Vivendi has nine months to show investors its worth

December 7, 2009

Vivendi has nine months to show investors its worth. The French conglomerate might not see any of the $5.8 billion it is making from the sale of its 20 percent stake in NBC Universal until September next year. Given its poor track record in creating shareholder value, Vivendi should use the time to convince investors that it deserves to keep the cash.

Investors have reason to doubt Vivendi’s ability to generate superior returns. Since chief executive Jean-Bernard Levy took charge in 2005 the French group has delivered a total return of just 1 percent on its portfolio which includes the world’s largest music group, a French pay-TV platform, controlling stakes in two mobile phone operators and a computer games maker. Over the same period, the Dow Jones European Telecoms and Media indexes have returned 3 percent and 29 percent respectively.

Levy’s new growth strategy is also unconvincing. In an effort to offset slowing growth in Europe, Vivendi has offered $4 billion in cash and debt for GVT, the Brazilian fixed line telecom operator. But the price for entering the red-hot Brazilian market is the equivalent of a hefty 12 times GVT’s consensus 2009 EBITDA. Vivendi doesn’t need the NBC proceeds to fund the Brazilian deal. But the worry is that it will use the cash to fund more expensive acquisitions.

One sensible option would be for Vivendi to buy out minority investors in its subsidiaries. It recently bought a further 10 percent of pay-TV unit Canal Plus France for $1.11 billion. Buying Vodafone’s 44 percent stake in mobile operator SFR and the 43 percent it does not own of Activision , the computer games company, would cost Vivendi over $12 billion. But its partners appear to be in no hurry to sell.

Even if Vivendi can consolidate ownership over its existing portfolio, however, that wouldn’t eliminate its conglomerate discount. Vivendi’s shares sell for 25 percent less than the sum of its parts, according to Morgan Stanley. That should improve a bit following the NBC disposal, but the portfolio still lacks quantifiable synergies. Expanding into high-growth markets may sound appealing. But unless Vivendi can show how that will improve returns, investors should push for it to return the NBC money as soon as it arrives.

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