Target Price: 23€
Blue Sky: 29€

UMG is turning around as streaming more than compensate for downloads. Growth is coming back for the first time since the early 2000. UMG is the largest of the 3 major (Warner Music and Sony Music) with a 35%+ market share and more than 3mn titles. Increasing adoption of paid streaming should drive growth at UMG. In early May, UMG’s signed a partnership with TENCENT, which has a platform of 890 mn monthly average users and they are the perfect door to China were UMG has no revenues. Streaming, already accounts for more than 50% of UMG’s revenues with physical revenues around 30% and the balance from licensing. Streaming is more profitable and should get the lion share of future revenues. In 2016, 4 of the 5 biggest markets have had stronger than expected growth and 2017 should confirm the turnaround. Streaming’s penetration is “only” 3% and if one assume that it will grow to 15% in 5 years the value UMG is 34/share of Vivendi with a 25% ebitda margins and using a discount rate of 15%. The market is expecting an IPO of the business over the next few years which would bring a strong re-rating of Vivendi shares.

Canal+ has been losing market share over the past few years as they have changed their business model, with less premium programming (sports) and more in house productions, including series, talk show and games. The company stated in its earnings presentation that Canal should troughed in the 1H of 2017. Canal has seen a strong pick up in third party (Free and Orange) subscriptions. While revenues are much lower (€4 vs. 20+) there is no cost (set top boxes and other customers acquisitions cost) associated with these subscribers. The risk for Canal is a potential canabalisation of customers by the telcos. As soon as Canal manages to again grow their subscriber base, Vivendi could be re-rated by as much as €3.5/share or 20% using peers ev/sales average multiple (see enclosed spreadsheet). An article in Le Figaro, on March 31, stated that Canal+ has picked up 100k in the 1st Q on the back of the new tiered pricing structure (Nov 2016). There has been a lot of talks/articles on Orange being interested in buying Canal+ which seems very unlikely following the stake building in Mediaset, but a stronger link is likely. Vivendi has been building up a hostile stake (28.8%) in Mediaset at the end of last year. While a closer link with Mediaset would allow for large synergies in programming and purchasing, Mediaset largest shareholder, Fininvest (40%), is trying to block the move and the Italian regulator asked Vivendi to sell its stake down to 10% within 12 months. Vivendi should/could appeal. Canal + is valued at between €4-and-9bn based on peers multiples. Mr. Bolloré is moving his pawn in Italy with Vivendi having nominated 10 of 15 board members of Telecom Italia.

Vivendi quoted assets are worth close to €6/share (32% of mkt cap) and they have €0.5bn in net cash. If they wanted to further strengthen their position in media and telecom they could raise close 5bn in cash with their net debt to ebitda ratio around 3x and net debt to equity at less than 25%. Vivendi announced in early May that they would buy Bolloré’s stake in Havas which should be accretive by about 10%.

Lack of clarity over future strategy and complexity could scare investors, but there is an immense upside potential if both Canal Plus and UMG’s turnsaround are confirmed. This would bring a huge re-rating of the stock. At current prices, the market is assuming a bear case scenario. Co has guided c5% organic growth for 2017 (would be a 1st in 10 years) and the market has rewarded the stock with a 10% under performance.

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Vivendi May 22 2017