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Strategy reversal has boosted Vivendi’s prospects, share price

It may seem odd that as French media giant Vivendi dithers over its future strategy, its credit status and share price should improve.

In fact, its stock is now riding over 30-percent higher than when the group announced a strategic review in April 2012 — a move that was understood to be leading towards an all-round sell off of assets deemed to be peripheral. This, of itself, amounted to a complete U-turn after a decade long spree of acquisitions.

This review now appears to have culminated in a more specific reversal, with a decision to sell off much of Vivendi’s stake in French mobile operator SFR. This comes only 18 months after, in April 2011, the company had taken full control of the operator by buying 44 percent from UK operator Vodafone for $11.3 billion in cash.

The problem was that Vivendi overreached and became straddled with debt following the deal with Vodafone, leading to pressure from investors to reverse strategy and sell off some assets — especially given the turbulent times facing the French broadcasting and media market. Only on Oct. 18, Nicolas de Tavernost, CEO of French commercial broadcaster M6, predicted a slump in French Free To Air advertising from €3.5 billion in 2011 to €3.1 billion for 2012 followed at best by a flat year in 2013.

The story goes back well over a decade, to the time when Vivendi was led by Jean-Marie Messier, who bullishly launched the group into a series of acquisitions that led to it becoming a media and communications conglomerate with a finger in many pies. This included a presence in the movie business through its division Vivendi Universal Entertainment, but huge losses ensued that forced Messier to resign in 2002.

This over expansion led to the sale of an 80-percent stake in Vivendi Universal Entertainment to the parent company of NBC, General Electric (GE). This, in turn, resulted in the formation of NBC Universal in 2003, 80-percent owned by GE, and 20-percent owned by Vivendi. This joint venture embraced Vivendi's U.S. film interests, including Universal Studios, as well as various TV channels, production and distribution units.

This continued until December 2009, when Vivendi decided to focus more on its domestic businesses and get out of NBC Universal. In a complex deal, Vivendi sold its 20-percent stake in NBC Universal to GE for $5.8 billion. GE, in turn, merged NBC Universal with Comcast's cable channels. At the time, most of the attention was on the media giant created in the U.S. as a result of the Comcast merger. But, it also set the stage for Vivendi’s strategic about turn.

The cash from the NBC Universal stake sale was used to buy the 44-percent stake in SFR from Vodafone, in the belief that this would provide a large and sustainable stream of revenue for many years to come. But, since then, competition has intensified in the French cellular market, and margins have been squeezed. At the same time, SFR’s advance in the fixed broadband market has been hampered by having to pay France Telecom, the incumbent Telco owning most of the access infrastructure, €11 a month for every fixed broadband connection it provides.

This has led Vivendi to court Numericable, France’s largest cable TV operator with almost 1 million TV subscribers, aiming to create a jointly owned merged company taking in SFR. One idea on the table is for Vivendi to retain 49 percent of SFR and receive a cash payment in return that could be approaching €5 billion. Such a deal could elicit investigation on competition grounds, given that Vivendi owns Canal Plus, France’s largest pay TV operator with almost 13 million customers. But, this threat could be defused by Vivendi taking a smaller stake in the merged company, perhaps 35 percent.

Another seemingly bizarre twist is that Vodafone may also do a U-turn and buy back into SFR, but this time taking over the whole company. This is not quite as strange as it sounds, though, given that Vodafone retains global aspirations and has a strategy of only investing in companies where it has a controlling stake. The sale of 44 percent of SFR last year, and buying back a majority holding now, would both be compatible with that strategy, although that is not to say it will happen.

What does look certain, though, is that Vivendi is seeking a much tighter focus around content, media and pay TV, drawing back from peripheral activities such as perhaps cellular service provision.