Description

This is an unusual situation, definitely not for everyone. But for those with the ability to wait out the storm, and with the stomach to ride out the volaility, Vivendi is a company whose assets greatly exceed liabilities, and whose stock price greatly discounts intrinsic value.

Vivendi is a global entertainment company with interests in film production, cable networks, publishing, telecommunications, and music. Its entertainment assets include the brands Universal Studios & Houghton Mifflin in the US, and Cegetel/SFR & Canal Plus in the Europe. Up to 75% of the company’s asset value is in US-domiciled companies.

In Jean-Marie Messier’s quest to become a global media powerhouse, he assumed a lot of debt acquiring top-tier companies, mostly in the US. In doing so, he oftentimes acquired less than 50% of a company & filled the board with his people. In doing so, he got to consolidate to the businesses, but had no control over the cash flow. This made it difficult to service the debt. As they say: house rich, cash poor.

Rather than rehash all the negatives, which are well covered by the press, I am just going to provide estimates of potential asset value on a segment-by-segment basis, and stated (and potential) liabilities; then I’ll try to answer questions. (The company also has a very informative 20f filed with the SEC.)

Music
Universal Music is ranked number one or two depending on how one defines the market. Other players include Sony and EMI. The market is highly concentrated and recent moves to further consolidate have forced regulators to step in and deny bids for EMI by, for instance, Bertelsmann, which owns the BMG label. In the past, transactions have occurred at around 10x EBITDA, though I have assigned a tentative 8.5x multiple. This equates to $9bn (They own 92%).

Publishing
Publishing includes recently purchased Houghton Mifflin and other educational and informational publishers, along with magazines in Europe and the US. Houghton Mifflin is on the block as are other parts of the segment. At 8x EBITDA (versus 8-10x on average for acquisitions of educational and magazine publishers respectively), this division is worth $6.5bn. A caveat—press reports show initial bids for Houghton by financial buyers in the range of 7x EBITDA. I’ll reserve judgment until something more official…just FYI. This is 100% owned.

TV & Film
Universal Studios group is a highly regarded film studio. These businesses have little appeal to anyone with a financial background due to the unpredictable nature of cash flow and the huge cash investments required. Transactions in this business are driven by ego. I guess it was fun for Messier to brag about his dinner dates with Meg Ryan & Sylvester Stallone. In the past, studios have gone for as much as 4x revenues (Paramount) to as low as 1.2x (MCA/Universal). On a multiple of EBITDA, this works out to as high as 20x. I value Universal at 1.2x sales and roughly 10x EBITDA.

USA Networks was acquired last year for about 17x trailing EBITDA, and is a valuable business. Though mature in terms of reach, it is very profitable, with margins north of 50% in its core USA Channel. At a 25% discount for its 93% ownership, this segment would be worth about $8bn.

Canal+ is a leading European pay-TV operator. ARPU is a pathetic $24 per month, versus $56 per month for GM-Hughes (excluding the NRTC subs). Also, the nosebleed prices paid for sports rights in Europe have ensured that European pay-TV companies are saddled with large, not-easily-recouped fixed costs. The good news is that license agreements were only for 3-5 years typically, so run-rate profitability should improve from, for example, 10% margins in France. Having said that, I still have a great deal of difficulty in determining fair value for this segment, so I simplistically halve the Street’s estimate of $9bn. This works out to less than $500 per subscriber, versus $1,000 EV/sub currently for Hughes.

Telecoms
The company owns 44% of Cegetel group, which in turn owns France’s number 2 mobile phone company, SFR, and fixed line company Cegetel. Other owners of Cegetel Group include British Telecom (26%), Vodapone (15%), and SBC (15%). SFR has about 13mn subscribers, while Cegetel (i.e. fixed line) has about 3mn. Vivendi also has a 35% stake in Moroccan mobile phone company Maroc Telecom, purchased for about $2bn.

Vivendi’s 44% ownership of just Cegetel Group, at 8x EBITDA, would be worth about $8bn. This equates to $1,400 per mobile sub, assigning zero value to the fixed line business for simplicity’s sake. I also value Maroc at zero, which conceptually offsets a put option liability from the Moroccan government. (see liabilities)

Vivendi Environnement
The company owns 162 million shares of this publicly traded French water utility, worth about $4bn currently.

Total assets sum to about $44bn, using what I think are reasonable multiples for core assets.

Liabilities
The company began the year with about $20bn in core net debt. Core net debt excludes the net debt of Vivendi Environnement, and excludes non-core assets. So far this year, they have generated some free cash flow in the core business, but this is dwarfed by the potential refinancing that must be accomplished by mid-year 2003. Including put options for its own shares, and put-able convertible securities, along with normal rollovers, debt subject to refinancing is about $6bn. Also, the company was on the hook for up to $4bn in cash and securities payable in reference to the USA transaction. This was settled in May. Finally, the company’s 20f lists page upon page of contingent liability, generally put options on various businesses (Messier was in a league by himself). These total $2bn, but may be more, as some liability estimates are not provided. As noted above, the company has a put option from the Moroccan government for an additional stake in Maroc telecom at ‘fair value’. To me, the wording sounds like the stake can be put to Vivendi but only at what both parties deem to be fair value. In this case, I don’t think Vivendi would be able to assign a fair value estimate, simply due to their distress. To account for this potential liability, I have written down Vivendi’s entire position in Maroc.

Offsetting part of the liabilities is a list of non-core assets, including stakes in Dupont, Echostar, and cash from the sale of a big chunk of Vivendi Environnement.

Adjusted for such assets, net debt at yearend would amount to about $17bn. This compares with $44bn asset value. That assets so greatly exceed liabilities should give pause to panic sellers and rumor mongers arguing for imminent bankruptcy. Furthermore, in a French bankruptcy, priority is given to job preservation. It is my belief that bankers have no reason to force self liquidation, as no one’s best interest is served. Regardless, discussions on a new credit line seem to be well on their way, and the market should hear something by the end of the month.

Equity value of around $28bn, or between $25 and $30 per share, compares with a current $12 stock price.

Catalyst

Continued asset sales. More rational credit market. Announcement of refinancing deal at favorable terms. Time