(Repeat for additional subscribers)
May 23 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed France-based Vivendi SA’s (Vivendi) Long-term Issuer Default Rating (IDR) and senior unsecured rating at ‘BBB’. The Outlook on the Long-term IDR is Stable.
The affirmation reflects the completion of Vivendi’s significant disposals (stakes in Activision Blizzard AB and Maroc Telecom) and its plans to sell SFR, the 2nd largest French telecoms operator, as part of their plan to move away from telecoms and become an international media group. After returning EUR4.8bn to shareholders, this should leave Vivendi with a net cash position to fund future investments and acquisitions in the media sector.
Maintaining the ‘BBB’ rating will depend on the strategic plan that Vivendi adopts, the acquisitions made, coupled with management’s ability to balance financial leverage with an operating profile that could be less predictable than when Vivendi had owned more telecoms assets.
Disposal of Telecom Assets
The EUR4.1bn disposal of Maroc Telecom and the planned sale of SFR demonstrate that Vivendi is well on its way to refocus the group towards media and away from more capital- intensive telecom assets. Altice SA has entered a binding agreement to pay Vivendi EUR13.5bn cash together with a 20% shareholding in the new Numericable/SFR entity, as part of the sale. The sale of SFR comes at an opportune time, as the company has been facing pressure on revenue and EBITDA (down -6% and -11% respectively in 1Q14).
Financial Policy Remains Conservative
A dividend to shareholders of EUR1.34bn is expected to be paid in June 2014. Vivendi also intends to distribute a further EUR3.5bn contingent on the successful disposal of SFR. Taking into account SFR disposal proceeds and these proposed shareholder distributions, Vivendi would have ended 1Q14 with EUR1.6bn in net cash, on an adjusted basis. Vivendi has said that it continues to target a ‘BBB’ rating and Fitch would expect management to take a conservative approach to managing its balance sheet as it continues its transformation into a media group.
Existing Media Assets Well Positioned
Vivendi’s music asset UMG is currently the industry leader in recorded music with a market share of over 30%, and one of the leading global music publishing groups. The group’s TV business, The Canal+ Group, benefits from fairly stable subscription-based revenue streams from operating the leading Pay-TV platform in France while also benefitting from growth opportunities in Africa, Poland and Vietnam. Fitch expects cashflow generation at these two businesses to be fairly stable.
Media Strategy Still Unclear
Visibility on Vivendi’s plans remains limited. A more detailed strategic plan is likely to be announced in the three to six months after the annual shareholder meeting on 24 June 2014 when Vivendi’s new Chairman, Vincent Bollore, will be formally appointed.
A more media-centric group is likely to have more volatile cashflows and be less able to maintain a certain quantum of debt for a given rating level than when Vivendi had a greater exposure to telecoms assets. Given Vivendi’s expected net cash position after the sale of SFR, management should have significant resources to pursue potential acquisitions in the media sector. Depending on the strategy that emerges and any potential media investments, an upper limit for Vivendi’s indebtedness would be around 2.0x to 2.5x funds from operations (FFO) adjusted net leverage to maintain its ‘BBB’ rating. A strategy tilted towards less predictable or advertising-driven businesses is likely to result in a leverage threshold at the lower end of this range.
FX Risks through GVT
GVT, Vivendi’s Brazilian telecoms operations, has expanded its network in Brazil and continues to deliver strong revenue growth (12.6% constant currency growth in 1Q14). Maintaining this growth requires a high level of capex, which limits GVT’s free cashflow generation. Vivendi’s strategy of funding investments mainly from the parent company means there is little debt in local currency at GVT, leaving Vivendi exposed to fluctuations in the Brazilian real.
At end-1Q14, Vivendi had EUR5.9bn undrawn available facilities coupled with cash on balance sheet of EUR868m, which is expected to increase by EUR4.1bn following the sale of Maroc Telecom on 14 May 2014. Vivendi has further increased its cash position following the sale of 6% of Activision Blizzard for USD850m on 22 May 2014. The proposed sale of SFR should also provide cash inflow of EUR13.5bn.
Vivendi has enough liquidity to cover all of its debt maturities, assuming the SFR sale is successful. At end-1Q14, the average term of the group’s debt was 3.8 years, down from 4.4 years as at end-2013, due to the issue of short term commercial paper.
Negative: Future developments that could lead to negative rating action include:
-FFO adjusted net leverage higher than 2.0x to 2.5x.
-Pressure on free cash flow driven by significant underperformance in Vivendi’s ongoing businesses
Positive rating action is unlikely in the medium term unless management pursues a more conservative financial policy.