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
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
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.