Vodafone ambition puts Vivendi on the defensive

Two giant bids in media and telecoms, together worth more than $100 billion (€78.8 billion), have sent shock-waves through companies boasting assets in those sectors - not least Vivendi Universal.

Shares in the French media and communications group have risen 5.6 per cent during the week since US cable group Comcast unveiled a $60 billion stock offer for Walt Disney, and AT&T Wireless agreed a $41 billion cash bid from US-based Cingular.

For followers of Vivendi, the bid activity smacks of déjà vu. Four years ago two bids in telecoms and media forever changed the French company's destiny.

In October 1999, its hopes of becoming a top-tier telecoms group were foiled after Vodafone bid for Mannesmann. Within months, America Online's purchase of Time Warner convinced Jean-Marie Messier, then Vivendi chief executive, that the future of the diversified utility lay with media content and distribution.

Back then, Vivendi was a predator - buying assets that left it with US film studios, music labels, computer games, theme parks and €35 billion of debt. Four years later, another merger and acquisition frenzy may again have a decisive influence on Vivendi's future. But this time the predator could become the prey.

Mr Jean-René Fourtou, who replaced Mr Messier two years ago, has already re-organised the empire. That culminated with last year's deal to fold Vivendi's studio, cable TV and parks business into NBC, the broadcasting arm of General Electric.

At first glance, Comcast's bid for Disney has few ramifications for Vivendi. Mr Steve Liechti of Merrill Lynch doubts the Comcast-Disney deal will trigger copycat deals, but says: "European media companies are now probably under-leveraged and the potential upside from M&A is not included in current share prices."

But the US bid could underpin valuations for media assets - including the French group's 20 per cent stake in NBC Universal.

Vivendi could also benefit if NBC Universal - spurred by a renewed appetite for content and distribution - decided to bid for companies such as EchoStar, the US satellite pay-TV operator.

Such a move would leave Vivendi with a smaller but possibly more liquid stake in US media. It could then decide the future of its prime asset - a 55.8 per cent stake in SFR Cegetel, France's dominant mobile operator.

The remaining 43.9 per cent is held by Vodafone, the UK mobile phone group that lost the bid battle for AT&T Wireless.

To many investors, Vodafone's decision to withdraw its offer for AT&T Wireless has raised an obvious alternative target. It could use its free cashflow to buy control of SFR Cegetel. Alternatively, it could buy Vivendi Universal outright.

Vodafone has already had one tilt at buying the French network. Just over a year ago, it offered €6.77 billion for Vivendi's stake in Cegetel - the network's parent - which then stood at 44 per cent.

But Mr Fourtou frustrated that approach by increasing Vivendi's stake with a €4 billion buy-out of BT Group's 26 per cent holding.

Given rising telecoms valuations, it would cost Vodafone a lot more to acquire SFR Cegetel today.

Analysts at Crédit Lyonnais believe Vivendi's 56 per cent stake is worth about €14 billion.

Mr Fourtou, however, has told bankers he will not sell for less than €18 billion. "If the price is right, he would sell," according to one person close to the chairman. "It would leave him with a debt-free media holding company."

Such a deal would complete Vodafone's European footprint.

The difficulty is that Vivendi, while still sub-investment grade, is no longer facing the near-fatal liquidity crisis that almost forced it to sell its SFR holding in late 2002. Since then, Vivendi's debt has been cut to about €12 billion and will fall to €5 billion on completion of the NBC Universal deal and the final withdrawal from Veolia Environnement, the utility arm. Any bid from Vodafone would have to compensate Vivendi for the loss of both its largest asset and €2.2 billion in potential tax credits linked to SFR's earnings.

Nevertheless, the British group appears to covet a deal that would further dismember the French media and telecoms champion. The only question is when.

Yesterday Vodafone declined to comment. But officials said Mr Arun Sarin, chief executive, stood by his statement to the Financial Times last December. He said: "We have declared we are interested in France - we want to own 100 per cent of the SFR asset, which is very important for our European footprint. But we've not associated any time or price with it. Whenever they think the time is right, we're ready to sit down and discuss it."

The past week's events may mean the time and price could soon be right. - (Financial Times Service)