are being driven by the expansion of digital subscription streaming services, which opens new markets (driving up growth), resulting in operating leverage and improved margins.

Universal Music Group is a high-quality business that generates a 35% ROIC, driven by simple, predictable, free-cash-flow generative revenue, high barriers to entry, and limited geopolitical risks. As you can see in the chart below, revenues have nearly double from 2014 to 2021, as subscription and streaming sales have been growing at a 25%+ rate, while also supported by recent catalog investments that UMG has made.

Music Industry History and Why the Future is Bright

Streaming has transformed the music industry from a declining industry to one of fast growth, and I expect this change to drive growth for years to come. As you can see in the chart below, the music industry has endured significant change over the past 20 years. Following a period of stable, long-term growth, the music industry changed in 2000, when Napster emerged. Physical CD sales plummeted, with limited offset from online consumption. These declines lasted for a decade, before streaming caused a stabilization and return to growth.

Prior to 2000, there were a few music labels that controlled everything from distribution to marketing. For consumers, buying music on a CD was similar to a license model of consumption. Consumers bought a full album up-front and got to listen to it for life. As a result, profits were front-loaded and the whole industry was structured to maximize up-front sales of a recording, not lifetime sales.

For customers, this was a poor value proposition because consumers prefer to listen to individual songs on-demand.  Napster solved this problem, but with some major problems, namely: (i) it was illegal; (ii) the quality was poor, and (iii), it was time-consuming. Not surprisingly industry revenues profits peaked in 1999 and we’re still not back to that level.

Apple first tried to solve this problem with iTunes, which offered on-demand song purchases. This was a step in the right direction, but it still didn’t provide consumers with what they desired because they still needed to pay for every song. The structure was also bad for industry because you basically had one distributor: Apple.

Then came streaming, which was a much better solution for all parties. Subscription services offered an on-demand, all-you-can consume model with a much better user experience. The price was also attractive. The average cost of music streaming is low, with average monthly revenue of under $10.

Within this streaming paradigm, the major record labels are extremely well-positioned. In music, content truly is king. Music listeners often listen to the same songs repeatedly; 39% of music on Spotify comes from older catalog music owned by the labels. Compared to video, owning the relevant IP is much more important because much video content is only consumed once.

Healthy Industry Structure

Universal Music generates a high return on capital, in large part, because it operates in a healthy, oligopolistic industry. Two-thirds of the industry is controlled by the three major labels: UMG, Warner, and Sony Music, which control about 70% of the market combined.

Despite the growing ability for amateurs to record and produce music, the value of the record labels has increased. Yes, an artist can produce music at home and do some basic marketing on social media. But, because so many artists can effectively record music, there is lots of music! Because of the complexity of the industry and abundance of soundtracks being promoted, artists continue to be reliant on the music labels for distribution and marketing.

Because of their dominant position, people love to hate music labels, but this doesn’t make them any less important. I recently heard an interesting story about a University of Berkeley music professor who surveyed his class with two questions. First, who thinks favorably of the music labels? No one raised their hand. Second, would you sign with a music label today? Everyone raised their hand.

Revenue Growth and Margin Opportunity

The addressable market for the music labels is large and UMG should realize healthy sales growth for the foreseeable future. Music is ubiquitous, with technology leaders, like Spotify, Apple, Tencent, and Amazon driving streaming adoption for their user bases. In the past, music was primarily consumed by radio, in a car, or with an electronic device, like an MP3 player. This limited the addressable market, especially in emerging economies where not everyone had access to one of these items. Now, with the proliferation of smartphones, the addressable market is much larger. It’s estimated that more than 50% of the global population today owns a smartphone or ~4 billion people compared with the 523 million streaming subscribers in 2021.

Today, paid music streaming penetration rates of smartphone users are close to 40% in developed markets. But, in emerging markets they are still below 10%. I expect emerging market streaming penetration rates to grow over the next 10 years, consistent with UMG’s expectations. As you can see in the chart below, I expect global subscribers to grow to 1.5 billion in 2030, from 523 million in 2021 (~13% CAGR), and total streaming revenue grow at similar rates as increase in ARPU will be offset by mix shift to lower ARPU developing markets. Apart from the streaming business, I expect that UMG sales will decline modestly, for a total growth rate of approximately 8% per year (starting in 2023). This is in-line UMG management’s expectations of high-single digit sales growth medium-term, which they recently indicated could be conservative.

