Why TI? Strategic upside for pay TV; Apple contracts
* Why Vivendi could seek to increase its stake in TI
VIV will take an 8% stake in TI as part of the GVT sale & has said it could increase its stake. Why? It would turn a minority stake valued at a discount into a strategic stake valued at a premium, allowing VIV to control TI’s board, strategy, and destiny. We think potential options could then include: A) exit to another telco in 2-3 yrs; or B) change TI’s strategy from a “dumb pipe” to become an integrated quad play (with Mediaset Premium) to support the take up of fibre & then sell to a telco. It could also drive TI’s exit from TIM Brasil.
* We’ve been too bearish on C+ … attractive strategic options
While C+ has good visibility on costs (without the hyperinflation Sky saw in the UK & could see in Germany), we value C+ group at just €5.5bn (cons €7bn) to reflect structural pressures. However, Vivendi has strategic options to create value: A) Organic growth into Africa: there are 220m French speakers in the world – half of them in Africa. That is expected to increase to 700m (!) in 2050 with 80% in Africa. C+ already has 1.5m subs (ARPU $18 / m) across 22 African countries & is uniquely positioned to exploit this opportunity as it can: leverage its programing investment in France into Africa; exploit Studio Canal’s library of >5k titles & bundle music to drive take up. Bollore’s understanding of the continent could smooth execution. B) Consolidation: Vivendi swaps a 100% stake in C+ for a c30% stake in ‘Sky C+’ &
then exits over time – returning cash & giving investors a pure play on music.
* More visibility on Apple Music contracts
Press reports suggest Apple will not pay Independent labels during the free 3m trial but will compensate them by paying out a higher proportion of revs on an ongoing basis (c73% vs c70% for Spotify with c13% going to publishers & c60% to the record labels) – See pg 7. The 3 major labels have already signed deals with Apple. While our industry model already assumes no payment during free trials, UMG, with a c35% mkt share, may have negotiated better terms. UMG will also likely receive an upfront payment & will have some flex as to when it recognises revenue. See pg 5 for …. Music – structural growth opportunities do not come better than this!
* Valuation – free option on music (& African pay TV)
VIV offers an asymmetric opportunity with downside risk mitigated by cash returns & a free option on music & Africa with the core trading on just 13x 2016E EPS