Nothing spooks a Vivendi SA investor quite like a deal announcement.
The Paris company famously teetered on the brink of collapse at the start of the decade, when its then head, Jean-Marie Messier, opportunistically and expensively snared television, music, telecommunications and video-game assets.
Management has long since changed, but investors were evidently reminded of the bad old days on Sept. 9, when Vivendi said it had bid 5.4 billion Brazilian reais ($3 billion) for São Paulo phone company GVT Holding SA.
Shares in Vivendi dipped almost 4.6% in the two days right after the announcement, while the rest of the French market climbed a bit.
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The bid for GVT, a provider of broadband communications to 2.3 million Brazilians, has many of the hallmarks of a classic Vivendi misadventure. It is in a region where the company has no experience, is at odds with its previous strategy to expand into Africa, offers no significant synergies and is priced at a rich multiple.
"Vivendi is a company with a rather messy strategy," says a Paris fund manager who asked not to be named. "It wants to add growth. But buying a company, any company, in a growth market is not hugely impressive."
The impression that Vivendi has been on a fishing trip for any available deal has not been helped by its recent abortive attempt to buy the African operations of Kuwait's Mobile Telecommunications Co. KSC, or Zain Group. Vivendi pulled out of talks two months ago amid reports that the seller wanted $10 billion for the unit.
Zain would have complemented Vivendi's 53% stake in Maroc Télécom, which in turn owns assets in Gabon, Mauritius and Burkina Faso.
But at $10 billion, a purchase of Zain would have stretched Vivendi's finances and anyway looked overpriced for an African telecom at about 8 times Ebitda, according to Alexander Wisch, an analyst at Standard & Poor's Equity Research in London. "Zain was greedy," he says. "Vivendi was right to walk away."
The bid for GVT may not have been Vivendi's first choice, but it "meets a strategic objective for Vivendi to expand in fast-growing economies," CEO Jean-Bernard Levy said in a press release.
The Brazilian telecom could prove to be an affordable beachhead that will give Vivendi experience and a platform in South America on which it can build for years. The size of the bid for GVT means that it comes with several considerable advantages: It will not require financing and it does not threaten Vivendi's ability to pay its sizable dividend. In France, the company is often treated as a substitute savings account due to its hefty 8% yield. Any threat to that payout would be poorly received.
The transaction may be small, but it's not cheap. At a multiple of 8.5 times Ebitda, Vivendi's offer for GVT weighs in at a 57% premium to the South American telecom average multiple of 5.4 times Ebitda. "I think it is a bit expensive, but I like it," says Standard & Poor's Wisch. "GVT is a focused company, with no debt and good management, and Vivendi has to generate growth."
The bid will likely succeed. It boasts the support of the target's management and its two biggest shareholders, Swarth Group and Global Village Telecom (Holland) BV, which have agreed to tender a 20% stake, though they will also retain 10%, ensuring Vivendi's new investment comes with minority shareholders.
But there are potential pitfalls. The Brazilian company's shareholders must agree to waive their own rules, which demand that any offer come in 25% above the highest price recorded in the past 12 months or put it to an independent valuation.
Shares in GVT have crept above Vivendi's offer of R$42 in the belief that the French company may have to raise its bid to R$47.50 per share.
There is also the possibility of a counteroffer from Spain's Telefónica SA, the front-runner in the South American telecommunications market and a company that has regularly been linked with Brazil's GVT.
Even if Vivendi's bid for GVT succeeds, it could turn out to be a "so what" moment. The Brazilian phone company is too small to significantly boost the growth prospects of Vivendi's phone unit, which is dominated by its 56% stake in the sluggish SFR, France's No. 2 phone company.
If the bid fails, or if Vivendi's management makes a hash of integrating GVT, then the unfortunate ghosts of Vivendi past will seem suddenly present. That could haunt the company and its share price, should its future dealmaking forays prove more ambitious.
