Mind the gap

Vodafone/SFR: Vodafone has the upper hand against Vivendi. The UK telco is selling the French conglomerate its 44 per cent stake in mobile operator SFR for ¤7.75 billion ($11 billion). Chief executive Vittorio Colao has extracted a hefty premium to sector trading multiples, even though the French group was the only buyer. The deal underscores how much better Colao is doing than his Vivendi counterpart, Jean-Bernard Levy, in the race to restructure these two unwieldy giants.

Vivendi says the purchase price equates to 6.2 times 2010 Ebitda based on its own accounting techniques, whereas Vodafone puts the price at 6.7 times. Either way, it's a decent premium given that European telcos trade at 5.1 times or 5.3 times historic Ebitda, according to Bernstein Research. In effect, Vivendi is paying a 17 to 31 per cent premium to take full control of France’s second-largest mobile operator. And Vodafone also gets an early 200 million euros SFR dividend too.

But Levy needed a deal. The transaction gives him the option to expand SFR abroad as well as offer triple-play services with Vivendi’s existing French pay-TV operation. The deal also makes the conglomerate more of a telco, with a greater proportion of revenues coming from sources more stable than computer games or music. But that doesn’t make the deal any less expensive, especially given the likely increase in competition next year following the entrance of a fourth mobile operator into France.

The muted investor reaction reflects longstanding expectations of a deal. But the recent relative performance of Vodafone and Vivendi suggests Colao is winning the bigger contest to close his firm’s discount to the sum of its parts. Since Levy struck a deal to sell Vivendi's 20 per cent stake in NBC Universal at the end of 2009, the French conglomerate's shares have barely moved. Vodafone shares are up 30 per cent over the same period, having tied up strategic loose ends in China, Japan and now France and pledged to return cash to shareholders.

Even if Vivendi cleans up its TV and computer games businesses, which are less than 100 percent owned, it would remain a conglomerate. Colao's biggest remaining challenge is to extract revenues from its U.S. mobile joint venture which hasn't been paying dividends. But with the omens favourable for a solution this year, Colao's race is on the home straight.