@Red

Thank you very much for the discussion. I want this site to become a place of discussion and critique. I learn faster that way and I think most people learn better that way as well. I want to learn as much as possible as fast as possible so I make my mistakes now when I am managing a relatively small amount of money, instead of making the mistakes after I go to work for someone or open up my own investment firm. Thanks again for helping that process.

I hope my explanations made sense to you.

Thanks for the company heads up as well and I will definintly look into them. I saw that they recently deregistered with the SEC which may be an opportunity. Will look into them after I get my next article written up.

I see. Thanks for the explanation.

Let me suggest a stock that I think you would enjoy looking at (in line with some of the other one’s that you’ve concentrated on) and that you might also find undervalued: Brazil Fast Food, trading in the pink sheets under the ticker BOBS.

Thanks for the discussion and for your blog, too.

@Red

The scenario at $17 seems entirely plausible to me if A) You think that Vivendi is only worth its reproduction value without goodwill and IA, and/or B) You think that its operations are not valuable, and/or C) You do not think that Vivendi will be able to sell or spin off any of its subsidiaries and continue to be encumbered by its debt load, thus having its debt rating lowered.

It looks like we may just have differing opinions on Vivendi’s assets and operations.

As always let me know where I may be wrong.

To your other question about upside. I will take 30% over one or two years in this artificially inflated economy. I have been reading your blog for ideas to steal as well : )

I have always only thought of Vivendi as a one or two year spin off or asset sale opportunity. I agree that as a long term hold potentially for years, decades , or forever, it is probably not that great of a bet. In the short term I like my odds of making that 30% over a year or two as I am already up 15% in my personal account, and 20% in accounts I manage with Vivendi on almost no news.

So, reorganizing a little:

1. You think that the intrinsic value of Vivendi is ~$37 per share
2. It owes $18 in straight debt, $2 in capitalized operating leases, $0.32 in unfunded pension obligations. Against that, it has $4.32 in cash & near equivalents.
2. So equity is worth 37 – 18 – 2 – 0.32 + 4.32 = $21.

That’s a 31% upside, if (a) you’re right about the earning power of Vivendi’s businesses, which I think you are, and (b) if management’s hurry to sell various businesses isn’t so great that buyers take advantage and offer less than fair value.

Got it.

I guess what has puzzled me a little abut the various write-ups that I have seen on Vivendi s that the best case upside seems so small. 30% upsides to intrinsic value are a dime a dozen in the current market and so many of them are less complicated and less risky than Vivendi seems to be.

The market — and this is a big company that attracts the attentions of big investors — seems to think that Vivendi will sell its various units but will do so at below fair value prices. If it sells them at a 10% discount, EV is $33 and the equity is worth $17. That certainly seems plausible to me. Why doesn’t it seem plausible to you?

@ Red

Thanks for your questions.

I agree with you that technically I am probably not doing things correctly as it pertains to Vivendi’s EV in this case, normally I would have included debt as well. However, let me state my case for doing it the way I did in my most recent write up on them.

Vivendi has stated multiple times that it is going to sell or spin off one or multiple of its subsidiaries so that it can: 1. Unlock the value of its shares, as management thinks that its shares are undervalued by as much as 40% currently. 2. And to lower its debt load to a more sustainable level. Another reason it has said it wants to lower its debt levels is because debt rating agencies have told Vivendi management that if it does not lower its debt load that the rating agencies will lower its debt rating, if I remember right to just above junk level.

Vivendi has made it seem that it will sell or spin one or multiple of its subsidiaries at almost any reasonable price to pay off debt and to prevent the lowering of its debt rating, even dismissing its former CEO who wanted to keep the company whole and not sell or spin off any of its subsidiaries.

Vivendi has received multiple bids on GVT already and hopes to complete a transaction in Q1 of fiscal 2013. The company has been fielding offers on Maroc telecom as well but to this point seems less concrete than the GVT offers.

To me there are multiple reasons and catalysts why Vivendi will consummate some kind of deal to lower its debt level, which is why I chose not to include debt in my calculations and is why I just concentrated on what the individual businesses may be able to be sold for, and what Vivendi could be worth if and when it pays down debt.

For the sake of argument, Vivendi currently has $18.12 per share in short and long term debt. Subtracting that from my original conservative estimate of price without UMG, $37.14 per share gets us to $19.02 per share for the equity. Adding back cash and short term investments to it’s per share value gets us to $23.35 per share, or about correctly valued currently, again still not including UMG. Even accounting for debt, the company is still 30% undervalued at my original buy price around $16.50 per share, and about 25% undervalued to my current total cost basis around $17.50 per share.

I still think that Vivendi will be worth somewhere between $30-$37.14 after it pays down some of its debt after it sells or spins of subsidiary(s), again not including UMG so it could be worth a bit more.

Please let me know if this makes any more sense or if I may have done anything wrong in my calculations.

Thanks again Red.

Hmm, Jason, not sure if this answer makes sense to me.

Vivendi’s worth is its enterprise value, i.e. the value of the various business + the value of its debt obligations – cash.

You are saying, in your various articles & posts on this company, that
1. the current market price of Vivendi’s stock inadequately reflects Vivendi’s enterprise value; and
2. that this value will be better revealed when Vivendi sells off some businesses.

Intrinsic value is always best understood in terms of enterprise value. Equity is just the residual after net debt, minority interests and the like.

Analogy: you own a newly developed 10-unit condo complex with a $10 million mortgage. You think that the market inadequately appreciates the value of the condo complex. You think it’s worth $30 million, but you can’t seem to find an investor who’ll buy it from you for above $15 million. So you sell 4 units to consumers at $3 million each. EV is now shown to be $3 million x 10 = $30 million, just like you said.

The last paragraph is especially puzzling to me: what is value if not the price that others (private buyers, esp) would pay?

Thanks for you comments.

The reason I left the cash and debt out of this valuation was because the main reason Vivendi wants to sell or spin off some of these assets is to lower its debt load. I cannot speculate into the future how much debt and cash will stay with Vivendi or even if it will be able to sell or spin off any of these assets so I wanted to stay out of the realm of speculation and only on conservative estimates of value of its subsidiaries.