After months of press speculation, Vivendi and Mediaset have unveiled their partnership. The benefits look immediate for Mediaset, perhaps more remote for Vivendi. The deal also has wider implications for the rest of the European free- and pay-TV landscape.
Vivendi and Mediaset unveil a "binding strategic and industrial agreement", which will lead to: i) the development of various initiatives for the production and distribution of audiovisual content; and ii) the creation of a
global OTT delivery platform. The online properties of the two groups in France, Italy, Spain and Germany will converge into a single project. The new project also forecasts expansion in countries where the two groups are not
present.
The proposed deal is cemented by a share swap. As part of the deal (closing expected on 30th September 2016), Vivendi will receive 41.3m shares in Mediaset (3.5%) at €3.23ps, with Mediaset receiving 7.4m Vivendi shares at €18.65ps. Mediaset will transfer 100% of Mediaset Premium (and €120m of net cash) in exchange for 40.5m Vivendi shares (2.96%), valuing Mediaset Premium at €755m. Vivendi and Mediaset have committed themselves to a three-year lock-up agreement on the respective listed shares. Vivendi cannot acquire further shares in Mediaset in the first year, and cannot grow its stake beyond 5% in the second and third year. No board members have been
appointed yet. The agreement between Mediaset and Vivendi is subject to the necessary reviews of the relevant Antitrust authorities, which we expect to be light.
Fundamentally, a positive for Mediaset ... The fact that Mediaset is crystallizing value around a margin/returns dilutive business and in exchange receives a decent liquid stake in Vivendi is good news. Our 2016/17 EPS increases 59/4% as: i) Mediaset Premium losses in 2015 were bigger than expected (€114m vs MSe on €90m); ii) Underlying cost inflation is more constrained (+€10m versus MSe on +€20m) than expected; and iii) This points to better than expected profits in the remaining free-TV operations where ad trends are also pacing slightly better than expected.
...although terms perhaps not as good as expected: i) There is a ~€200m
cash leakage as Mediaset has to first buy Telefonica's 11% stake in Mediaset
Premium and will deconsolidate €120m of cash; ii) The value of Mediaset
Premium of €755m is €150m short of our expectations; iii) Mediaset share
count increases 3.5%; and iv) The existing lock-up that prevents Vivendi from
getting a >5% stake in Mediaset until 2019 will likely remove any M&A
premium that may have been baked into the share price for now. Our SOTP is
updated for the deal, but our €3.7 PT is unchanged. Our 2016 EPS is up 59%
(very low base and benefit of deconsolidation of losses) but our outer years
forecast are more modest, which explains why our base €3.7 PT is unchanged.