Recommendation: Outperform rating reiterated based on the following factors: 1) Vivendi is returning around 19% of its market capitalisation in dividends/buybacks over mid-2014 to mid-2015; 2) the shares do not reflect the recent valuation re-rating of some of its holdings (stake in Numericable) or peer groups (Sky Italia and Sky Deutschland), in our view; 3) we continue to see room for an attractive over-the-top media strategy with a platform leveraging content from Canal+ and UMG (VEVO), should management consider this strategic direction; and 4) better top-line momentum for GVT (expansion in Sao Paulo).
* New offers for GVT: Telefonica's bid is more attractive in terms of cash proceeds. Vivendi has announced that it has received an offer from Telecom Italia and a new offer from Telefonica to acquire GVT:
* Telecom Italia is offering a value of c.€7bn, of which €1.7bn in cash, a 16% stake in Telecom Italia (22% of voting rights) and a 15% stake in TIM Brazil.
* TEF is raising its offer from €6.7bn to €7.45bn, of which €4.66bn in cash and a 12% stake in TEF Brazil with an option to exchange 1/3 of the shares in a 5.7% stake in Telecom Italia (or 8.3% of voting rights).
* Offers are now matching our €7.4bn valuation for GVT, which we believe to be above consensus. Our valuation implies a multiple of 10.4x 2014e EBITDA and is based on a DCF with 11% WACC and 4% terminal growth rate).
* Which offer to pick? Telefonica is offering more in cash and total value, however Vivendi is cash-rich and searching now for attractive reinvestment opportunities - GVT represents 90-100% of group revenue & EBITDA growth in our estimates. In our opinion, Vivendi's decision will depend on how far along management is in identifying media targets for its announced M&A strategy and how much it requires. Thus, we don't completely rule out that management could be interested in a merger of both strongly performing assets TIM Brasil and GVT.
* We expect the prospect of a transaction to be positive for VIV shares. The transaction could trigger consensus to: 1) further remove some of the holding discount (€0.5-0.8/share due to GVT); 2) increase possible acquirers' appetite for a post-GVT Vivendi with two unique assets left: a No.1 worldwide position in music (UMG) and a No.1 Pay-TV position in France; 3) raise speculation about an even higher special dividend to come (currently €2.6 by mid-2015 in cash & shares).
* New offers for GVT: Telefonica's bid is more attractive in terms of cash proceeds. Vivendi has announced that it has received an offer from Telecom Italia and a new offer from Telefonica to acquire GVT:
* Telecom Italia is offering a value of c.€7bn, of which €1.7bn in cash, a 16% stake in Telecom Italia (22% of voting rights) and a 15% stake in TIM Brazil.
* TEF is raising its offer from €6.7bn to €7.45bn, of which €4.66bn in cash and a 12% stake in TEF Brazil with an option to exchange 1/3 of the shares in a 5.7% stake in Telecom Italia (or 8.3% of voting rights).
* Offers are now matching our €7.4bn valuation for GVT, which we believe to be above consensus. Our valuation implies a multiple of 10.4x 2014e EBITDA and is based on a DCF with 11% WACC and 4% terminal growth rate).
* Which offer to pick? Telefonica is offering more in cash and total value, however Vivendi is cash-rich and searching now for attractive reinvestment opportunities - GVT represents 90-100% of group revenue & EBITDA growth in our estimates. In our opinion, Vivendi's decision will depend on how far along management is in identifying media targets for its announced M&A strategy and how much it requires. Thus, we don't completely rule out that management could be interested in a merger of both strongly performing assets TIM Brasil and GVT.
* We expect the prospect of a transaction to be positive for VIV shares. The transaction could trigger consensus to: 1) further remove some of the holding discount (€0.5-0.8/share due to GVT); 2) increase possible acquirers' appetite for a post-GVT Vivendi with two unique assets left: a No.1 worldwide position in music (UMG) and a No.1 Pay-TV position in France; 3) raise speculation about an even higher special dividend to come (currently €2.6 by mid-2015 in cash & shares).