Vivendi to sell Activision? Description of other subsidiaries.

http://www.ign.com/articles/2012/06/08/vivendi-to-sell-activision

A little bit of nice timing here coming off my post yesterday.  Anyways I have been hearing these rumors for a month or so now and am just waiting for their meeting on June 22nd to see what they have decided or not decided to do.

Activision Blizzard (ATVI) description- Worlds biggest video game company, and in my opinion has the best overall portfolio of games in the entire industry.  Call of Duty, Skylanders, Diablo, Starcraft, World of Warcraft, among others are included in the portfolio. This is the asset that I think would make the most sense to sell or spin off.

Call of Duty produces over $1 billion of revenues by itself with every game they produce, which comes out once a year usually in November.

However most of these franchises have either just come out with games or are past their prime in my opinion. World of Warcraft while still a cash cow is gushing subscription members every month, and Blizzard has already started to move resources into their next MMORPG which has no release date. Diablo III just came out so won’t expect another game in that series for a while. Call of Duty while still producing huge revenues and profits is at its peak to me and can only go down from here. The development studio who makes the Call of Duty series has been fighting with and losing a lot of team members over the last several years which will also hurt quality in the future.

I also see the entire console video game industry in a decline as well.  You can only keep asking people to pay more for less, for so long before they decide to stop buying games and consoles, especially with cheaper games coming out either free to play or for under $10 on tablets and phones.

The next generation of gaming systems is going to start coming out later in 2012 which is also another reason they should sell before that happens due to the higher costs and lower profitability that comes from every new console generation.

In my opinion now would be the perfect time to sell ATVI, will likely never be able to get a higher price than they would now due to the above. The only problem would be finding someone big enough to buy them.

GVT description-Fixed phone and internet Brazilian telecom who Vivendi recently bought.  Has great growth potential but will cost a lot in the short term due to high amounts of cap ex in the telecom industry. Should be one of the better Vivendi holdings over the long term though as their margins are good.  My main concern with this one is that Vivendi over payed for it so it will take longer to recoup that investment, and being in Brazil you never know what company might be expropriated by  the goverments in South America.

Maroc Telecom description-Mobile/internet/fixed phone company with most of their business in Morocco.  Same problem with cap ex as GVT above especially since they are going to be transitioning into 3G coverage from 2G, also could eventually pay off due to more data plan subscriptions from the smartphones that run 3G.  Maroc has also been having problems with the government in Morocco as they have been having to cut rates thus losing out on revenues and lowering margins.

Canal+ description- Pay TV/cinema company with operations mainly in France. Another asset I could see them spinning off or selling. Owns 80% of Canal+ France which they have been trying to buy out completely to no avail which could lead them to sell their portion of it. Does own the rights to show Ligue 1 soccer matches and UEFA Champions League matches in France which is a major advantage.

Universal Music Group description-Biggest owner of music and music publishing rights in the world. Produces the lowest EBITDA and CFFO margin of the entire group.  Also doesn’t seem to fit the profile of the rest of the subsidiaries which might lead this to being sold.  However owns the rights to music from the likes of: Rihanna, Lady Gaga, Justin Bieber, Eminem, Taylor Swift and various other major music artists.  The music industry could also see a comeback to higher profitability with things like ITunes, Pandora, and Spotify though if they can figure out how to monetize their publishing rights properly.

SFR description- Mobile/fixed phone/internet company with operations mostly in France. Vivendi’s biggest revenue generator currently and probably most important to the groups success in the future.  Currently facing some headwinds in France with having to cut rates which is lowering margins. They are facing new, tougher, and cheaper competition in their market which is also currently lowering margins and causing a loss of subscribers.  Also losing some business due to the difficulties of the European economy and the loss of discretionary income by some individuals.  Recently bought out the remaining 44% of SFR from Vodafone which in my opinion they overpaid for, but should pay off in the future. Will hopefully return to profitability in the near future.

My valuations of Vivendi

I have used two different valuation techniques for Vivendi (VIVHY) Here we go.

Asset reproduction valuation done on 4-2-2012.  All #’s in millions of Euros unless otherwise noted.  Using 2011 10-k.

These valuations are done by me, using my estimates, and is not a recommendation for you to buy the stock. DO YOUR OWN HOMEWORK.

Assets:                                                   Book Value:                                  Reproduction Value:
Current assets
Cash                                                        3,304                                              3,304
Marketable Securities                              1,544                                              1,544
Accounts Receivable (net)                      6,730                                              4,500
Inventories                                               805                                                   500
Prepaid Expenses                                     0                                                       0
Deferred Taxes – tax liability                    700                                                  400
Total current assets                               13,083                                             10,248

PP&E Net                                                 9,001                                              6,000
Goodwill                                                  25,029                                            12,514.5
Intangible Assets                                     6,814                                                3,407
Total Assets                                            53,927                                            32,169.5

Number of shares 1,242
With IA: 53,927/1,242=43.42 Euros per share = $57.40 per share
Without IA: 47,113/1,242=37.93 Euros per share = $50.14 per share

Reproduction value:
With IA 32,169.5/1,242= 24.90 Euros per share = $34.24 per share
Without IA 28,762.5/1,242= 23.16 Euros per share = $30.62 per share

Current share price on 4-21-2012 = $16.50 per share

Sum of the parts valuations done on 4-26-2012 #s in millions of Euros unless otherwise noted.