Fueled by strong sales growth, I expect EBITDA margins to expand to at least 25%, consistent with management expectations. As I showed above, EBITDA margins have already increased to 21% from 13% in 2014 and I expect this trend to continue.

The main driver of further margin improvement should be operating leverage, in my view, which should account for ~400bps of margin expansion that I expect over the medium-term, in-line with management’s expectations.  In 2021, total SG&A for UMG was €2.2 billion, up 8.6% from 2020 (with total employees increasing just 3.4%). As a result of opex increasing less than revenue (which increased 14.6% in 2021), margins benefitted by 140bps. Longer-term, I believe that SG&A will grow at a slower rate than sales and add ~400bps to overall margins, as you can see in the table below.

There are a few other factors that could contribute positively to margins, as well. First, gross margin for subscription/streaming is much higher than physical product – estimated at approximately 75% compared to 40%, as you can see below. The difference is mostly accounted for by physical manufacturing and distribution costs, which make up about 35% of sales. By 2028, I estimate that streaming will make up 75% of total UMG sales, up from 53% in 2021, which would positively impact gross margins.  

Second, catalog (older music tracks) are higher-margin business because there is limited associated operating expense. The cost to create the catalog, was conducted long ago. As you can see below, Catalog margins are about 15 percentage points higher than new releases, because there are no marketing expenses.

The reason I am not giving explicit credit to these factors is that I expect some of this structural benefit to be shared back with the artists. But, each could provide some upside to my estimates. 

UMG Conclusion

In the appendix, I show the summary of my forecast, with UMG net income expected to grow to €4.2 billion, from €0.9 billion in 2021. Part of this increase comes from giving a “fair return” of 8% post-tax, on excess cash flow.   

Bollore Operating Businesses

Bollore’s main operating assets are Bollore Logistics and Bollore Africa Logistics, which has been agreed to be purchased for €5.7 billion by MSC, a Switzerland-based company. Following that completion of the sale of Bollore Africa Logistics, I estimate that Bollore will pay down €2.5b of debt, leaving €3.1b of excess cash (net of tax). This is worth €2.29 per share and accounts for 18% of my estimate of intrinsic value of Bollore. I estimate that the remaining operating assets of Bollore are worth €2.61 per share and account for 21% of the intrinsic value of Bollore stock. 

High-Quality Assets with Good Returns on Capital

Bollore Transportation and Logistics is made up of two main operations that each generate a healthy return on invested capital.

-          Africa Logistics – Operates ports, rail, and other transportation logistics across 47 countries in Africa.

-          Other Logistics – Freight-forwarding business that acts as an intermediary between the shipper and transportation services.

Bollore was early to West Africa (where people predominantly speak French) and has been investing heavily in building out African ports, logistics and infrastructure over many decades which gives them a wide moat. This is a high-quality businesses because of several competitive advantages that it possesses, including:

1. Vertical Integration – Bollore’s ports, railways and location branches allow it to conduct imports and exports from distant areas in Africa.

2. Concentration Levels – The main terminal operators and shipping lines active in West Africa are highly concentrated (as you can see in the map below). Bollore and APM Terminals control 44% and 34% respectively of the container throughput in the West African container market, bringing their joint share to just below 80%.

3. High Barriers to Entry – Ports and Logistics require large up-front investments, the contracts have long durations, and political connections are important. The business is also complicated because of documentation and customs requirements, limiting smaller players from participating.

4. Cross Ownership – The market shares leaders, Bollore and APM simultaneously compete and collaborate with one another. Bollore and APM’s jointly operating terminals including Tema, Abidjan 1 and 2, Douala, and Pointe Noire.

5. Monopolistic Positions – Shipping demand is sticky, as most countries have a single Container Terminal.

To calculate each segment’s ROIC, I had to disaggregate the reported financials into each business segment and make a few assumptions. Bollore reports revenue for Africa and Non-Africa Logistics but does not report operating profit by segment. By looking at Logistics peers, including DSV and K&N, I believe that their Non-Africa Logistics business has an operating margin of between 5-6%. Using that assumption, I calculate the operating profit of Logistics to average ~€250 million over the past five years and the operating profit of Africa Logistics to average €333 million over the past five years. 

