TheChek News Flow

Vivendi Looks Cheap in Light of Spotify’s Valuation

ByJack Hough January 13, 2018

Vivendi Looks Cheap in Light of Spotify’s Valuation

The spotlight is on Spotify, a London-based music-streaming service that’s planning an unusual debut on the New York Stock Exchange. But savvy investors should look to Paris, home of Vivendi, a holding company for media businesses.

That’s because the popularity of Spotify, and streaming in general, is making music rights more valuable. Vivendi’s biggest moneymaker, Universal Music Group, is the world’s top rights-holder for music, representing acts such as the Beatles, Katy Perry, and Kanye West.

The economics of owning rights and charging royalties are, unsurprisingly, more favorable than those of paying royalties and collecting subscriptions. Spotify loses money for now. Universal is quite profitable. Spotify is reportedly planning to list its shares for public trading as soon as March, bypassing investment banks and the costly process that companies typically go through to raise money.

If Spotify, which isn’t yet profitable, will soon be worth $20 billion, as some investors predict, Universal should be valued at more than $40 billion, argues JPMorgan analyst Daniel Kerven in a recent report.

What’s remarkable about that estimate is that Vivendi (ticker: VIV.France) recently had a stock market value of 30.3 billion euros, or $36.9 billion.

ADVERTISEMENT

“You pay for Universal Music, and you get everything else for free,” says David Marcus, whose Evermore Global Value fund (EVGBX) ranks among the top one-fifth of peers for five-year performance, according to Morningstar, and counts Vivendi as a top-five holding.

Marcus says he viewed Vivendi as a value trap for years, but warmed to it after 2012, when French industrialist Vincent Bolloré sold TV assets to Vivendi in exchange for shares, which he kept.

Vivendi Looks Cheap in Light of Spotify’s Valuation

BOLLORÉ IS PERHAPS NOT as well-known in the U.S. as he should be. Over the past 20 years, his Bolloré SA (BOL.France) has multiplied investors’ money 22 times, compared with six times for Warren Buffett’s Berkshire Hathaway (BRK.A). Today, Vincent Bolloré controls Vivendi via a minority stake and a French law that gives long-term investors enhanced voting power. “He has brought rational thinking to Vivendi,” says Marcus.

ADVERTISEMENT

He has also brought controversy. Under Bolloré, Vivendi sold assets, including telecoms in France, Morocco, and Brazil, and videogame company Activision Blizzard (ATVI). It invested some of the proceeds in Telecom Italia (TIT.Italy); videogame concerns Gameloft and Ubisoft Entertainment (UBI.France); and Havas, an advertising outfit. Analysts call Bolloré SA one of the most complicated business structures they’ve seen, designed to protect family control. Children of Vincent Bolloré run key businesses.

ADVERTISEMENT

The Havas deal raised eyebrows, because Vincent Bolloré was its chairman at the time, meaning he was, in a sense, both seller and buyer. And why does Vivendi need an advertiser? Bolloré says Havas can help monetize the company’s intellectual property in marketing campaigns; beyond music, Vivendi owns Canal+ Group, a film and television studio whose characters include Paddington Bear. Time will tell. In the near term, the opportunity at Vivendi could be large enough to make ignoring some of the warts worthwhile.

ADVERTISEMENT

In a typical music subscription costing $10 a month, $5 to $6 goes to the record label, which pays $1 to $2 to the artist; $3 to $3.50 goes to the retailer, like Spotify or streamin g services from Apple (AAPL) and Amazon.com (AMZN); and $1 to $1.50 goes to the publisher, who pays 50 cents to $1 to the songwriter. Universal controls 20% of publishing, second only to Sony (SNE), and 33% of recorded music, ahead of Sony and Time Warner (TWX).

Vivendi Looks Cheap in Light of Spotify’s Valuation

SPOTIFY HOPES TO BECOME profitable as its scale expands. It will have to compete with tech giants that might be willing to sacrifice margins to expand their digital ecosystems. Universal will benefit from worldwide competition for new streamers. This year, JPMorgan’s Kerven estimates, the division will bring in €5.95 billion in revenue and €868 million in earnings before interest, taxes, depreciation and amortization. In 10 years, he projects revenue of €13.4 billion and Ebitda of €3.89 billion. That’s more than triple the Ebitda all of Vivendi produced last year.

Valuing Vivendi is complicated because some of its assets produce little or no income. Its shares trade at 24 times the 2018 earnings consensus. Many analysts use a sum-of-the-parts analysis, rather than a price/earnings comparison in forming price targets.

JPM’s Kerven is a bit of an outlier, with a target of €42, implying 76% upside from a recent €23 and change. Evermore’s Marcus sees the stock moving “into the high €30s,” and says a Universal spinoff is a possibility, but he hopes Vivendi keeps it.

Three more points to consider: First, Universal collects more than one-third of its revenue in the U.S., and so benefits from the recent corporate tax cut. Second, last month the Copyright Royalty Board in the U.S. ruled Sirius XM Holdings (SIRI) must pay more in royalties; Universal gets a piece. Third, Vivendi stands to gain more than just investor focus on streaming economics when Spotify goes public. It owns a 5% stake.

The Bottom Line: Vivendi, with a hand in music, TV, and videogames, is valued at $37 billion. Its music holdings alone could be worth more than $40 billion, thanks to streaming.