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Fitch Affirms Vivendi SA's IDR at 'BBB'; Outlook Stable
May 16, 2017 / 4:36 PM / 7 months ago

Fitch Affirms Vivendi SA's IDR at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 16 (Fitch) Fitch Ratings has affirmed Paris-based Vivendi SA.'s (Vivendi) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. The Outlook on the IDR is Stable. Vivendi's proposed acquisition of Havas will not impact its 'BBB' rating. The company has sufficient funds and leverage headroom to fund the acquisition from existing cash reserves and debt. Vivendi intends to acquire an initial 60% from the Bollore Group for EUR2.3 billion and make a tender offer for the remaining 40% that is listed for up to a further EUR1.6 billion. Fitch views the potential acquisition of Havas as broadly neutral for Vivendi's rating, with a lack of visibility on the extent and evolution of industrial synergies with Vivendi's existing portfolio offset by Havas's different but equally strong, independent operating profile. Vivendi's ratings are supported by the company's recorded music and pay-TV operations, which have leading market positions within their respective segments. Revenue pressure at Vivendi's operations in France is likely to remain in the short term. However, this should be offset at the free cash-flow (FCF) level, which is expected to improve on the back of EBITDA improvements and growth at UMG. KEY RATING DRIVERS Havas Acquisition Broadly Neutral: We view Vivendi's proposed acquisition of Havas as having a broadly neutral impact for its credit rating. Vivendi has sufficient cash resources and leverage headroom to fund the acquisition with existing cash and debt. A lack of visibility on the extent of industrial synergies between Vivendi's existing business portfolio and Havas is offset by Havas' strong position in the advertising and communications market. The market is highly competitive, but Havas has been increasing its revenues. The company has a strong cash-generative business model that will add diversification and be enhancing to Vivendi at the FCF level. Reduced Headroom Post Acquisition: At the end of 1Q17 Vivendi had a net cash position of EUR0.5 billion. Depending on the extent of shares that will be tendered by minority shareholders of Havas, Vivendi's FFO adjusted net leverage is likely to range between 2.0x and 2.8x by end-2018 upon the successful completion of the transaction. Leverage at the upper end of this range would leave limited headroom for further debt-funded inorganic investments in the short term. However, the combination of Vivendi and Havas will broadly double the group's organic deleveraging capacity to 0.2x to 0.4x per year and improve the company's financial flexibility. Music Streaming Growth-Positive: Universal Music Group (UMG) is currently the industry leader in recorded music with a market share of over 30% and operates one of the leading global music publishing groups. Revenue pressure from the decline in physical sales is being offset by acceleration in the growth of subscription-based streaming revenues which grew by 58% in 2016 on a constant currency basis. We expect growth in streaming to continue with increasing service penetration, new pricing mechanisms and platforms. Growth in subscription-based streaming revenues is also likely to be margin-enhancing and improve the revenue mix from a stability and visibility perspective. French Pay-TV Weakness: Vivendi's operations at Canal+ in France saw a 47% decline in EBITA during 2016. The division accounted for 36% of group EBITA in 2016 (48% in 2015). The decline was driven by a combination of subscriber churn following the loss of exclusive sports rights, increasing content investments, reduction in free-to-air advertising revenues, competition from online TV, and for some market segments the lack of a triple-play offer. Canal+ has a challenged position in the French pay-TV market which despite the current weakness is likely to be resilient in the medium term due to the division's content production, procurement, brand and bundling capabilities. Turnaround Strategy Likely to be Effective: The company's strategy to improve profitability in France is based on stabilising revenue declines while reducing costs. Revenue stabilisation will be achieved by investing in content, improving the segmentation, positioning and value of its product offers, expanding wholesale distribution and upselling higher value content packages. In addition, Vivendi aims to reduce costs by a run rate of EUR300 million by 2018 through a cost-efficiency programme. Vivendi achieved EUR100 million of the savings in 2016. This leaves a further 4 percentage points of divisional EBITA margin that the programme could release over the next two years. FCF Growth, Some Risks: We believe Vivendi has the scope to expand pre-dividend FCF margins to 5% to 6% from 3.5% in 2016 (excluding Havas). The expansion will drive FCF growth. This reflects a combination of cost-reduction measures, consolidation of newly acquired businesses, growth in international pay-TV and music streaming offsetting increases in cash tax, ongoing restructuring costs and pressures in France. The principal risks to this growth include higher than expected subscriber churn, lower pay-TV ARPUs and an escalation of content costs at Canal+ in France. Opportunistic Strategy, Low visibility: We believe Vivendi's inorganic expansion strategy and approach has a strong opportunistic element that is opaque and makes it difficult to judge the long-term operational profile of the group. In conjunction with the significant influence of one of its major shareholder Vincent Bollore and related-party transactions like Havas, the lack of visibility adds risk to the credit profile of the company. However, given the size and quality of Vivendi's assets, these factors are considered consistent with a 'BBB' rating. Transponder Costs, Revised Rating Guidelines: Fitch has not traditionally included satellite transponder lease costs in Vivendi's lease adjusted debt calculations, but will now do so to apply greater consistency across our portfolio of media companies where appropriate. The impact of the inclusion is to add around 0.5x of incremental lease adjusted leverage and our upgrade/downgrade sensitivities have therefore been widened to take account of this more conservative approach. The downgrade guidelines for FFO adjusted net leverage have been revised to a range of 2.5x to 3.0x from 2.0x to 2.5x previously. DERIVATION SUMMARY Vivendi's ratings imply an average operating risk profile compared to its global media and entertainment sector peers. This reflects the strong competitive position of the company's global music and French pay-TV and content creation business, broad geographic revenue generation and a revenue mix with both subscription- and advertising-based exposure. The company's exposure to secular shifts in alternative distribution platforms and ongoing audience fragmentation remains, but is improving as music-streaming platforms help monetise content, alleviating risks from physical sales declines and piracy. The lack of convergent product offers in France and content price inflation are continuing risk factors within the company's domestic operations. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer (excluding Havas) include: - revenue growth of 4% in 2017 slowing to 2% to 3% per year thereafter; - UMG revenues to grow around 4%-5% a year between 2017and 2020; - EBITDA margins of 11% in 2017, expanding to 13% by end 2020; - stable capital intensity with a capex-to-sales ratio of 2% per year; - dividends distribution of EUR0.5bn in 2017 growing by 8% in 2018; - lease adjusted debt around EUR1.5 billion at end-2016 based on a blended lease multiple of 6.4x, reflecting a 5x multiple relating to satellite transponder expenses and 8x multiple for other operating lease expenses; - a cash charge assumption of EUR100 million in 2017 based on litigation provisions made by the company. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Positive rating action is unlikely in the medium term unless management pursues a more conservative financial policy and there is greater visibility in Vivendi's long-term asset portfolio. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - FFO adjusted net leverage higher than 2.5x-3.0x (including satellite transponder costs). A strategy tilted towards less predictable or advertising-driven businesses is likely to result in a leverage threshold at the lower end of the range. The successful acquisition of Havas would change this to 2.8x. - Pressure on free cash flow driven by significant underperformance in Vivendi's continuing operations. LIQUIDITY Healthy Liquidity: At end-1Q17 Vivendi had a strong liquidity position with a net cash position of EUR0.5 billion and a EUR2bn RCF. Contact: Principal Analyst Alexander Cherepovitsyn, CFA Analyst +44 20 3530 1755 Supervisory Analyst Tajesh Tailor Senior Director +44 20 3530 1726 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Damien Chew, CFA Senior Director +44 20 3530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. 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