In the table below, I show the revenue, operating profit, operating margin, capex, and asset base (assuming a 20-year useful life for investments) of each segment. I estimate that Africa Logistics generates about a 10-15% ROIC and Logistics generates an ~40% ROIC. Bollore’s Logistics business (ex-Africa) has grown sales at ~4.5% annualized, while the Africa Logistics business has been more cyclical. As you can see in the table, Africa Logistics revenue was much stronger in the first half of the 2010’s decade than the second half.

My outlook for Bollore’s African operations is bright, and the business is analyzable, because of the elevated investments that it has made over the past five years, not because of a macro view. And concerns about Bollore’s African business simply being guided by commodities is misguided. Yes, most exports are commodity driven, but in a period of very weak commodities, from 2015-2019, Bollore’s African operating profits declined just 3%.  

More important than African macro factors are the idiosyncratic elements driving Bollore’s business. Bollore should see an acceleration of revenue growth because of investments that they have been making. Over the past decade, Bollore has spent roughly €2.5 billion (€1.5 billion from 2014-2019 alone) in capex. This is elevated spend that is meaningfully above maintenance capital of €100-€125 million that will drive future growth. Assuming Bollore can generate its historical return on capital, I expect that operating profit will increase about 26%, compared to 2021, over the next few years.

Bollore committed to the elevated spend to get the most out of their strong relationships/contracts that they hold. I verified the revenue potential of these growth investments with a former executive of the company, who noted, “no one else has been investing in Africa like Bollore has for the past 20 years”. Bollore should enjoy the fruits of these investments in Africa over the next 10 years, which should lead to increased free cash flow and growth. 

Bollore’s business is driven more by overall GDP than by trade, which I expect to grow longer-term. In 2019, for instance, when trade was down 23%, Bollore’s African revenue declined just 1% and operating income increased by 20%, as it is exposed to intra-Africa commerce, particularly through its rail business (as you can see in the table above). And despite weakness in commodities, from 2016-2021, Bollore’s operating margins were quite resilient in the mid-teens, allowing for profit growth and highlighting the toll-collection nature of the business.

African trade is not just driven by exporting raw materials, as it imports more goods than it exports. In 2019, which is the most recent data from the World Bank, Africa had imports of $253 billion, more than exports of $241 billion. And those imports were less dependent on commodities, as 44% of imports were from finished goods, predominantly from Asia, compared with 85% of exports being commodities.  

Longer-term, I expect Africa GDP and trade to resume growing closer to historical rates of 5% per year. Unlike many other countries and regions in the world, including China, African population is expected to continue growing over the next 30 years. According to the UN, Africa’s population could double by 2050.

Ultimately, these African assets are in contract to be sold for about 10x EBITDA, which I deem to be a fair price for the assets.

Overview of Bollore Logistics (non-Africa)

Bollore Logistics is one of the world’s ten largest logistics businesses. The company acts as an intermediary between shippers and transportation servicing companies, liaising with various carriers to negotiate on price and decide on the most economical, reliable, and fastest route. Bollore’s range of services extends across five core categories: Multimodal Transport, Customs and Regulatory Compliance, Logistics, Global Supply Chain, and Industrial Projects. At its core this is a network business that is capital-light, with a capex-to-sales ratio of just 1% per year. From 2007-2021, the business generated annualized sales growth of 4.5%, with steady operating margins (based on peer analysis) of around 5-6% per year.

Conclusion

In total, as you can see in the appendix below, I estimate that 21% of the BOL value will come from Bollore’s Transportation and Logistics business, excluding the sale of its African assets.  

Vivendi (ex-UMG)

The final portion of value at Bollore is its ownership of publicly traded Vivendi. Vivendi is a combination of high-quality media assets, with limited levels of capital required and a strong history of generating good returns on capital. I break down the business into more detail here.

