On March 1, Vivendi reported 2009 results in line with the group’s expectations. Vivendi revenues were up 6.9% at €27.1 billion and its EBITDA up by 8.8% YoY at €5.3 billion. Although most activities but Universal witnessed revenue growth, the EBITDA growth was another story; Activision and Maroc Telecom (MT) were the only units to report an increase. Moreover, MT’s share of the group EBITDA was resilient in 2009 despite a challenging economic environment. These results confirm and reinforce Vivendi’s emerging market investment strategy.  Some takeaways:

Maroc Telecom from mere subsidiary to crown jewel

- MT reported revenues up by 3% YoY on a comparable basis and a 1.6% increase in EBITDA. By contrast, Vivendi’s other major telco operation, SFR, reported a 7.5% growth in revenues but a disappointing 0.5% decrease in EBITDA. MT’s share of group EBITDA dropped by 4 percentage points in 2009 to 23% while SFR’s contribution dropped from 57% to 46%. MT’s contribution to group revenue remained stable at around 12%. Most importantly, MT remains Vivendi’s most profitable telecom operation with EBITDA margins at 46% while SFR barely reached the 20%.   

- Vivendi expects Maroc Telecom to be a driver of growth in 2010 thanks in part to African subsidiaries.  In 2009, 57% of group mobile subscribers net additions were acquired across MT’s African operations, up from 50% in 2008.

Outlining African Investment Criteria

- Vivendi has invested nearly €550 million in acquisition across sub-Saharan Africa over the past three years. The group’s four African operations (Gabon, Burkina Faso, Mauritanie and Mali) generated an EBITDA of €83 million in 2009, up 186% from 2008. This performance has likely whetted the company’s appetite for more African acquisitions, as evidenced by a flirtation with Zain’s African assets last year, but in a context of rising African asset prices. In 2006, the median African mobile operator valuation was around 6.3x EBITDA according to our Mobile Profitability report. Two years later, that median had reached around 9x EBITDA. Bharti valued Zain at around 8x EBITDA in February 2010.

In its annual results statement, Vivendi’s board laid out key guidelines for further investments in emerging markets:  

• “Seize external growth opportunities with a focus on fast-growing regions / businesses, assessed under a selective, rigorous and financially disciplined process
• Focus on media and telecom subscription-based business models
• Profitable assets with strong growth prospects
• ROCE to exceed local risk adjusted WACC within 3 to 5 years
• EPS accretive in the short term”

Last month, the government of Mali (GOM) officially rejected the latest financial offer for the country’s state-owned telco, Sotelma. Early this year, Maroc Telecom (MT) was selected as the winning bidder for a 51% stake in Sotelma, with a EUR 252m (USD 330m) bid. Negotiations have since plodded along, offering a glimpse into the challenges of reconciling divergent perceptions of African carrier value, all the more so in a context in which valuations have cratered.

What MT offered: MT offered EUR 252m for the 51% stake, more than half what had been proposed by the next bidder, Sudan’s Sudatel. Sotelma is an intriguing operation; by African state-owned telco standards, it is relatively well managed. Its revenue is as high as that of Telkom Kenya despite its operating in a market that is three times smaller. The company’s mobile business has some solid upside, with a mobile penetration at 30% and only one major competitor; by contrast, the upside of the fixed business is fairly marginal.

What the GOM wants: the GOM is said to seek closer to EUR 350m; MT has proposed to sweeten its offer by an additional EUR 30m, in exchange for tax breaks and the GOM taking over Sotelma’s debt, but the government has balked at the idea. The GOM would also require the winning bidder to stick to its proposed business plan for the company, a requirement that would compel some investment in a fixed business that carries virtually non-existent intrinsic value.

There is no telling where this standoff will go. For the GOM to meet its objectives, the winning bidder would need to ignore current (depressed) market valuations and price the operation more in line with the standards of the 2006-2008 period.  The MT bid already does that, by valuing Sotelma at 4.6x revenue, and more than 10x EBITDA, a substantial premium over current market valuations.

For indicative purposes, Sonatel (a gold standard of sorts for West African telcos) currently carries an enterprise value of 2.4x 2008 revenue and about 4x EBITDA; Burkina Faso’s Onatel (an operation not that dissimilar to Sotelma) is valued at similar revenue multiples and at about 5x-6x EBITDA, more in line with the privatizations of Telkom Kenya, Ghana telecom (on which Vodafone has just taken an impairment charge of $375m, 40% of what it paid), and Onatel’s own privatization two years ago. By contrast, the GOM is valuing the operation at twice those levels. That is a risky bet to make. For the bet to work, the GOM needs somebody to overbid wildly; in the current context, however, we are skeptical there is a better offer elsewhere. In our view, the GOM should take the money (with no tax breaks) and run.