Cash-rich Vivendi must avoid repeating past mistakes
I'm old enough to feel tense and uneasy when I approach the idea of investing in a company that might come under the heading of 'conglomerate.' It is a word from the 1960s 'go-go' years of American corporate inventiveness when it became popular for companies with completely unrelated activities to jump into bed together.
By the late 1960s, Wall Street believed that all but a tiny fraction of American business would be carried out by some 200 super-conglomerates. That, of course, never happened. As one critic said at the time "conglomerates services industry the way that Bonnie and Clyde serviced banks."
However, conglomerate-type companies were a world-wide phenomenon and the firm we are looking at today, the French giant Vivendi, was one such multi-layered combine. At the start of the millennium, its activities included water services, transport and construction, along with Universal Studios and Polygram Records, acquired from Seagram's, the Canadian drinks company. Even then it was an uneven mix, so management hived off the construction and property to a new entity, Vinci SA, while its water and waste activities became Veolia Environmental (we have examined both of these spin-offs in this column in recent months).
The French company added UK music publishers EMI to its Polygram business before tagging on the Vodafone shareholding of SFR, a French telecom company; it also bought a US gaming company, Activision, and a majority stake in Moroc Telecom. Once again it was confronted by a mismatch of TV, film, telecoms and recorded music. Sense prevailed and a restructuring during the last few years reshaped debt, which up to 2013 was in excess of €13bn.
Last year, the company sold Moroc Telecom for €4.2bn, Activision for €8.2bn and SFR to a European cable company for €3.5bn. These sales have transformed Vivendi's debt profile. However, investor concerns still exist, at the lack of synergy between Vivendi media business and its Brazilian telecom subsidiary GVT. Recently Vivendi received a surprise offer from the Spanish telecom company Telefonica to take GVT off its hands for €6.7bn. Two years ago it tried to sell GVT but couldn't. Should the deal go through, Vivendi would show a nice profit, having acquired the Brazilian company for €2.8bn five years ago. The new-look Vivendi will now consist of the television service Canal Plus, Universal Group and a cash pile already mentioned.
Canal Plus is a well-known pay-TV channel in France but also in Francophone Africa and Vietnam. It is also involved in the production and distribution of films and sports broadcasting and it contributes €5bn of revenue to the group.
Universal Music Group accounts for 35pc of the world record music industry. It has lots of record labels, including Capital, Island, Polydor, Motown, Decca and Deutsche Gramophone. But you would wonder how valuable a record label is these days, even with the stellar line-up that Vivendi boasts. It owns the Beatles' and Beach Boys' catalogues and generates sales from prior recordings of stars like Abba, Rolling Stones, Queen and Frank Sinatra. The music industry has over the years been subject to changing technology but recent music sales by streaming is giving rise to optimism. For Vivendi, it will be difficult to find further growth and it is unlikely to find it through acquisition, so the company could be back on the asset sale merry-go-round.
Nevertheless, Vivendi has been transformed with a new focus on its remaining subsidiaries. By comparison with previous years; group sales will drop from €29bn to €10bn if GVT is sold. The company has a market cap of €26bn with a share price of €19, way below its 10-year high of €30 in 2007. Recently Vivendi appointed Vincent Bollore, one of the richest men in France, as its new chairman. Hopefully, he will use his undoubted expertise for Vivendi's investors. What is certain is, being cash rich, they will be asking him different questions.
Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy or sell any of the shares mentioned.