Canal+ group accounts for ~50% of Vivendi’s value (ex-UMG) value and 9% of Bollore value. Canal+ group is one of the largest Latin language media companies globally, operating pay TV platforms in Europe, Africa, and Asia Pacific. Canal+ generates ~50% of its revenue from French pay TV business, which has faced structural challenge from the growth of internet video subscription platforms (including Netflix, etc.). The slow decline in the French pay TV business is more than offset by Canal+’s international pay TV business, which is growing low to mid-single digit (especially in French speaking African nations). I expect flattish topline growth and improving margin going forward as pay TV international becomes a bigger part of the mix.

Havas group accounts for ~20% of the Vivendi ex UMG value and 3% of Bollore value. Havas is the 6th largest advertising agency holding company, providing marketing services to clients in a range of industry verticals. Global ad agencies had already suffered from structural pressure, clients marketing direct to consumers led to increasing use of in-house marketing teams rather than ad agencies. I expect to see flat topline growth and for the margin to revert back to historical average.

Vivendi's equity portfolio accounts for ~24% of the Vivendi ex UMG value and 4% of Bollore value, including Vivendi's 17% investment in Telecom Italia, 45.1% investment in Lagardere (Vivendi has made a tender offer for Lagardere since then), and 33% ownership in Banijay Group.

In total, as you can see in the appendix below, I estimate that 17% of the BOL value will come from Vivendi’s operations, excluding the value of UMG.  

Share Count Analysis

As mentioned in the introduction of this report, Bollore’s net share count is about 46% of the reported gross share count, a fact that is missed by standard reporting on Bloomberg or Factset. This structure, known as “Breton Pulley,” effectively helps the Bollore family to maintain voting control despite owning a minority of the shares. The basic idea is that much of Bollore’s reported share count is owned by subsidiaries that are themselves owned by Bollore. Here’s how it works:

The Bollore family owns 23 million shares directly. The rest of their ownership in Bollore is through their interest in a company called Odet, which own 63% of the Bollore’s gross shares outstanding.

But here’s where it gets tricky. Bollore, in turn, effectively owns 84% of Odet (or equal to 1.6 billion of the 1.9 billion total shares that Odet owns of Bollore)! Because Bollore effectively owns these 1.6 billion shares of its own company (as shaded in gray below), I exclude them in my calculation of the net share count. 

And, as you can see at the bottom of the table, the net or economic share count is 46% of the reported gross share count. As a result of this circular ownership, the economic interest in Bollore of each shareholder is ~2.2x the reported ownership.

That might seem complicated, but it’s quite simple when you think about it from a cash flow perspective. Let’s say Bollore pays €100 of cash dividends. 63% of that (or €63) would go to Odet shareholders, including the Bollore corporation. And because Bollore effectively owns 84% of Odet, through various structures, they would “retain” €53 of the €63 paid to Odet shareholders.

Management / Risks / Capital Allocation

1.   ESG - Bollore is a holding company, which is sometimes associated with concerns about corporate governance. While the corporate structure is complicated for Bollore, I am tightly aligned with the founding family that effectively owns more than half of BOL shares and with employees as the top 500-600 employees are paid, significantly, in stock. My research suggests that investing alongside “owner-operators” like Vincent Bollore has been a highly alpha-generative strategy. Ultimately, I am investing in high-quality media and logistics assets run by a successful capital allocator. While the Bollore family does control the business, my research suggests they will make smart decisions with its capital and remain focused on long-term wealth creation.

2.   Geopolitical - Beyond Bollore’s control of the business, there are concerns about Bollore's African ports and logistics business. The ports business especially involves negotiations and partnerships with local governments. There is, of course, a degree of risk when operating such a business in Africa. I acknowledge this risk, but Bollore has structured each asset to be segregated joint-ventures. Thus, political turmoil from one segment has very limited spillover effects to the other units.  

3.   Capital Allocation – Bollore has a long track record of increasing shareholder value, outperforming the MSCI EAFE by 1,000bps, annually, going back to 1985. There are many examples, highlighting the company’s smart use of capital, including its investment in Vivendi with a focus on Universal Music Group, its heavy investment (and pending sale) of African assets, and now through its decision to repurchase its own stock. I will carefully monitor what Bollore does with the proceeds of the African Logistics business and expect that, once again, he will efficiently deploy the capital to increase shareholder value.

Appendix

Catalyst

buybacks, share count consolidation, growing free cash flow.