‘Lackluster’ Vivendi worries the market

French media and telcoms conglomerate Vivendi is evidently creating some anxieties for the market. One investment bank described its recent performance as “lacklustre”, and this despite earlier this week declaring a rise in Q2 profits, helped by its pay-TV and video games divisions.

Chairman Jean-Bernard Lévy said that despite "a tighter economic environment" the company would stick to its forecast of profit growth similar to last year. Vivendi, well known around the world for its Universal Music business as well as products like World of Warcraft (said to be the world’s most popular online role-playing game), has already spent a fortune acquiring UK-based games business Activision Blizzard to boost revenues in this area, and its Canal Plus pay-TV is doing well with a five per cent revenue rise (to just over €1bn), with a profits increase of a spectacular 31% at €181m, helped by the synergies with the TPS business acquired last year.

So what is Chairman Levy and his team doing that, for example, bankers at Morgan Stanley don’t like? The bank, in a note, says Vivendi’s 1H was “lackluster both in revenues which grew 15% actual to €5988m but where underlying growth was, on our estimates, around 2.5% and in EBITA. EBITA of €1364m was modestly beneath both [our] expectations (€1380m) and those of the market.

They continue, saying: “Vivendi’s original guidance pointed to 8% growth pre the impact of the Activision and Neuf Cegetel deals. At these results, management indicated that actual results will fall below the constant perimeter guidance. This is because (i) management reduced underlying consensus EBITDA expectations at Neuf Cegetel by around €200m to €700m, citing over-aggressive forecasts and a bunching of non repeatable positive items in the 2007 comparative (ii) there is €100m of restructuring expense in 2008 at Neuf (iii) a tangle of restructuring expenses, stock based compensation costs, revenue recognition changes and allowances for intended disposals, mean that Activision Blizzard will not be earnings accretive in 2008. Overall, our earnings forecast for 2008 falls by 11% to €2.47 (virtually flat on 2007) and 2008 has effectively turned into a transition year.”

Morgan Stanley recognised that Canal Plus is “ahead of schedule with H1 EBITA of €399m (H1 2007 €340m) pre transition costs and with a lower level of transition costs due in H2 (Canal Plus has already absorbed €48m of the expected €80m of annual transition costs).”

But it also suggests that Vivendi is still cautious, even “defensive” as far as future guidance is concerned. “While Q2 EBITA and the guidance was on balance disappointing it is still the case that Vivendi offers a defensive profile in a beleaguered media sector at relatively undemanding multiples. Vivendi remains attractive, in our view, to those who remain cautious on the economic outlook and the market in 2008 and 2009. Vivendi has virtually no advertising exposure (just 3% of revenues) and has substantial exposure to subscription based revenues (Canal Plus, Games, SFR). Some 70% of its EBITDA is derived from telecoms, typically regarded as having a relatively defensive profile. It has relatively low financial leverage (net debt/ EBITDA is around 1.25x). Vivendi thus avoids many of the perceived cyclical, structural and financial problems that afflict much of the media sector.”