A little less conversation, maybeWe expect Vivendi to clarify its position on a potential IPO of UMG on 17 May. We argue the market is undervaluing UMG by 30-50%, and that the prospect of a separate listing should continue to drive the Vivendi share price higher near term. We remain Overweight.
* A green light for a partial IPO of UMG? Vivendi’s Management Board will
present its initial findings on “how UMG’s capital might evolve” to the
Supervisory Board on 17 May. If the company announces its intention to float a
minority of UMG with its Q1 revenue announcement that day, we argue the
issues likely to drive the stock price reaction are: (i) will investors price UMG at
more than the valuation currently embedded in Vivendi's share price? (ii) what
impact might this have on Vivendi's conglomerate discount? (iii) what might
Vivendi do with the cash it receives? (iv) will a significant number of shareholders
simply switch their shareholding in Vivendi to UMG? and (v) what impact might
there be on Vivendi's ability to grow its dividend payments over time? Net net, we
believe the stock should continue to trade higher into a partial IPO, driven
primarily by the significant undervaluation of UMG in the current market value
of Vivendi.
* Market undervaluing UMG by 30-50%: At the current share price, we think the
market is valuing UMG at $18B. This strips out Canal Plus at ~€6B, the
quoted/unquoted stakes at ~€8B and other consolidated assets at ~€2B. In our
last report (Vivendi: A Head Full of Dreams), we argued UMG should be valued
at $25B (assumes 17% CAGR in streaming subscribers and 16% terminal EBITDA
margin), with a bull case valuation of $35B (20% CAGR and 21% terminal EBITDA
margin), which suggests the market is currently undervaluing UMG by 30-50%,
assuming no conglomerate discount. To fully reflect our $25B valuation of UMG,
Vivendi should trade at €27 (17% above today's price); to fully reflect our $35B
valuation, Vivendi should trade at $34 (~50% above today's price). To reflect our
€10B bear case valuation of UMG (which assumes zero growth in streaming
subscribers and 16% EBITDA margins), Vivendi should trade at €17 per share
(~25% below today's price).
* 20% conglomerate discount = €7B of equity value: However – arguably –
turning UMG from a 100% controlled subsidiary to one where Vivendi only owns
a stake would create the risk that investors apply a conglomerate discount to
the holding company. This could be justified by (i) the weakening of Vivendi's
control over UMG's future capital allocation strategy, specifically in relation to
the payment of dividends and to M&A; and (ii) the potential impact on Vivendi's ability to pool cash from UMG and to utilize its tax losses. We would highlight
that a 10% conglomerate discount would reduce the fair value of Vivendi's equity
by €3.4B, and a 20% discount would reduce it by €6.8B.