Entering the Endgame; Tension Between SOTP and EPS
*What's Changing in This Report?
We reduce our 2014-15E EPS by 13-17% driven by a combination of weaker u/l trends (mobile at SFR), FX (in particular Yen and Real at UMG/GVT) and investment (content costs at C+; Watchever in Germany). Despite the move down in EPS, we increase our SOTP-based PT to €19.8 as we remove the holding discount. We stay Neutral on Vivendi.
*Entering the End Game
The Strategic Review is due to come to a head by the end of 1H14. By that stage, SFR is set to be de-merged, leaving Vivendi a much smaller and more focused asset centred on Universal Music (40% of Vivendi Media revenues), Canal+ (44% of revenues) and GVT (16% of revenues). The precise level of gearing is unknown, but based on SFR keeping an investment-grade rating, we assume the rump media asset will be left with around €2bn of debt.
*First, the Good News…
We see three sources of potential upside: (1) a better rating on SFR, which could benefit from market repair; with each EBITDA multiple point worth €2.5bn (c. €1.9 per VIV share), on our estimates, the gearing to this is significant; (2) non-telco M&A, in particular scope to liquidate the ATVI stake (worth c. €1.1bn) or GVT (worth c. €5.5bn), proceeds from which could fund accretive cash usage; (3) better growth (and with it a better multiple) for the core media assets.
*…But the Story Is Very Dependent on Asset Sales Completing
The benefit of market repair in France will only be fully realized post demerger. Furthermore, the competitive landscape in Brazil is in flux and a clean exit from GVT is far from guaranteed. Finally, the rump generates c. €12bn of PF revenue and c. €2.5bn of PF EBITDA, but only c. €500m of FCF. This not only implies a very low ongoing FCF yield (barely 3% ex SFR at 5.5x 2014E EV/EBITDA) but calls into question the dividend, which at c.€1.3bn p.a. would not be covered, on our estimates.
*Downgrading EPS by c.13-17% but Staying Neutral
Ex any holding discount we can justify the current share price and raise our PT accordingly. We see two key issues for investors: (1) many investors assume that GVT will be disposed of but there is uncertainty on this point and running GVT is much less preferable to a clean sale, in our view. (2) All of the analysis above assumes no further deterioration in u/l EPS momentum, which we think may be optimistic.