Liquidity not a good enough explanation
The Supervisory Board accepted the offer of EUR40 per share for Vivendi’s
20% stake in SFR-Numericable. The offer was made jointly by Altice and
SFR- Numericable itself. This is a 28% discount to the closing price on
27 February 2015. The company also waived the EUR750m earn-out right
which is worth EUR0.55 per Vivendi share. The company’s explanation was
that it had a) achieved a premium of 20% over the closing price for the shares
on 27/11/14, b) that the total of EUR17bn for SFR had been achieved in-line
with the valuation projected in April 2014 and c) the liquidity in the shares was
too low to allow for a sale on the market (average daily volume 100-200k). Our
view is that the level of discount is too high and that shareholders deserve to
benefit from the equity upside generated by the SFR Numericable stock price
performance, especially in light of the high probability of telecom consolidation
in the French market which should boost value for all operators. One of the
reasons given by Vivendi for favouring the Numericable offer for SFR over that
from Bouygues was that it allowed upside from retaining a 20% stake. We
downgrade our rating to Neutral.
Cash return of EUR5.7bn vs EUR3.5bn but buyback capped at EUR20
The company plans a buyback of EUR2.7bn over 18 months as part of a
EUR 5.7bn cash return (the rest via dividends for 2015 and 2016). However
the buyback is capped at EUR20 per share. Our view is that the buyback
should be either at a higher price than the current share price to illustrate that
management believes the company is undervalued or should take place
without a cap as is typical for other companies. The company did promise to
be conservative on M&A and sees current asset multiples as high.
Increasing net income
The company has guided to a slight increase in sales and a flat operating
income margin. Our FY15 net income estimate rises from EUR 628m to
EUR 688m. This is due to a net income base which was 8% higher in FY14
than our estimate and guidance of a 10% net income increase in FY15 due to
lower restructuring charges and interest expenses. We lower our target price
to EUR22, removing the earn-out and including a potential tax liability.