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We think the sharp fall in the wireless division this year will partly be cushioned by more resilient fixed-line revenues, steady pay-TV revenues, and buoyant growth in the Brazilian fixed-line business. We also anticipate somewhat lower revenues from Morocco-based Maroc Telecom (MT; not rated), with geographic diversification into other African markets partly offsetting lower domestic prices, as well as a potential decline at Universal Music Group (UMG; not rated), Vivendi's global recording music subsidiary. The latter drop will likely result from structurally falling physical recorded music sales (CDs mainly), which are still not fully offset by rising digital music sales.
For 2013, we see continuous revenue decline at mobile subsidiary SFR, given the impact of lower average revenue per user (ARPU). Still, the impact could ease after the likely significant drop this year. We think that the French pay-TV business Canal+ is facing mounting competition and a weaker domestic economic environment that constrains households' disposable income. Conversely, we foresee continuous growth at fixed-line operator GVT in Brazil owing to its targeted strategy and low fixed broadband penetration, which should continue to attract new subscribers, although we note an increasingly competitive environment and diminishing ARPUs. In our view, U.S.-listed video games company Activision Blizzard (AB) should also show growth, despite AB's heavy concentration on a few games.
We think that group EBITDA margin will shrink toward the mid-20% area by 2013 compared with about 30% in 2011, and stabilize thereafter thanks to the beneficial impact to be derived from management's aggressive cost cutting objectives that seek to achieve about EUR0.5 billion (roughly 4%-5% of revenues) in operating cost reduction at SFR level by end 2014, and additional cost savings expected from the integration of recently acquired EMI assets at UMG level and cost measures taken at MT.
S&P base-case cash flow and capital-structure scenario
Our "intermediate" financial risk assessment balances rising debt leverage triggered by intense EBITDA pressures in the telecom division, higher cash tax outflows because of income tax regulation changes, and the recent acquisition of fourth-generation (4G) spectrum at SFR and the EMI assets at UMG, with management's commitment to preserving the current rating, highlighted in particular by the dividend cut in 2012.
We expect that Vivendi's key financial metrics will deteriorate markedly in full year 2012 and, barring asset disposals, weaken further in 2013, but likely remain within adequate parameters for the rating.
Overall, factoring in at this stage only the asset disposals required by competition authorities in relation to the EMI transaction, we anticipate that the Standard & Poor's adjusted debt to EBITDA ratio for Vivendi will increase toward, but not exceed, the 2.5x (3.0x on a proportionate basis) maximum level we consider adequate for the rating by 2013, from 2.1x (2.5x on a proportionate basis) in 2011.
The short-term rating is 'A-2'. We assess Vivendi's liquidity as "adequate" under our criteria.
The ratio of liquidity sources to uses for the next 12 months was 1.25x at end-September 2012 by our calculation. Sources included the group's EUR5.4 billion of long-term undrawn committed lines, well spread from 2014 to January 2017; cash at group level of about EUR0.7 billion at end-September 2012, excluding the large cash balances sitting at U.S.-based subsidiary AB; and our anticipation of funds from operations (FFO) of about EUR5.8 billion. At this stage, we have not factored in asset disposals that European competition authorities have mandated following the recent GBP1.2 billion acquisition of assets from U.K.-based EMI Group PLC (EMI, not rated).
Funding requirements at end-September 2012 included EUR4.4 billion of debt maturities in the ensuing 12 months, of which EUR3.1 billion were outstanding commercial paper; about EUR3.3 billion in capital expenditures; EUR1.7 billion in dividends including those to minority shareholders; about EUR3.3 billion in capital expenditures, and the contracted acquisition in the Polish TV market.
We believe that Vivendi has good access to capital markets, and sound and broad bank relationships. We think that management will continue actively managing liquidity in order to keep it adequate. In November 2012, Vivendi issued a EUR700 million bond maturing in 2020; in May 2012, Vivendi closed a new EUR1.5 billion 2017 facility refinancing part of a EUR1.9 billion 2013 loan (of which EUR1.1 billion undrawn); in April, it carried out a EUR300 million tap issue on its 2021 bond and raised $2 billion on three U.S. bond tranches maturing in 2015, 2018, and 2022.
The continued availability of parent company credit lines is subject to Vivendi's compliance with a single financial covenant that limits net debt to EBITDA to 3.0x on a proportionate, pro forma basis. We expect headroom under this financial covenant to remain comfortable. We understand that SFR's lines are also subject to financial covenants, under which the headroom is large and where the calculation includes parent company loans.
We understand that the availability of the group's bank lines is not subject to repeating material adverse change provisions.
The group has recently put in place a letter of credit to cover the liquidity risk related to the June-2012 U.S. jury verdict requiring it to pay EUR765 million in damages. The outcome of this litigation is uncertain at this stage, however, and Vivendi has said it would appeal.
The negative outlook reflects the possibility of a one-notch downgrade within the next two years if Vivendi's business risk profile were to weaken to below the current satisfactory category, or, while remaining satisfactory, it was not sufficiently balanced by a stronger financial risk profile to sustain the current rating. Alternatively, absent any business reshuffling, a prolonged and steep EBITDA drop at SFR level could put some additional pressure on the business risk profile, adversely affect credit metrics to a larger extent than we currently anticipate, and trigger a downgrade.
We could revise the outlook to stable if we are increasingly convinced that performances of Vivendi's telecom division will stabilize; that the group's business risk profile remains satisfactory; and that its credit metrics will remain within adequate parameters for the rating, or, if required by a lower business risk profile, strengthen to a sufficient extent.