Quick check: Vivendi SA – Seth Klarman “Cigar butt”

I hate to admit it, but I am somehow a Seth Klarman “groupie” after reading his “margin of Safety” a couple of years ago.

So when ever Baupost reveals a new position, I stop everything else and try to find out why they did it (see my Microsoft analysis).

So I was quite surprised that Klarman now invested in Vivendi, the French media company.

In the hedge fund’s 2011 annual letter, they disclosed buys in private companies and mentioned recent purchases in Europe, without giving any names. The letter mentioned an expansion of the London office, as the hedge fund has been finding value due to large selling in Europe.

However, we have just discovered that Baupost’s largest disclosed equity holding (at least at the time of the purchase) was Vivendi SA (EPA:VIV) (VIV FP). The purchase was recently disclosed in Vivendi’s 2011 annual report.

Baupost owned 25.5 million shares as of February 29th, 2012; then worth close to $530 million using a ratio of 1.3:1 for euros to dollars. The $550million figure comes from looking at where Vivendi’s shares traded in 2011 and early 2012.

In the back of my mind I have always booked Vivendi as just another shitty media stock who spends all the money on stuopid acquisitions, however Klarman sticks to his strategy of buying cheap and struggling companies instead of “beautiful expensive” companies.

One of the reasons why they bought Vivendi are relatively clear: Vivendi generated a ton of free cashflow over the last few years. Some of this cashflow made it as dividend to investors, but most of this (plus some) went into acquisitions.

Lets look at some historical data:

EPS BV BV tang. FCF/Share Dvd net Debt/share
2002 -21.43 13.09 -19.68 0.49 1.15 11.55
2003 -1.07 11.13 -16.47 2.18 1.15 10.55
2004 2.57 14.40 -2.16 2.92 0.00 4.55
2005 2.66 16.27 0.50 2.14 0.60 3.25
2006 3.50 17.23 2.13 2.43 1.00 3.53
2007 2.26 17.47 -0.84 2.81 1.20 4.41
2008 2.23 19.34 -6.73 2.81 1.30 7.00
2009 0.69 17.92 -8.17 3.53 1.40 7.69
2010 1.78 19.44 -6.85 2.46 1.40 6.52
2011 2.16 15.61 -9.95 2.43 1.40 9.57
             
Sum/Delta       24.20 10.60 -1.98

From a free cashflow perspective, Vivendi generated an impressive 2,40 EUR free cashflow per year. Howver, less than half of it was distributed as dividend and a small amoutn was used to reduce debt.

Tangible book as one could expect for a media company is negative, but for a media company I would accept it to a certain extent. Debt is relatively high, but even including the debt load, the total valuation is quite low at 3.7 EV/EBITDA.

The share price looks really really ugly:

So based on yesterday’s post about momentum, this would be a clear “no” or better “non”.

Some more interesting points:

1. Vivendi does not have a majority owner

2. A couple of their subsidiaries are listed. That makes an interesting “sum of parts”:
– 61% in Activision are worth around 6.5 bn
– 53% of Maroc Telecom are worth around 5 bn EUR
A very simplistic comparison with Vivendi’s total marekt cap of 14 bn shows a maybe interesting situation.

3. Acquisitions:
– Vivdendi paid almost 8 bn EUR in 2011 for the 40% they did not own in its French Telecom subsidiary. However, after Iliad SA launched its aggressive enntrance into the French mobile market this amount was most likely much to high.

– in parallel, Vivendi is bidding for EMI and has bought several other companies, like a tv station for 350 mn EUR last year.

One has also to keep in mind that Klarman is managing around 25 bn USD, so the Vivendi position is for him a 2% postion, similar to News Corp, HP and BP. And not all of his invetsments are winners, despite the “Margin of Safety”.

I am howver not sure if the Iliad scenario was included in his “Margin of Safety” considerations.

Nevertheless it is very interesting situation as this is basically his first major contintental European Investment (despite a 5 mn EUR stake in a samll fFrench company named Chargeurs SA).

For the time being I nevertheless prefer to watch this from the outside as for me Vivendi is still a company which generates a lot of free cashflow but spends most of it for stupid acquisitions.

17 comments

  • I can’t read the article (subscription required), but this would be the only way to unlock value in my opinion.

    However, I cannot judge how likely this would be.

  • rather superficial analysis why Vivendi is such a great stock:

    http://www.gurufocus.com/news/172765/seth-klarmans-vivendi-investment-is-a-no-brainer

    Author does not adress any of the issues and just concentrates on the P/E ratio.

  • Oskar, you are right the company looks good.

    Vivendi has another problem because it owns a few listed companies that are consolidated some of the company metrics may look good such as FCF but it cannot really access the FCF or cash because its in another company like Activision for example.

    Luckily there are a lot of even cheaper companies in the French market at the moment to replace Vivendi with.

    Its unbelievable what I am finding there.

  • Surprisingly Vivendi earns ROA (outlook 2012/2013 of around 7,5%) similar to more respected mobile-phone companies (Freenet , Vodafone both around 7%) and TV-stations like Television Francaise 1 (around 6%) or ProSieben Sat1 AG (around 8,5%).
    Despite the weak balance-sheet it seems to be the impression of poor management, french corporate governance and the lack of an organic growth perspective that leads to this low valuation.

  • Hi Tim,

    agreed to all points. The loss of confidence is maybe the major point. What ist the value of free Cashflow if managment wastes it on tupid aquisitions ?

    Time for an activist investor ? But that didn’t helpo Carrefour either…

    MMI

  • I agree Vivendi is extremely undervalued but I sold it shortly after the 2011 results were released.

    I did not find the decline in the results of the mobile business surprisingly what really surprised me was cut in the dividend, especially after management a few times confirmed that the dividend was completely safe or may even be increased.

