Analysis: Vivendi makeover takes shape as SFR deal nears

PARIS (Reuters) - A new-look Vivendi (VIV.PA) is set to emerge after it buys out Vodafone (VOD.L) from French mobile operator SFR, capping a five-year turnaround effort by Chief Executive Jean-Bernard Levy.

The makeover would potentially solve the French conglomerate's identity crisis, while a likely higher dividend and less-risky acquisition stance could repair frayed relations with investors.

The SFR deal would leave Vivendi more dependent on telecoms and mature markets. Growth would be lower but profits stronger, and the group's holding company structure -- long a drag on shares -- would be simplified.

A deal could come soon, according to banking sector sources.

Levy, who has said the deal is his top M&A priority, said in a recent interview talks with Vodafone over its 44 percent stake in SFR could begin as soon as Vivendi received the $5.8 billion from selling its 20 percent holding in NBC Universal in the U.S.

Regulatory approval for the NBCU-Comcast deal came through on Tuesday in the U.S., and Vivendi is expected to get the proceeds in coming weeks.

"After the SFR deal, Vivendi would be a company with higher cash flows, potentially less growth, and a center of gravity more focused on France," said Patrice Cochelin, a credit analyst at Fitch Ratings.

"It would also have a simpler financial structure, addressing what we have long seen as a rating weakness."

For Levy, buying the SFR stake would cap five years spent putting Vivendi's house in order after an ill-advised spending spree by his predecessor left the group teetering on insolvency.

During that free-spending era, Vivendi cobbled together holdings in everything from U.S. movie studios to a Polish mobile operator, all under the banner of a "convergence" strategy in which content and distribution were married.

As a result, Vivendi became an entertainment-telecom hybrid, part of the media index .SXMP yet with two-thirds of profits coming from French and Moroccan telecom.

UGLY DUCKLING

Even as Levy nursed it back to health, investors viewed the shares with skepticism, applying a 10-25 percent conglomerate discount because Vivendi did not own its major divisions.

Also weighing on its shares was the company's reputation among investors as a serial acquirer.

Vivendi did roughly one multi-billion euro deal a year, such as buying a controlling stake in video games maker Activision Blizzard (ATVI.O) in 2007 and Brazilian fixed-line telecom group GVT in 2009.

Although Vivendi walked away from deals it deemed too rich, such as buying Middle Eastern telecom operator Zain (ZAIN.KW) last year, investors continued to fear it would embark on value-destructive acquisitions.

As a result, over the past five years, Vivendi has consistently underperformed the telecom .SXKP and media indices by at least 5 percent and often wider margins.

Now Vivendi is poised to become a much simpler company with a clearer financial structure and a more comforting dividend and acquisition strategy, say analysts and fund managers.

The shift could help Vivendi shed its ugly duckling status among investors.

Vivendi will soon complete the sale of its stake in NBC Universal to General Electric and has settled a decade-long ownership battle with Deutsche Telekom over its Polish mobile unit.

Levy is weighing using the roughly 5.6 billion euros ($7.5 billion) proceeds from those two exits to buy out Vodafone's SFR minority stake as well as Lagardere's (LAGA.PA) minority stake in French pay-TV unit Canal Plus.

DIRECT PITCH

Doing both deals could usher in a new era in which Vivendi becomes more of a stable, dull telecom stock with a high dividend rather than a flashy high-growth entertainment stock.

Vivendi now has a dividend yield of 6.5 percent, more in line with the telecom sector average of 6.2 percent than the media index average of 3.9 percent.

Levy has hinted at investor meetings that Vivendi could increase its dividend payout if it completes the SFR deal. He is now making a more direct pitch to dividend-seeking investors, said Claudio Aspesi, analyst at Sanford Bernstein.

"For a while Vivendi liked the idea of telling a growth story, while having a high, telecom sector dividend," he said. "But now it has realized that it can't be all things to all people, and is focusing on appealing to the dividend investor."

Benoit Trioux, a fund manager at Axa Investment Managers Paris, which owns Vivendi shares, said the new new-look group would be seen differently by investors.

"Vivendi has long been seen as a 'value trap' and many investors have been skeptical about its strategy. But the SFR deal would give Vivendi access to 100 percent of the cash flows at its most profitable division, and that would be looked at favorably by investors."

One telecom investment banker in Paris said he thought the SFR deal would reduce the discount by 5 percent or more.

"Vivendi would send a strong signal to the market by putting a lot of money on the table to clean up and simplify its structure," he said.

The SFR deal could also usher in a more conservative period at Vivendi in terms of acquisitions.

Credit rating agencies and analysts estimate Vivendi might have to pay 7-8 billion euros cash to buy Vodafone's SFR stake, leaving little headroom to borrow for deals for several years.

"My feeling is that the era of big external acquisitions at Vivendi is over," said Ian Whittaker, analyst at Liberum Capital.

"They'll be more in a phase of tidying up the portfolio, with the focus on buying out other minorities or doing smaller acquisitions to strengthen existing businesses," he said.

Levy said in November expansion in emerging markets remains a long-term goal, although acquisitions in such high-growth countries would be on hold "for the next couple of years" while the company tries to take full control of SFR.

Damien Chew, a credit analyst at Fitch Ratings, said he thought Vivendi would keep its "two-pronged M&A strategy" of buying out minorities and expanding in emerging markets, adding that acquisitions were central to the company's culture.

"We'll see what happens ... I expect they will turn their attention back to opportunities in emerging markets," he said.

(Additional reporting by Marie Mawad and Gwenaelle Barzic; Editing by David Hulmes)