Vivendi Group

Vivendi SA (EPA:VIV) is a French conglomerate that owns all or part of Universal Music Group, Global Village Telecom, Canal+ SA (EPA:AN), SFR, Activision Blizzard, Inc. (NASDAQ:ATVI), and MAROC TELECOM (EPA:IAM).

March 2013
Strubel Investment Management, LLC

Wall Street (and, really, the finance industry in any country) appears to have an allergy to companies that are hard to analyze and do not have an exciting “sexy” story to tell investors. Vivendi SA (EPA:VIV) certainly does not have a great story. It’s a hodgepodge collection of assets rammed together under the umbrella of a French holding company. Many of the asset purchases were funded by debt, leaving present day Vivendi with too high a debt burden. (Vivendi assets still far outstrip the debt as we will see in the valuation section.) Vivendi is also hard to analyze (at least by Wall Street standards) since it is really six different companies.

On the valuation aspect, we disagree with Wall Street. Given the plethora of private party transactions surrounding many of Vivendi’s assets and comparable companies as well as the publicly traded nature of two of the subsidiaries, we believe it is not hard to come up with a reasonable approximation of Vivendi’s worth.

Universal Music Group (“UMG”)

Universal Music Group (“UMG”) is one of the “big three” music recording and publishing companies in the world, along with Sony Corporation (NYSE:SNE) and Warner Music Group. Since the debut of Napster in 1999 and the rise of digital music, music companies have struggled with falling sales. The practice of purchasing entire albums at $15.99 has given way to purchasing individual songs for $.99 to $1.29, or users are illegally downloading the music for free from numerous file sharing websites. The media has also proclaimed that the Internet would democratize the recording and publishing process for artists and that major studios would be relegated to history’s dustbin.

The entertainment industry is characterized by, if nothing else, extreme hard-headedness to changes in consumers’ consumption habits. In the 1920s, the record industry complained about radio. Then, movie studios whined about being forced to divest their theater businesses. In the 1950s, we saw broadcast TV fight against subscription cable TV. The 1970s brought “Armageddon” in the form of the VCR. In the 1980s, we were told the cassette tape “was killing music.” The 1990s and early 2000s brought music to the Internet with Napster (a file sharing program) and the DMCA (Digital Millennium Copyright Act), and the record industry deciding it was a fantastic idea to sue their own customers. Now, we have home- and cloud-based DVRs and Internet radio.

In each new incarnation, the entertainment industry stayed profitable. Despite this they see every new media format on the horizon as a potential threat (usually largely imagined) to the industry’s existing profitability. The industry fought the changes tooth and nail through advertising campaigns and copious lobbying, but lost every battle—and will continue to lose. When people want to consume content a certain way, they will do so no matter what the entertainment industry, or the government says. Each time, though, the entertainment industry bravely yet stupidly stood in front of the freight train of change.

Right now, we seem to be approaching the end of the fight-the-Internet stage. Record companies have stopped suing their own customers for downloading songs illegally. (I’m not condoning illegal behavior; I’m simply pointing out that suing your customers or potential customers is a poor way to get them to buy your products in the future.) The a la carte consumption of music has breathed new life into the previously dormant singles market. And record companies are finally figuring out that rather than suing everyone and anyone, they can change tactics and actually make money (lawsuits *cost* money) by licensing content to services that provide music in formats consumers want, such as free advertising-supported digital radio. We are not all the way through this transition, since media companies are still pursuing some questionable strategies, such as the Copyright Alert System that monitors peer-to-peer file sharing. We are, however, closer to the end of era of media companies fighting the Internet than the beginning.

As far as the other argument that the Internet has thoroughly democratized the recording, production, and distribution processes of releasing and promoting music, I find that doubtful.

 “People don’t turn down money. This is what separates us from animals.”
-Jerry Seinfeld from Seinfeld

 The major record labels still employ glad-handing executives who walk around with giant bags of cash to grease the wheels and get things done. Only now, instead of getting an artist featured