VIVEF - Vivendi SE: Acquisition Finalized But There Are More Doubts (Rating Upgrade)

2024-01-22 00:19:02 ET

Summary

• Vivendi's financial performance has been decent, but the company has not been profitable for the last 2 quarters.
• The completion of a major acquisition is a positive, but the impact on the company's bottom line remains to be seen.
• Vivendi's proposed split-up could unlock shareholder value, but it also adds uncertainty and potential costs.

Investment Thesis

With the completion of the major acquisition by Vivendi ( OTCPK:VIVEF ), I wanted to look into what happened since I covered the company back in February of ´23. The company’s financial performance has been decent; however, the margins have not improved as the company is not profitable for the last 2 quarters. The finalization of the acquisition is a positive, however, I would like to see how this will affect the company’s bottom line. The split up of the company in the future gives me hope that the management will unlock shareholder value, therefore I am upgrading from my sell recommendation to hold, as I would need to see how the company story develops over the next couple of quarters.

Update on Financials

It’s been almost a year since I last covered Vivendi. During this time, the company saw a 2% increase in stock price, while the S&P500 advanced 20.5%. Let's have a look at how the company's financials developed over this time.

As of Q2 ´23 (Q3 not available as of yet), the company had around $2B in cash and equivalents against $3.1B in debt. That is not a huge debt amount, so I don’t think it’s of any issues there still. Plenty of cash on hand to cover interest expenses and, same with operating income, easily covers interest expenses on debt.

In terms of revenues, the company has seen some growth in the last 9 months, which was about what I assumed the company would grow at in my previous article if we consider constant currency growth that is. I am a little disappointed with the massive slowdown in Gameloft and Vivendi Village, however, these are tiny compared to the company’s main revenue generators, the Canal+ Group and Havas. These two segments have been doing relatively well in the last 9 months.

In terms of margins, the company is not doing too well here, as it has not been profitable in the latest quarters. The management is having a tough time controlling costs and other non-operating income items that are bringing the company’s bottom line down dramatically. This is a red flag for me, and I will be more cautious about the company’s potential to become profitable again. It has fluctuated quite a lot over the years, which is what I don´t like from an investment as I prefer certainty and not a gamble on whether the company will turn itself around unless that long thesis is very compelling,

Comments on the Outlook

Unsurprisingly, the company has completed its acquisition of Lagardère , as the EU commission finally approved the sales of Editis and the Gala business to IMI and Groupe Figaro, respectively. This will boost the company’s revenues significantly going forward, although inorganically. As I mentioned in my previous article, Lagardère did 35% revenue growth back then, and in the nine months ended September ´23, the company managed 15.3% growth and 9.6% in Q3 alone. These are much better numbers than what Vivendi has been able to achieve, so in the end I expect most of the growth coming from Lagardère. This acquisition will add over 75% to Vivendi’s top line as Lagardère did almost €6B in the 9 months ended September, while Vivendi did €7.1B.

I would like to see the growth being sustained going forward, and the company may have a fighting chance to be a good long-term investment, however, I would need to see some proof. I don’t like the fact that the growth at Lagardère is starting to slow down quite a bit from when I covered Vivendi last, so I would like to see a couple of quarters when the company is already fully integrated into Vivendi.

I need to see the company’s profitability improve and be much more stable than it has in the past. I would like to see how much the acquisition will help Vivendi’s bottom line.

A Proposed Split-up

Just recently the company announced that it is open to splitting the company up to unlock shareholder value and true potential of each of the best-performing business segments, Canal+, Havas, and now Lagardère, which would be under what they call “an investment company”. In theory, this all signs great, the management is taking the initiative to improve shareholder value by making each company focus on each market separately. However, this adds more uncertainty for me, as these things don't get exactly as planned in the end and may end up costing a lot more for the whole restructuring, which could hurt shortly and possibly longer. Lagardère will be its own company once again, and from the looks of it, that is where most of the growth is, while Havas has the best margins.

Closing Comments

There is a lot of opportunity here, although the future just got murkier. In my previous article, I recommended selling, however, the acquisition coming through successfully, and the proposed split up makes me hopeful that the company manages to turn the ship around. However, it is a little too chaotic right now. I am going to update my rating to hold as I believe the company is not worth selling right now, with such promising ventures mentioned. I do think that unlocking shareholder value will take quite some time and there is no rush to jump on board just yet, especially if the restructuring will bring unforeseen costs and lower margins, which may bring down the share price even more.

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