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Vivendi's Staying Power


To skeptics, it sounded as airy as a French souffle. When Paris-based Vivendi took over Seagram Co. last summer, Chief Executive Jean-Marie Messier said he would lead the new Vivendi Universal (V) into the promised land of digital convergence. His plan: take a rich brew of film, music, and publishing content, blend in distribution outlets such as European pay-television company Canal+, top it off with a dollop of technology--from Web-enabled cell phones to interactive TV sets--and poof!

Yeah poof. Since the merger announcement, Vivendi has repeatedly delayed a full-scale rollout of its mobile Internet portal Vizzavi, while pushing back the launch of next-generation digital TV from this spring until 2002. Not surprisingly, investor anxiety mounted over Messier's staying power in the vaporous world of media and net convergence.

BEEFY. But take a closer look: Overall, Vivendi Universal is looking surprisingly beefy these days. Revenues from its media and communications businesses jumped 10% in the first quarter, to $5.2 billion, and cash flow is expected to rise 35% this year, as Messier trims costs and squeezes at least $200 million in synergies from the merger. "Despite the global economic slowdown, we are ahead of our targets," he says.

Far from retrenching, Messier is still hunting for acquisitions. Recently, he plunked down $400 million to buy MP3 and a fistful of other online music sites. Now, he's weighing a $1.7 billion offer for U.S. textbook publisher Houghton Mifflin Co. (HTN) Investors aren't complaining: Vivendi Universal is outperforming many media and telecommunications stocks--and lots of analysts think it's still undervalued by at least 20%.

What's the secret? Good old-fashioned cash flow. Even if its snazzy digital ventures lose money for the next two or three years, as they almost certainly will, Vivendi looks set to ride comfortably on profits from more traditional businesses. With its extensive holdings in movie production, book and software publishing, and subscription-based pay TV, Vivendi gets fewer than 5% of revenues from advertising. As a result, the company is weathering the global downturn better than advertising-dependent media companies such as Britain's Pearson PLC (PSO). That means Messier can keep spending to build his digital capabilities at a time when Internet properties are available at fire-sale prices. Vivendi also has a separately listed utilities business, Vivendi Environment, that pumps out steady cash flow.

HEAVYWEIGHT. Against that backdrop, an acquisition such as Houghton Mifflin makes a lot of sense. Textbook publishing is hardly sexy, but a wave of education reforms has made it a growth industry in the U.S., with sales of elementary and secondary instruction materials jumping 23% since 1998, to $4.35 billion this year. Houghton Mifflin, which posted profits of $55.8 million on sales of $1.03 billion last year, would be a nice geographic complement to Vivendi's publishing unit, which is a European heavyweight but does little business elsewhere. And Messier thinks the publishing business is ripe for the introduction of digital technology to boost margins. For example, Vivendi recently launched education.com, a site that offers tips on learning and steers users to Vivendi products such as games marketed under the "Knowlege Adventure" label. "We already have 170 million people a year buying our educational software, who like our brand and our content," he says. "Now we are going to leverage that."

Could the whole concoction fall flat? Certainly a prolonged downturn would hurt. So would a couple of box-office bombs from Universal Studios Inc., which lately has been churning out hits such as The Mummy Returns. But Vivendi has started to cross-market products, such as an interactive game pegged to Universal's summer release of Jurassic Park III. And Messier is pushing for even more cost-cutting. "He has proved himself to be a very good, pragmatic manager," says analyst Neil Blackley of Merrill Lynch & Co.

Even if Vivendi's bottom line isn't hurting, the next few months will be a crucial test of Messier's digital vision. Duet, the subscription-based online music service he's building with Sony Corp. (SNE), is set for launch in July, against tough competition from the MusicNet service being developed by AOL Time Warner (AOL), EMI (EMIPY), and Bertelsmann. With a new generation of Web-enabled mobile phone handsets coming on the market in June, Vivendi is finally gearing up Vizzavi, the mobile Net portal in which it's investing $1.2 billion jointly with cell-phone giant Vodafone Group PLC (VOD). Messier predicts 2 million subscribers will be on board by late summer and 4 million by yearend. The question is whether Vizzavi can entice them to pay for extra services such as online game playing and customized stock-market information.

It's a big job, even for the indefatigable Messier. But he's still cooking up new ideas. How about, for example, letting people pay to use the digitized voices of their favorite Universal Music Group artist to record customized voicemail messages? "Hi, this is Bono from U2. My friend Joe isn't here right now, but...." It's too early to say whether Vivendi will continue to serve the kind of meaty results that investors like. But Messier looks set to stay in the kitchen.

Corrections and Clarifications

The table accompanying "Vivendi's staying power" (European Business, June 11) listed cash flow, in millions, for Vivendi Universal properties. The cash flow figure for Vivendi's music business should have been listed as $1,070 (millions), or $1.07 billion.

By Carol Matlack in Paris, with Diane Brady in New York


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