Vivendi is in media's sweet spot
The once-ungainly French conglomerate is well-positioned for a world where people get their entertainment from the Internet and cell phones.
NEW YORK (Fortune) -- If you wanted to start a big media company from scratch today, knowing that people increasingly are going to get their entertainment and information from the Internet and their cell phones, you probably might avoid owning a magazine publishing business. (Sorry, Time Warner, parent of Fortune and CNNMoney.com).
You also might pass on holding broadcast networks. (Apologies to CBS, NBC Universal and Disney and News Corp.) But perhaps, knowing that consumers love to download tunes and buy mobile ringtones, you might want a piece of the music business. Video games seem to be hot properties online and for cell phones, too.
And just to make sure you understand these new distribution mediums, you might want to hold ownership stakes in wireless and broadband service providers.
Okay, okay. So Vivendi didn't exactly "build" itself into a music-and-games new media concern. Rather, former CEO Jean-Rene Fourtou dismantled the unwieldy conglomerate created during the media-and-Internet boom years by his predecessor, Jean-Marie Messier.
What remained after Fourtou sold off publishing, theme parks and Universal studios were music, games and pay-television producer Canal Plus. Those just happen to be assets that translate well to the mobile and broadband world. (Vivendi also holds ownership stakes in No. 2 French mobile operator SFR, and Neuf Cegetel, a broadband provider in France.)
This strategy (or happy accident, depending on your point of view) appears to be paying off. On Thursday Vivendi reported a 5 percent increase in second quarter revenue - ahead of some analysts' estimates - on strong sales in its television and games divisions.
The stock is trading at about $33 a share, up 10 percent for the year. Vivendi shares have outperformed a number of U.S. media companies, including Time Warner (Charts), CBS (Charts) and Viacom (Charts).
Now under the leadership of Jean-Bernard Levy, who became CEO and chairman of the company's management board in April 2005, Vivendi seems poised to deliver 15 percent earnings growth over the next several years thanks to its position in fast-growing sectors such as games.
"Vivendi offers earnings momentum... a 4.3 percent dividend yield and a reasonable valuation" of nearly 12 times 2007 earnings, Merrill Lynch analyst Julien Roch said in a recent report. "In our view, this is why investors should buy the stock."
Over breakfast in New York recently, Levy sounded more like the former banking and telecom executive he is than burgeoning media mogul. Over toast and tea, he spent must of the time talking about his priorities for Vivendi's cash, and they sound a lot like Lessons Learned from the Bursting of the Media Bubble.
The first priority, he said, is for Vivendi to generate enough cash to organically expand its businesses. Next, pay shareholders dividends, and finally, only after the first two goals are met, make acquisitions.
Levy also eschewed the once-hyped notion of synergies among Vivendi's business units. "Nothing pleases me more than to hear that SFR and Canal Plus worked together on Internet television without any intervention from headquarters," said Levy. "The only intervention I need to do is perhaps to lobby certain ideas with regulators."
Of course, other media executives are distancing themselves from synergy talk these days. You'll hear similar talk of not forcing collaboration from Time Warner executives, for example.
So what is Vivendi's edge, if it isn't some secret sauce that comes from housing music, games and TV under one roof? Levy contends that Vivendi really knows consumers - their tastes, their buying habits, the way they use their gadgets and TVs - and that knowledge puts the company in a position to make money on trends.
"Almost all our revenue comes from fees paid by subscribers," he says. "We understand consumer trends and what the consumer is willing to pay for." Translation: Vivendi gets pop culture. Sounds like there's the soul of a media mogul inside Levy after all.