Global Village Telecom (“GVT”)
Vivendi SA (EPA:VIV) owns 99.71 percent of GVT, a Brazilian telecommunications company. Emerging markets are all the rage now for good reason. (Incomes in these countries are rising and that means demands for more goods and services.) The attractiveness of emerging markets in particular applies to telecom companies. With higher incomes, more people can afford more expensive TV and Internet access as well as more expensive mobile phones.
Almost every developed market telecom company faces the twin problems of intense competition and a largely static market of potential customers. For example, in the United States just about everyone who wants and can afford high speed Internet, cable or satellite TV, and smart phone with a data plan already has one. Growth is limited to roughly same rate as the adult population or stealing customers from competitors. Against this backdrop of intense competition and limited growth, telecom companies are forced to spend massive amounts of money on continual upgrades of their infrastructure to support higher speeds and keep up with competitors.
In emerging markets the dynamic is usually different. There is competition but it tends not to be as fierce since there is an ever-growing piece of pie each company can get. Once the market is not emerging and becomes saturated, growth and returns on capital will mirror developed markets. We have no idea how long this will take and are happy Vivendi is actively shopping GVT. Let some other shareholder roll the dice on when the telecom market in Brazil will become saturated.
Initial media reports quoted Vivendi as wanting EUR 8.9B for GVT and expressed some skepticism that Vivendi would get that price. The latest reports now quote Vivendi as looking for a lower price of around EUR 7.0B to 8.0B. The highest bid Vivendi received was almost EUR 6.0B from DirecTV with a lower offer from KKR & Co. L.P. (NYSE:KKR). Vivendi decided to end the auction after no bids met their price requirement. Both sides now seem intent on trying to wait each other out. DIRECTV (NASDAQ:DTV), KKR & Co. L.P. (NYSE:KKR), and other potential bidders seem to think Vivendi might be forced to sell GVT sooner and that they can pick it up at a fire sale price. Vivendi is betting it can monetize other assets to pay down its debt and sell GVT later. We decided to use the EUR 7.0B figure as our best estimate of the value of GVT.
Canal Plus Group (“Canal+”)
Canal+ SA (EPA:AN) is a film and television studio and distributor. The company consists of Canal+, a pay TV channel in France, the Netherlands, and Poland. The Canal+ channel airs original programming, first-run movies, and third-party programming. Canal+ also owns StudioCanal, a film production and distribution company that has the third largest film library in the world. The final piece of Canal+ is CanalSat, a satellite and IPTV provider.
Canal+ SA (EPA:AN) has reported steady increases in revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization) over the past three years, and we believe that Canal+ is worth approximately EUR 8.0B.
SFR
SFR is a French telecommunications company that provides mobile phone, landline, Internet, IP television, and mobile Internet services. In 2011, Vivendi purchased the remaining 44 percent of SFR that it did not already own from Vodafone. SFR is Vivendi’s most valuable asset and, unfortunately, has a difficult market environment. SFR is facing increased competition from low-cost telecom provider Iliad SA, in addition to the recession that is currently gripping the Eurozone. French unemployment recently hit a 16-year high. Although French President Francois Hollande has so far resisted calls to implement widespread austerity, it is doubtful the French economy will thrive until the Euro elite pull their collective heads out of their rear ends and cease austerity efforts. As we have seen countless times throughout history, high budget deficits are necessary to spur economic growth. (If this seems odd to you, I have written two articles explaining how government sector debts and deficits work for currency issuing nations. You can read them here and
