Vivendi is a French media conglomerate which has been a perpetual value trap that is now creating considerable value for shareholders via multiple sales, spinoffs, disposals and plowing the cash into dividends and buybacks effectively realizing the long-standing sum of the parts story. This has come about largely becase of Vincent Bollore's involvement over the last 2 years, who is now the largest shareholder. He also finally managed to take control of the board and was appointed Chairman. This should ensure the cash from sales/disposals won't be wasted. If anything buybacks are likely to be the preferred avenue to allow Bollore to increase his ownership. Bollore has a long history of value creation which you can read about seperately. He's one of the wealthiest French person (top 10 ish). 

 

So lets go over what's in Vivendi

 

 

On top of this catalyst rich event-driven story of cash return, there's a structural turnaround/growth story of the music industry. The recorded music revenues peaked in 1997 and have been declining ever since and I am effectively calling a halt to the decline in 2014/2015 and a slow growth strategy emerging from here on out. Physical revenues continue their decline. Digital downloads are just about peaking now and will flatten out (or maybe even decline) but streaming revenues are going to take-off from here and offset all of these other models. And within streaming revenues I am basically talking about the subscription model. Because of the non-stop decline in music revenues for last 2 decades, there has been a big consolidation as various labels have folded and merged top the point we now have 3 major labels control 88% of the sales. Universal Music Group is the biggest and controls about 40%, Sony Music is the 2nd biggest and controls about 30% and Warner Music about 18% and rest 12% is independents. The subscription market is immensely more profitable for the labels than previous model. From a $100 spend by the user, the label collects a much higher %age from a subscription model than previous models. In effect not only are there no packaging, manufacturing and distribution costs of Physical, but also there's no single behemoth like Apple which took a dispropotionate cut of Digital Downloads and the new players like Spotify, Deezer, Amazon streaming, etc are all taking a smaller cut.

 

The reason they are willing to do that is that the market is exploding. The format itself is driving much higher spend. The same reason that Adobe shifted from physical/single sales to subscription, or Microsoft is switching to subscription, is why overall music spend is expanding. The proposition of subscribing to any and all music ever released in the past or at present for $10 a month, where you can create any custom playlists, download any song, and basically have access to any song ever released or will be released, is for most people a great deal at $10 a month. The trick is ofcourse that most people would otherwise not have spend $120 per year on music but now they end up consuming more music. Either way the $120 per month is expanding the market and the labels are benefitting (as well as the streaming subscription services which are exploding). Currently 25% of Swedish population is already on the subscription model, as they are early adopters. We don't know where this peaks and stabilizes. 13m of Spotify's expected 57m users this year will be on the subscription service, rest on free. 7m of Deezer's 24m users on subscription. And these numbers are growing very rapidly. The major labels EBITDA already turned last year (even though revenues bottom in 2014/2015, they have higher EBITDA margin in subscription so their EBITDA's already bottomed and have started growing). 

 

Subscription revenue market should go from $1.1b total last year to $10b by 2018/2019 and by then represent more than half the music industry revenues. In that case UMG's EBITDA would explode upwards to $1.7b by 2018, from currently 2015E of $1.1b as EBITDA margins go from 15% in 2013 to 25% in 2018 in conjunction with rapid revenue growth. Note this is not a consensus view. Barclays just recently put out a big note on how they expect the streaming subscribers are super heavy users who would save from spending $120 per year (since they spend more than $120 per year otherwise) and hence this is cannabalization of these users and is net negative. I completely disagree. I feel this will expand the market, lead to higher ebitda margins (since streaming is higher ebitda margins for the labels) and hence the combination of increasing revenues and margins leads to my significantly higher EBITDA 3-4 years out. Also once the growth element gets understood, I feel the multiple attached to this growing EBITDA would also expand from 7-8x currently to 10-12x. Hence I value UMG at the higher end of my multiple at 12x their 2018E EBITDA hence 12x 1.8 = $21.6b. Discount this back at 10% per year to get $16.2 which is €12.0b. This valuation entails a multiple re-rating once the story gets clear. It will be realized via a spin-off and listing. 

 

 

GVT is a Brazilian broadband/telecom player offering fixed line, broadband, pay tv, and VOIP. It now has penetration in 152 cities in Brazil and has stopped the capex for further expansion and is instead focusing on harvesting the investment from last many years. This means its EBITDA - Capex is just about to turn positive and will rapidly expand from here. With 2015E EBITDA of €750m , GVT is worth at a 7.5x multiple about €5.6b. GVT is effectively for sale and is considered a strategic asset and is likely to sell for a higher valuation. Various brokers estimate a sale in the region of €8b. It is suspected that a current sale process is under way. The recent strengthening of the Real has firmed up this valuation target somewhat. 

