Vivendi to split up SFR unit in search for focus

Vivendi Market Cap (as of 29/11/13): €25bn

On Tuesday, November 26, French media and telecom conglomerate Vivendi announced that its supervisory board approved a plan to spin off its mobile telephone division SFR as a standalone company to be listed on the French stock exchange. Shares in the new entity will be distributed to existing shareholders.

The rationale behind this decision is to continue a push to refocus Vivendi as a media company and remove the conglomerate discount that has weighed down its stock price in the past few years.

The two resulting companies will need to focus on maintaining their market share in two of the most competitive industries worldwide, telecommunications and media & entertainment. In the media sector, the rapid rise in the share of digital sales and the increasing threat of piracy represent the main challenges that music publishing companies have to overcome in devising their market approach. The recent evolutions in the telecommunications industry have also put further pressure on telecom operators to overcome intense price competition, decreasing profitability and sizable debt burdens. In regards to the future strategy for SFR, analysts agree on the fact that the demerger will yield greater autonomy to seize opportunities in a dynamic market, reflecting the growing number of services and high speed broadband access in an environment with a huge increase in usage. SFR faces fierce competition in the mobile telephony market from Orange France, the national market leader, Bouygues Telecom, and also from rapidly rising mobile virtual network operators (MNVOs), such as Virgin Mobile and Simyo, which do not own their own network infrastructure but buy access to network services at wholesale rates and set retail prices independently.

Recent evolutions in the media sector have seen a shift of power towards consumers and digital distributors in spite of the commanding presence that Universal Music Group (part of Vivendi) has in the market alongside its two main competitors, Sony Music Entertainment and Warner Music Group.

Vivendi, based in Paris, posted revenues of €16.2bn for the year to date. During the past couple of months the company has been going through a significant transformation which should strengthen its position in media and content and maximize the value of its telecom activities. The goal the company has put in front of itself is to decrease the amount of debt (net debt was €13.4bn in 2012) and strengthen its balance sheet.

Two very significant moves in this direction where made by Vivendi in the last few months. The company sold its majority share of Activision Blizzard back to the company for €6.2bn in July and sold its 53% stake in Maroc Telecom to Etisalat of Abu Dhabi for €4.2bn in early November. On November 5, 2013, Vivendi acquired Lagardère Group’s 20% interest in Canal+ France for €1bn in cash. Overall these transactions resulted in a significant reduction of Vivendi’s debt since it also started to implement a bond repurchase program for €3.1bn.

The SFR spinoff will be a good step forward since Vivendi has had trouble realizing synergies between its media and telecoms business. SFR may also become an attractive acquisition target as it will be able to seize opportunities in a transforming market, which might entail price upside potential. Possible tie-ups for SFR include a partnership with Numericable, a recently floated French cable company, and Bouygues Telecom, another telecom provider with whom SFR recently entered into network sharing talks.

Although some financial analysts are reserved towards the future growth potential for Vivendi’s media arm, given the company’s 30% share of global markets, the firm’s executives point to the fact that recent acquisition deals, such as Vivendi’s incorporation of British recording company EMI, overcame anti-trust hurdles.

When the company completes the spinoff, it will include Universal Music Group, Canal+, and GVT (Vivendi’s Brazilian telecoms and pay TV unit). Despite the company’s goal to focus on its media and entertainment business, it failed to find a buyer for GVT, which might be of concern to its investors looking for an increase in share price because of the possibility of persistence of its conglomerate discount. Activist investor Vincent Bolloré (who owns about 5% of Vivendi) is to become the new group chairman after the demerger is completed, probably at the next annual meeting in June 2015.