    The main reason I sold is I have lost complete confidence in Vivendi’s management.

    Firstly they numerous times confirmed that the dividend was safe and may even increase. This promise was not held.

    Also management decided to invest more than €7,75 billion to buy out Vodafone stake in SFR in April 2011, nine months before they knew a new discount mobile telephone service provider will start business in France.

    Surely this uncertainty would have led any normal businessman to either delay the acquisition or at least negotiate a cheaper price. But this is not what Vivendi did according to the Financial Times Vivendi paid (6.2 times SFR’s 2010 earnings before interest, taxation, depreciation and amortisation) marginally more than what the typical European telecoms company was sold for around the time.

    Also it was not as if there were any other buyers for Vodafone’s stake in SFR as Vivendi already owned 54% of the company.

    The other reasons I sold was the company said that profitability will decline in 2012 and 2013 at both SFR and Maroc Telecom two units that bring in more than 56% of the company’s operating profit.

    Furthermore both these businesses as well as GVT in Brazil will require substantial capital expenditure to expand as well as upgraded their existing telecommunication networks. This means that dividend increases in the future can be ruled out or may even be reduced further.

    Especially if the company wants to protect its BBB credit rating on is current €12 billion of net debt outstanding (61% of equity).

  • moin winter,

    für 2011 habe ich nichts gelesen Hier auf Gurufocus kann man zumindest ansatzweise seine Aktienperformance nachvollziehen: http://www.gurufocus.com/StockBuy.php?GuruName=Seth+Klarman

    Woei wie gesagt, Aktien bei im deutlich in der Minderheit sind.

    Hier ist auch noch eine Info:

    http://www.institutionalinvestor.com/Article/2869238/Seth-Klarmans-Baupost-Up-Less-Than-3-Percent-This-Year.html?ArticleId=2869238

    Trotz relativ vielash scheint er immer den S&P auszuperforman und zwar Jahr für Jahr.

    MMI

  • Gibt es eigentlich eine Statistik oder einen Anhaltspunkt dafür, wie erfolgreich seine Baupost-Holding in den letzten Jahren war?

    • zu Vivendi: Sorry, hatte ich falsch ausgedrückt. Überraschend war glaube ich wie aggressiv und “unkooperativ” Iliad war.

      Die sind ja mit echten kampfpreisen für frz. verhältnisse gestartet,

      Anscheinend war Mobil telefonieren in F sehr sehr teuer.

  • Ich bin bekanntlich schon seit längerem in Vivendi investiert, als Dividenden-Dauerinvestment, und bisher mit Verlust selbst inklusive Dividenden; betrüblich für mich, da ich große Summen in Aktien wie FTE und Vivendi investiert habe. Dabei ging es mir vor allem um die Dividenden – der viel höhere FCF dient nur als Sicherheitspolster, daß die Dividende aufrechterhalten werden kann. Wobei Vivendi leider sein eigenes Versprechen nicht halten wird und heuer die Dividende drastisch kürzen wird von 1,40 auf 1 Euro (die Bonusaktien sind bestenfalls nichts wert).

    • das mit Iliad konnte man eigentlich so nicht vorher sehen.

      Ich hatte ursprünglich ja auch mal in der 2008er Krise RWE und EON als “sichere” Dividendentitel gekauft, aber man darf sich nicht immer nur von hohen Dividendenrenditen leiten lassen. Was beiu Vivendi allerdings positiv ist, ist die Tatsache das nicht das ganze Geschäft reguliert ist.

      MMI

      • Naja, seit ich dabei bin, konnte man den Eintritt des vierten Mobilfunkwettbewerbers schon absehen! Ende 2009 gewannen sie die Ausschreibung (wurde erst Anfang dieses Jahres in Betrieb genommen), und daß eine solche Ausschreibung stattfinden würde, war sicher nochmals viel länger vorher bekannt, und ich hatte erst lange danach investiert (deutlich nach dem Tief in der Finanzkrise, als der Markt schon wieder höher notierte, genau weiß ich es aber nicht mehr). Vielleicht hatte ich damals den Fehler gemacht, und das ignoriert und damit unterstellt, daß das alles schon eingepreist sei – was eigentlich für ein Value-Investment absurd ist, weil es eine Art Markteffizienz voraussetzt. Tja, vielleicht hätte ich deshalb besser von zurückgehenden Umsätzen im frz. Telekombereich (auch bei FTE) und mindestens proportional sinkenden Gewinnen/Cashflows ausgehen sollen (wobei das in den Prognosen der AGs selbst immer selbst gar nicht so stark ins Gewicht fiel – wir werden erst noch sehen, wie stark es sich tatsächlich bemerkbar macht). Andererseits gibt es wie Du sagst zumindest bei Vivendi auch noch andere Geschäftsbereiche, Ausland und eben Medien.
        Ich hatte nicht nur wegen den Dividendenrenditen gekauft, sondern vor allem wegen der hohen FCF-Rendite (KBV ist so eine Sache wegen des Goodwills wie bei fast allen Aktien in diesem Bereich), allerdings schien mir erstens eine hohe Dividendenrendite nötig, um vom FCF profitieren zu können, und zweitens sollte es ein Dividendeninvestment sein – Kurs egal, sonst würde ich kaum in solche Large-Caps investieren, sondern im Small-Cap-Bereich bleiben. Jetzt wurde beidesmal leider die Dividende gekürzt.
        Jedoch: Selbst wenn z.B. die FTE ihre Dividende ebenfalls auf 1 Euro kürzt – weit stärker als angenommen – dann wäre das bei 10 Euro immer noch ein sehr attraktives Investment! Es kommt ja nicht bloß auf die Rendite an, sondern auch auf die Volatilität eben dieser.

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