 

 

Canal+ is a french TV broadcaster which owns and produces a lot of quality french languange content that is consumed in France as well as other french speaking regions like North and West Africa, Eastern Canada, and SE Asia. Various dcf analysis of this steady business assigns a €8bn valuation. This business has been incredibly resilient and serves a specifc demographic despite the naysayers, faces little competition. Note that for 2014 about 50% of Canal+ EBITDA will come from international french media consumption, up from 35% in 2012. This will continue to increase to 80% in 2018.  The business is perceived as under stress from stagnant french subscribers while facing rising sports programming acquisition costs. Reality is that French subscribers will decrease in importance to Canal+ as the international growth opportunity beckons. I use 8x their 2015E EBITDA of €900m for a €7,200 valuation.

 

 

 

 

Vivendi has agreed to sell SFR to Altice/Numericable for €13.5b for which Altice has already raised the funds. I have assumed the transaction closes, and used Net Cash balance pro-forma for this €13.5b payout. Also Vivendi will still have a 20% stake in the combined entity. There have been massive synergies guided for the combined entity by Altice, who will control 60% of the new SFR/Numericable and who is being led by another activist investor, Patrick Dahi who styles himself as Europe's John Malone. Guided synergies are a massive. Hence a valuation of €17-18b for the combined entity is reasonable. Which results in a 20% stake worth €3.4b-3.6b. In addition there is a very high probability chance of securing the €750m earnout that Vivendi wins for fairly easy to reach EBITDA targets. 

 

 

Spotify last raised money in Nov 13 for a $4b valuation but recent discussions with Google for a sale were valuing it north of $10b. I am extremely bullish on this business as explained by my discussion in UMG. I have put a fairly wide range for spotify valuation in my base and bull case. Vivendi own 5%.

 

 

Vevo streams music videos for UMG and Sony Music and dominates YouTube rankings. It has the highest minues per user, highest overall users, and many other rankings. Google (which owns YouTube) took a stake in Vevo so as to align the interests of all stakeholders (UMG/Sony quickly agreed since they didnt want Google to try bar them from YouTube etc). Google valued the company at $700m for its stake in Jun 13 and expectations are for valuation to have moved up significantly since then as the dominance and viewership continues to grow exponentially. I have assumed a $1b valuation which is conservative. Vivendi owns 50% of Vevo

 

 

Rest of the self is mostly self explanatory. Here's the SOTP

 

 

					Base	Bull
UMG					10,000	12,000		Bull case represents multiple   re-rating as well in spinoff
GVT					5,625	8,000		Bull case represents takeout   valuation.
Canal+					7,200	8,000
Net Cash -   proforma for €4.1b for Marac sale and €13.5b for SFR and Oct 13 ATVI sale									7565	7565
20% stake in   Numericable					4000	4000		Valuing Num-SFR combined INCLUDING   synergies at €20b
Numericable   earnout					750	750		Deal related
Operating   leases					-1035	-1035
Law suit   provisions (Liberty case)					-550	-1045
Pension   liabilities					-610	-610
Spotify					148	370		$4b-$10b valuation for 5% stake   (then convert to €)
Vevo					259	370		$700-$1b valuation for 50% stake   (then to €)
Other assets					1200	1200		Property, NPV of NPLs etc.
Cash raised   from ATVI sale on May 25th 2014									615	615
Remaining   ATVI Stake					707	707		At mkt value (ticker ATVI US)
Societe   Edition de Canal stake					374	374		At mkt value (ticker AN FP)
Holding   company costs					-693	-693		7x 2014E EBITDA
Less   minorities					-281	-281
Equity Value					35,274	40,287
Shares   outstanding					1345	1345
Equity value					26.2	30.0

 

 

 

I think the shares are worth north of €26 and upwards to €30 in bull case. The valuation will be realized by Bollore's continued shepherding of the assets. They will sell off, spinoff, divest and do buyback and dividends to return the cash. The valuation is well under-pinned at current levels and in my opinion has very limited downside for a quality asset.

 

 

 

 

 

 

 

 

 

 

 Continued asset disposals, spinoffs, buybacks, dividends.