With a new CEO recruited externally, Vivendi’s objective seems to be to make important changes vs the previous plan. In this report we review what new management could act on and conclude that whilst there are cost cutting
opportunities beyond the current plan, we see limited opportunity to accelerate them in the short term and preserve top line improvements at the same time. Also we see no early exit from Brazil. Meanwhile competition on fixed line is rising and we wonder if Vivendi is still that welcomed in Italy. We cut our PTs to EUR0.82/0.66. TI trades at a premium to peers which we believe is unwarranted on fundamentals.
We reiterate our UW and prefer BT, ORA and DTE.
What can change? The press reports that Vivendi was behind the recent change in CEO as it wants more cost cutting in Italy and sees Brazil as non-core. On costs, when we benchmark TI to peers on employees, this seems an area with savings of potentially EUR0.5bn above TI’s plan. However TI has been working on this already for many years and given protective labour laws, it is a long-term process. Cutting costs in other items such as marketing could create revenue downside risk. On Brazil, as we wrote recently in Brazil: Opportunities for TEF B and TIMP, we believe that consolidation is unlikely to happen in 16e and see no scenario to exit Brazil quickly.
More competition on wireline. Meanwhile pressure is increasing in wireline with a new entrant, Enel, the Italian utility company that has announced a EUR2.5bn investment. So whilst there is a growth opportunity in the fixed market (spending per pop is c. 35% less than EU peers due to low Broadband penetration) that could be largely offset by losses on the wholesale side of the business (30% of fixed revenues).
Is Vivendi still welcome? According to the press, Mr Bolloré (Chairman and main shareholder of Vivendi) has been seen as an Italian insider. With new competition on fixed line and the regulator opposing a TI price increase, it is fair to wonder if he is still welcome. History is not encouraging as it seems TI crystallises the attention of many
national stakeholders that have their own views about the best strategy for TI.
Changing estimates and cutting PT. We cut our mid-term estimates for revenues, partly offset by higher cost cutting post 2018. Recently we also increased our estimates for TIMP (in local currency and due to stronger BRL). With a worse mix this leads us to cut our TI PTs (-8% to EUR0.82 for ords, EUR0.66 for prefs).
Risks. Orange has expressed potential interest in TI but a bid could just be on the 25% that enables to control TI. Approval of the consolidation between 3 and WIND, which is being reviewed by the Competition authorities, would be a positive catalyst but is largely reflected in our estimates.