EUR 850.00 For Business Accounts Only

Morningstar | Vivendi Reports a Mixed 1H; Looking to Sell Up to 50% of Universal Music

Vivendi posted a mixed first half of 2018 as revenue beat consensus expectations and EPS came in slightly below Street projections. Note that beginning in 2018, the firm switched to reporting only revenue results for the first and third quarters. While UMG remains the largest contributor to operating income (generating over 70% in 2017), the management board recommended that Vivendi sell up to 50% of the music unit to one or more strategic partners. The board ruled out an IPO of UMG due to the potential complexity. We are maintaining our no-moat rating and our EUR 19 fair value estimate. With shares trading in 3-star territory, investors should wait for a pullback before investing.

First-half revenue came in at EUR 3.1 billion, up 18.3% year over year but only improved by 4.0% after taking into account currency fluctuations and the acquisition of Havas in July 2017. UMG grew 6.8% organically as streaming revenue growth (up 34.3%) continues to offset the ongoing decline in physical (down 12.8%) and download (down 25.9%) recorded music sales. Canal+ saw overall revenue improve by 1.3% organically as the growth in the TV International and Studiocanal more than offset the continued organic decline in TV France revenue. The overall subscriber base grew by 1.462 million subs year over year to 16.0 million subscribers, driven by expansion outside of France once again. While the subscriber base in France remains in decline, the rate of decline has fallen since the beginning of 2017. Revenue at Havas fell 2.9% organically due to revenue drops in Europe (down 5.7%) and North America (down 0.6%), the firm's two largest regions. We note that the issues at the Arnold Group in the U.S. drove much of the decline in North America. In contrast, Publicis posted an organic decline of 1.7% in Europe for the first half and IPG reported 4.5% organic growth in the U.S. We remain skeptical of the advantage of consolidating Havas into Vivendi.

Due to the continued change in customer preference with respect to the delivery of recorded music, streaming revenue generated 56% of recorded music revenue in the first half 2018, up from 14%, in the first half of 2014. With the recent Spotify IPO and the continued growth of streaming revenues at UMG, investors and analysts have been agitating for the board at Vivendi to unlock the value at the music unit, leading to the recent management board decision to sell up to 50% of the unit. We continue to believe the Bollore family has no interest in deconsolidating the media empire that the family has constructed at Vivendi, making the sale of control of UMG unlikely.

While management did not outline any specific qualifications for a strategic partner, we think the requirement that any partner be aligned with the current strategy at UMG implies that Vivendi is not looking for help with expanding UMG, but rather just for a method to monetize the asset. The process of looking for a partner is expected to launch in the fall and could take up to 18 months to complete. Management outlined three potential uses for the capital raised by the sale: stock repurchases, special dividend, or acquisitions. We do expect the firm to return some of the capital to shareholders in the form of share repurchases, but expect the majority of the funds raised to be put towards the expansion of the burgeoning Vivendi media empire.