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Vivendi Notes, Bagehot


Below are notes on Vivendi (Disclosure: Woodlock House owns shares of Vivendi at an average price of ~ €22). Further on down, a look at the memoirs of Walter Bagehot and James Grant’s new biography of him.


First, Vivendi…


Vivendi reported strong results for the first half of the year. As CEO Arnaud Roy de Puyfontaine said, “the numbers speak for themselves.


Sales figures for its various businesses:



EBITA:


Earnings tripled year-over-year for Vivendi. You can find the release here:

https://www.vivendi.com/wp-content/uploads/2019/07/PR190725-H1-2019-Vivendi.pdf


All eyes are on UMG, the crown jewel of Vivendi’s crown. UMG is one of three big music labels (along with Sony and Warner) and has the largest share at more 30%. You can think of it as supplying the music for streaming services such as Spotify and Apple Music. UMG is the fastest growing label and, as a result, is taking market share. In the release, Vivendi shared the following:


* On the Spotify Global Chart, UMG had eight of the top 10 songs for the first half of 2019, including all of the top six. (UMG had 55% share of the top 50 songs streamed on Spotify.)


* According to Nielsen’s Mid-Year 2019 Music Report, in the U.S., the world’s largest music market, UMG had six of the top 10 artists, including all of the top 5 (Ariana Grande, Drake, Billie Eilish, Post Malone and Queen); eight of the top 10 albums, including the Top 2 (Ariana Grande, Billie Eilish); and seven of the top 10 songs (based on digital consumption).


* In the United Kingdom, based on OCC (Official Charts Company) data, UMG had six of the top 10 singles of the first half of 2019, including Lewis Capaldi at No. 1, and six of the top 10 albums.


It continues to invest in artists, as you can see by looking at advances to artists on the balance sheet (in millions of €):









In short, it’s a healthy, growing asset. What is UMG worth?


In my mind, I’ve always thought UMG should be worth at least as much as Spotify. UMG’s economics are better than Spotify’s. The latter has a market cap of $28 billion (€25 billion). So, that’s one potential marker.


Another is to look at the EMI Music transaction in May of 2018. Sony acquired an additional 60% stake in EMI. The acquisition price was ~19x EBITDA. UMG’s catalog is far more extensive and valuable than EMI’s. It seems reasonable to assume it’s worth at least 19x EBITDA. UMG is on pace for about €1.2 billion in EBITDA. So, 20x that gets you €24 billion for UMG.


Of course, there are other ways to value it. You could do a DCF, the method I trust the least, and in which you can (easily) arrive at the biggest number.


Let’s say a 50% sale takes place that values UMG at €25 billion. That means Vivendi will get back €12.5 billion in cash. Since this is a long-term holding of Vivendi’s, the sale is exempt from the French capital gains tax. But it is subject to other taxes, which come to about 4% of the proceeds. Vivendi, even after taxes, would still be looking at a €12 billion cash windfall – or about 38% of its €31 billion market cap.


Some percentage will go toward buybacks, management says. And some percentage will likely go toward debt repayment. Vivendi took on some debt to finance buybacks ahead of the sale. In the second quarter alone, it bought back 5% of its shares.


Of course, it could be that Vivendi decides not to sell, or can’t close the deal for whatever reasons. If this happened, I think Vivendi shares would fall initially. But long-term, perhaps keeping all of UMG would be better. It seems like a great business with a lot of potential ahead. As a long-term investor, I’m not worried about a scenario where a UMG deal doesn’t go through.


Vivendi owns several other assets. The most important of these are Canal, Havas and a stake in Telecom Italia. (Vivendi also owns 4% of Spotify). Your overall value for Vivendi will depend on how you value these pieces. For me, all roads lead to €30 and beyond. And that’s being fairly conservative with the valuation on UMG.


Here is a bit from a story in Music Business Worldwide earlier in the year:

“Universal Music Group’s valuation just keeps on mushrooming.


The company’s worth was being pegged at €29bn ($33bn) by Deutsche Bank in early January, before Morgan Stanley upped the stakes. In mid-January, the latter bank suggested that Universal was worth $29bn at a “base valuation” – but that in a “bull case”, it could be worth anywhere up to $42bn.


Now, that high-water mark has been hoisted skyward yet again. This time, it’s JPMorgan, which has just stuck a gigantic €44bn ($50bn) ‘fair value’ price-tag on UMG.”


These are investment bankers, so their numbers are hardly impartial. Do I think UMG is worth €44 billion? Not today. But could it go for a €30-35 billion price tag? In this market? Sure.


Remember, the entire market cap for Vivendi today is €31 billion.


Anyway, we’ll know soon. If management’s timetable holds, we’ll know by the end of the year. Until then, I’m happy to hang on to Vivendi. I think time is on my side here. UMG should continue to grow and post strong results. And the value of UMG - and Vivendi - should grow as well.


*** Walter Bagehot (1826-1877)


I have a copy of James Grant’s new book Bagehot: The Life and Times of the Greatest Victorian.


Who was Bagehot? Grant writes: “Bagehot was a banker, a man of letters, and a financial journalist; most famously, he edited The Economist.” I’ve always been interested in Bagehot because of his wit and easy-to-quote, aphoristic writing style. I often don’t agree with him. But I admire his way of putting things.


I’ve only just started Grant’s book, so I don’t have much to say about it. But as for Bagehot, my favorite Bagehot book is The Memoirs of Walter Bagehot by Frank Prochaska, published in 2013. Bagehot published no memoirs. Prochaska, an enthusiast of Bagehot’s, carefully constructed one. He used, mostly, Bagehot’s own words culled from essays, books and letters. The Memoirs, then, is work of literary construction. And a darn good one, at that.


A sampling of quotes I have highlighted in my copy:


“The good times of high prices almost always engender fraud. Credulity is the natural condition of man, and all people are most credulous when they are most happy.”


“In financial affairs, as elsewhere, men rarely desire what they already have. An over-confidence in times of modest prosperity leads John Bull, irritated by 2 per cent, into reckless investment. People won’t take 2 per cent... Instead, they invest their careful savings in something impossible – a canal to Kamchatka, a railway to Watchet, a plan for animating the Dead Sea.”


Sound familiar?


And this:


“There is pressure to have a view, but that habit of always advancing a view commonly destroys the capacity for holding one… Opinion is cheap.”


A few more:


“Life is a school of probability. The data of historical narratives, especially modern histories, is a heap of confusion.”


“Histories, like memoirs, are closer to art than to science.”


“All abstractions are arbitrary; they are more or less convenient fictions made by the mind. An abstract idea means a concrete fact or set of facts minus something thrown away.”


He could also be funny:


“A man's mother is his misfortune, but his wife is his fault.”


“The cure for admiring the House of Lords is to go and look at it.”


So that’s Bagehot. If you want to get a taste of the man’s writing, try The Memoirs.


Thanks for reading.


***

Published July 29, 2019

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