Bloomberg News

Vivendi Credit Ratings Under Threat Unless It Cuts Debt

June 27, 2012

Vivendi SA (VIV)’s debt ratings may be threatened unless the French media and telecommunications company shows it can reduce its liabilities, two ratings services said, adding pressure on Chief Executive Officer Jean- Bernard Levy to come up with a plan beyond cutting costs.

Fitch Ratings, confirming its BBB rating -- the second- lowest investment grade -- and a stable outlook, said today the rating “would come under pressure” if there was no clear expectation of the Paris-based company’s ratio of adjusted net debt to earnings staying below 2.5 times in the “medium” term. The ratio was 2.3 times at the end of March. Moody’s Investors Service warned of ratings pressure yesterday.

Shareholders want Levy, more than seven years at the helm, to come up with a strategy to revive a stock that is trading near its lowest level in nine years. Vivendi failed to shed light on its plan after a meeting of top executives last weekend. Levy, 57, told a private gathering of investors in London yesterday he would focus on cutting costs at the French wireless unit SFR, people with knowledge of the matter said.

“Vivendi’s rating would come under pressure if there is no sign of deleveraging in 2013,” Fitch said today.

Since April, analysts at Fitch, Standard & Poor’s and Moody’s have written notes about Vivendi’s limited debt headroom, citing the Universal Music Group division’s acquisition of parts of EMI Group and pressure on earnings at SFR because of increased competition in the French phone market.

London Meeting

Fitch’s report today also cited potential legal damages related to a $956 million verdict this week in a U.S. lawsuit over Vivendi’s 2001 purchase from Liberty Media Corp. (LMCA:US) of a stake in USA Networks Inc. Moody’s also cited the ruling, saying it “adds to rating pressure at a time when the company’s debt level is high and it grapples with a number of operating challenges.” Vivendi said it would appeal the ruling.

The company’s net debt increased to about 12.5 billion euros ($15.6 billion) by the end of March, nearing the level reached a decade ago when former CEO Jean-Marie Messier’s acquisition binge left the company close to bankruptcy. Still, Vivendi’s earnings have also risen, suggesting its ability to service debt is better than back then.

CEO Levy, who had been scheduled to meet with investors yesterday and give a speech at a media conference organized by JPMorgan Chase & Co. (JPM:US) in London, spoke instead via videoconference from a remote location, according to people with knowledge of the meeting, who asked not to be identified because the event wasn’t public. Levy confirmed Vivendi’s full-year forecasts and reiterated his commitment to the BBB rating by Standard & Poor’s, said a person who attended the gathering.

Universal-EMI Deal

The cost of insuring Vivendi bonds using credit-default swaps increased as much as 4 basis points, or 2 percent, to 203 basis points today, according to Bloomberg prices. Since the beginning of the year, that cost has risen about 14 percent. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Vivendi fell 0.5 percent to 13.36 euros at 2:03 p.m. in Paris. At 17.2 billion euros, Vivendi’s market capitalization compares with almost 40 billion euros in total value of its various businesses, not counting net debt, according to April estimates by Morgan Stanley analysts. The investment bank values SFR alone at 12.9 billion euros, and Brazilian phone unit GVT at 5.2 billion euros.

‘When Appropriate’

Vivendi also owns Universal Music, a phone company in Morocco and a stake in Activision Blizzard Inc. (ATVI:US)

European regulators have a Sept. 6 deadline to rule on a bid by Universal Music to acquire EMI’s recorded-music business, which they have said would create a company “almost twice the size of the next largest player” in Europe. Universal may not be sufficiently constrained by smaller competitors, customers’ buying power or illegal music downloads, the EU said when it opened an in-depth probe in March.

Levy is poised to detail plans to SFR unions next week about how he will cut operating expenses by about 350 million euros in 2013, on top of the 450 million euros budgeted for this year, people with knowledge of the matter said.

Jean-Louis Erneux, a spokesman for Paris-based Vivendi, declined to comment, as did Patrick Burton, a spokesman for JPMorgan in London.

Shareholders had expected details of Vivendi’s strategy after the annual gathering of top executives last weekend. Vivendi said June 25 it would communicate its plans “as and when appropriate.”

Telecom Lessons

As SFR fights back competition from Iliad SA (ILD), the discounter that began selling wireless packages in January, the Vivendi unit is looking for ways to stop customers from leaving. Levy said last month that “strategic vision” for the division will come from Michel Combes, the Vodafone Group Plc (VOD) executive who will lead SFR starting on Aug. 1.

Levy has also been working on plans to reduce costs at SFR, although disagreements with the phone unit’s executives on how to go about reducing spending have slowed the process, people with knowledge of the matter said.

French companies must inform labor unions about plans to reorganize, including staff moves or job cuts, which often lead to protracted negotiations between management and employees.

Firings in the telecommunications industry have proved especially complicated. France Telecom SA (FTE), SFR’s main competitor and the country’s biggest phone operator, was rocked two years ago by a streak of employee suicides which unions blamed on stress caused by a reorganization aimed at making the company more competitive.

To contact the reporter on this story: Marie Mawad in Paris at mmawad1@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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