44% of SFR bought in 2011 for 77,750 million Euros. Implied value of total stake since Vivendi now owns 100% of SFR = 17,360 Euros

60% of Activision (ATVI) =6,587 Euros

100% of SFR + 60% of ATVI =23,947 m Euros = $31,629 million

Vivendi has a total market cap currently of $23.46 billion

So you are getting most of the 60% of ATVI, all of GVT, all of Canal+, all of UMG, 53% of Maroc Telecom, which equals 5.41 billion Euros, all cash and debt for free, by just purchasing part of ATVI and all of SFR.
GVT, Canal+, UMG, and Maroc Telecom are the rest of their subsidiaries.

Valuing the whole of Vivendi, cash, and debt using above estimates, I am estimating very conservatively 40 Billion Euros = $53.832 billion of total value for Vivendi.

$53.832 billion/number of shares at full dilution of 1.250 billion= $43.07 per share

Current share price = $18.60 per share

This valuation would be used if they were to do a spin off or selling some of their assets and companies.

The reproduction valuation is generally the most conservative intrinsic value estimate and the one I use the most since I am very conservative and want the biggest margin of safety as possible.

Some other things I like about Vivendi besides the massive margin of safety are they pay a healthy yearly dividend. They have consistent free cash flow of at least 3 billion Euros per year after cap ex. Good margins. Cash and cash equivalents of over 3 billion Euros. Net operating loss carry forwards of around 8 billion Euros. Seth Klarman owns shares of Vivendi at his hedge fund Baupost Group, and has been buying more recently, actually got lucky and got in at a cheaper price than Klarman. Also the management of Vivendi is reviewing what they could do to unlock the value that is missing right now, by their own estimates at least 40%, could be spin offs or sale of some of their subsidiaries.

Risks: A lot of debt and continual huge amounts of cap ex in their telecom subsidiaries. European debt issues; most of their business is done in Europe, specifically France. If they decide not to do a spin off or asset sale it could take a while to unlock value, which would not bother me since it would enable me to acquire more shares.

Would like them to eventually do some kind of spin off or asset sale to pay down their debt which should also increase the share price. Would not even mind if they cancelled the dividend for a year or two to pay down debt either.

Feel free to give feedback.

Portfolio structure

Before I get to my valuation of Vivendi and the reasons I decided to buy it I want to go over how I am structuring my portfolio now.

I have structured my portfolio into two different categories: Long term value holds which I intend to hold for years and hopefully decades. The second category is special situations which as of right now I am mainly learning about spin offs, but eventually hope to include some bankrupt/distressed debt, right offerings, etc and plan to hold for 6 months to 3 years.

Current portfolio list from previous post and my plans for them:

Stocks that I bought without doing valuation or as much research as I am doing now:

Intel (INTC) Long term value hold. This was where I started to do what I am doing now.

Philip Morris (PM) Long term value hold. One of my highest conviction picks along with Intel and Vivendi in the long term section.

Altria (MO) Long term value hold, like the potential of the smokeless tobacco segment and their stake in SAB Miller.  I am worried about their high amount of debt though.

Kinder Morgan Management (KMR) Likely long term value hold.  Bought before their merger with El Paso.  Worried about the debt.  Most likely going to keep position at least for a while to see how the new merged entity plays out.

Main Street Capital (MAIN) Long term hold with high monthly dividend.

Vodafone (VOD) Long term value hold.  Wish I would have done the valuation on this and waited till it was a bit cheaper but like the dividend that it is the biggest phone company in the world. Most important non core asset is they own 45% of Verizon.

Universal Insurance Holding (UVE) not sure what to do with this one yet. Greatly under valued, by my estimate has $6.40 net cash per share with full dilution of options, and I get a minimum value of $9.85 per share, current price is $3.68 per share.  Normally that would lead me to buy more shares but now that I have done more research on the company a few things worry me. First obviously is Florida and the hurricanes that hit there every year.  Second and most importantly I had a couple questions for their IR department which were pretty straight forward and easy questions to answer and they wouldn’t answer them for me, which bothered me more than the hurricanes. So conflicted on this one.

Got kind of lucky with most of the above in that I bought them when they were selling cheaper than what they should be selling at. Now for the not so lucky portion with the old way of what I was doing.

Taseko Mines (TGB) holding for now and waiting until November to see if their Prosperity mine is approved, if it is I am going to likely sell, hopefully at a small profit, will reassess at that time if I am going to hold or not.  Bought way overpriced, but like future potential in the mines they own and aren’t operating yet.

Have already weeded out other previous overpriced and bad stocks that I would have never bought with the valuation and research I am doing now, again at a total loss of around $600. Live and you learn.

Now onto the two companies with my new philosophy of doing things and what my new philosophy is.

