VIV FP / UMG – Buy VIV FP on Tuesday and UMG over the first 3 days – Spin clears path for value creation, +37% upside from current price

*We expect index selling on Tuesday to create a good entry point in VIV – along with investors who only are looking for UMG exposure to sell down

*UMG will also have index selling pressure on the first day of trading which we will also look to use for an entry point

*Withholding tax makes it difficult to enter the trade before VIV goes ex the UMG distribution

Summary

*VIV goes ex the UMG distribution on Tuesday 21^st September and the UMG shares start trading on tomorrow as well

*VIV holders receive 1 new UMG share for each held

*As the event is to be treated as a dividend, many investors are liable to withholding tax on the UMG distribution, this could be anywhere between 5-30% of the value of UMG (which is the larger part of the company)

*We like both VIV and UMG medium term – we believe that VIV clearing its holding co structure with the UMG distribution and the MMB takeover offer opens the company for a new set of investors who want exposure to the European media sector which is quite hot at the moment  

*Our valuation of VIV comes in around EUR 21 while for UMG we value the company at around EUR 23 implying a valuation of EUR 42.5bn for UMG – buying VIV today (EUR 32) therefore implies a +15%-37% upside depending on withholding tax

*As the tax situation is quite significant and we expect to see index selling on Tuesday in VIV FP as it goes ex we would look to buy it on Tuesday and buy UMG over the 3 trading days as we also expect net selling from index funds to put pressure on the stock as it exits indcies on the first day of trading

*Another way VIV is to buy the Topco instead (BOL FP)  – over the medium term we expect Bollore’s Topco to benefit the most in major corporate actions – liquidity and complexity of BOL FP holdco structure makes BOL FP more difficult to play around this event, we therefore focus on VIV/UMG

Background

*VIV retains a 10% stake in UMG leaving 60% stake to be distributed

*Earlier this week VIV announced that they are launching a bid for MMB FP which they held a 27% in already – the bid values MMB at EUR 3.4bn and could well be the fresh bit of air needed to revive the company under a broader European Media company  

*The bid will be launched following the pending approval of VIV’s 17% stake purchase from Amber capital  which would bring VIV’s stake in MMB up to 45%  (expected to complete in December) – following which they would need to launch a full bid

*French regulator is likely to demand some remedies from VIV in relation to the stake purchase

*The analyst community is not too excited about the MMB deal as it limits VIV’s further potential for buybacks etc which has caused the stock to come off its highs– we however quite like the fact that they are expanding its media exposure – this is a sector we are very bullish on already as we expect to see media consolidation within Europe to fight against the US peers in the race for content that is currently ongoing – names we have previously looked at involved PSM GY, TL5 SM and NENTB SS which we all see consoldiation potential for

*UMG is also a very attractive asset which is in high demand at the moment – while we would have been more excited about a US primary listing we see the Amsterdam listing as attractive as well

Index wise

*VIV is set to be deleted from the Eurostoxx 50 which should cause around 30-35m of selling pressure on Tuesday

*For UMG we expect to see a around 10-15m of net selling on Tuesday in a large index reshuffle from CAC, Eurostoxx 50, Stoxx Europe, FTSE Europe, MSCI

*The AEX is not expected to add UMG until the Dec review – which could be a great catalyst for UMG at that point

*Due to the witholding tax aspect, and the UMG net selling pressure some fast money is likely to prefer to buy post the ex date which should leave the stock more supported on the index selling

*In addition to index selling there will also be outright selling of VIV as some investors only want the UMG exposure which is the larger part of VIV at the moment

Valuation

*Our SOTP valuation of VIV comes in around EUR 21 while for UMG we value the company at around EUR 23 – buying VIV today (EUR 32) therefore implies a +15%-37% upside depending on withholding tax – Buying post the ex date will make the upside scenario clearer