Undervalued by at least 50% for long term holds, at least 25% undervalued for special situations. Some kind of catalyst involved or catalyst that I can predict might happen Examples: Big time value/activist investor involved, strategic review, spin off, etc. Insiders are buying or already own a big chunk of the company. Some kind of sustainable competitive advantage for the long term holds, bonus for the special situations. Will continue to add to this list above. Low debt and a lot of cash.  Investment does not have to reach all of the criteria above but the more the better.

Dole (DOLE) Spin off potential and grossly undervalued by my estimate.  Company is under strategic review right now deciding on whether they want to sell assets or do a spinoff or spinoffs to get their debt under control. Will give my valuation, reasons for buying into them, and risks in future post.

Vivendi (VIVHY) Long term hold, possible spinoff situation as well.  My next post will be my valuations of Vivendi, reasons for buying, and risks.

Current Portfolio

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Here is an overview of my current portfolio: Dividends are reinvested on all stocks that have dividends except KMR, was told KMR does not allow partial shares to be reinvested by my broker.

Portion bought before doing any valuations and less research than I am doing now. Lessons to be learned.

Giant Interactive (GA) 34 shares originally acquired 20 shares in November 2010.  Will get back to later

Intel Corp (INTC) 15 shares bought originally at a cost basis of $19.72

Kinder Morgan Management (KMR) bought 5 shares at a cost basis of $62.50

Main Street Capital (MAIN) bought 15 shares originally at a cost basis of $18.73

Altria (MO) bought 11 shares originally at $26.91

Philip Morris (PM) bought 5 shares originally at $69

Taseko Mines (TGB) have 70 shares total now at a cost basis of $4.77, ouch, will get back to later

Universal Insurance Holdings (UVE) have 49 total shares now at a cost basis of $4.85

Vodafone (VOD) bought 11 shares originally at $26.21

Stocks after valuation and now doing a lot more research

Vivendi (VIVHY) 32 shares at $18.35

Dole (DOLE) 58 shares at $8.74 owned in retirement portfolios that I manage for others.

Also own Vivendi 62 shares at $16.19 in retirement portfolios that I manage for others.

I wish I would have been doing valuations and the amount of research I am doing now from the beginning of my investing journey, I would have saved myself a lot of money, around $600.  Would have stopped me from buying a lot of overvalued companies and bad companies.  Most of the money I lost was when I first started and about half of my portfolio was in Chinese small caps ouch again, which brings us back to GA.

I just sold my entire position of 34 shares in GA, the other 14 shares were from a special dividend paid and a regular dividend paid.  I did some valuations of GA yesterday and got a reproduction value of $1.45 per share.  If it was selling at 5X EBIT and 10X EBIT I got prices of $3.88 and $7.77 per share respectively.  I try to be very conservative in my valuations so I get the biggest margin of safety, and hopefully a bigger return later on.  I usually won’t buy now unless there is a 50% or greater margin of safety.

Not good since my cost basis even after the special dividends was around $6 per share for GA, remember I bought GA before I started doing valuations or the amount of research I am doing now.  So even if it was selling at 10X EBIT it would not have met my criteria now of the 50% margin of safety.

Taseko Mines is kind of in the same realm my cost basis now is $4.77 per share at 70 shares, bought all shares before doing any valuations, now I get a reproduction value of $3.70 per share.  So not only will I most likely lose money on this stock no matter what happens, even if the Prosperity mine that would be a gold and copper mine if it is approved, gets approved I still would only make a minimal amount of money due to my high cost basis and lack of margin of safety.

The lesson here is to get decent at some valuation techniques buy at a margin of safety and hold and reinvest the dividends if they have dividends.

Oh and don’t have half of your portfolio in Chinese small caps as a beginning investor when you aren’t doing valuations or in depth research.

My next post will be going over my detailed valuations of Vivendi and Dole, my reasonings for buying them, how long I plan to hold them, and which part of the portfolio both with be in.

Hello world!

Hello everyone, or hello to myself if no one is here and I am talking to myself.  Anyways this blog is going to mostly be about value and special situations investing, I will be posting every security I buy, why I bought it and how I valued it.  Discussion is encouraged and critique is welcomed.  I am relatively new to investing so any comments on how I could do something better would be amazing.

When I say mostly I may occassionally wander off into other various topics some including, Austrian economics, sports, video games, politics, current events, etc, pretty much anything that is either bothering me or I have some thought on.

The entire reason I am doing this is because I want a log of my buy and sell decisions so that I can look back at them and learn from the good and bad decisions that I have made.  If people find this blog useful/helpful the more the merrier. I have found that most people learn more efficiently when we can bounce ideas off on each other, especially since I have only been learning about investing for about 3.5 years now and only dedicating myself to it since February of 2012.

I do owe a debt of gratitude to csinvesting.wordpress.com and oldschoolvalue.com.  I have learned more from those two websites and the links, information, books, video lectures, discussion on those sites than all of the books I have read combined and I am still doing catching up especially on csinvesting.  Thank you to John Chew and Jae Jun.

Alright let us begin this journey and hopefully we can all learn from each other,

Jason Rivera