OREANDA-NEWS. Fitch Ratings has affirmed Paris-based Vivendi SA.'s (Vivendi) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. The Outlook on the IDR is Stable.

Vivendi's ratings are supported by the company's well-positioned media assets and incorporate our view that the group will increase its net leverage over the short- to medium-term through investments and shareholder remuneration, reversing a 3Q15 net cash position of EUR8.0bn.

To maintain its existing ratings, Vivendi would need to maintain funds from operations (FFO) adjusted net leverage of below 2.0x to 2.5x. The exact level would be influenced by the profile of Vivendi's future investments and financial structure. A strategy tilted towards less predictable or advertising-driven businesses is likely to result in a leverage threshold at the lower end of the range.

KEY RATING DRIVERS

Well-positioned Media Assets
Vivendi's two core media assets are strongly positioned within their respective segments of the media sector. Fitch expects the assets to generate fairly stable cashflow, with underlying pre-dividend free cash flow (FCF) margins of around 6%-7% and scope to further improve through cost optimisation and efficiencies.

Universal Music Group (UMG) is currently the industry leader in recorded music with a market share of over 30% and operates one of the leading global music publishing groups. The Canal+ Group, benefits from fairly stable subscription-based revenue streams from operating a leading Pay-TV platform in France while also benefitting from growth opportunities in Africa and Vietnam.

New, Slightly Higher-risk Profile
Following the sale of Vivendi's telecoms assets and interests in Activision Blizzard, all of the cash flows from operations are driven by the company's two media assets. This compares with 28% in 2012. The sale of assets leaves the group with a more media-centric profile and a narrower business focus that is potentially more exposed to secular shifts and cyclicality. These can be both positive and negative for the group. The shift to digital content in the music market may help to grow UMG's revenues and margins while the evolution of over-the-top (OTT) operators such as Netflix could weaken demand for pay-TV operators.

Maintaining Financial Flexibility
At end-3Q15 Vivendi had a net cash position of EUR8.0. In addition, the company has a EUR2bn RCF, giving the company sufficient capacity to cover all outstanding debt. Vivendi is taking a measured approach to shareholder remuneration and is maintaining financial flexibility for potential new investment opportunities. To date, the company has announced dividend distributions of EUR6.8bn between 2015 and 2017. The company may in addition implement a share repurchase programme of up to EUR2.7bn, depending on whether global stock market development would lead to a share price of EUR20 or lower.

Seeking Investment Opportunities
Vivendi's aim is to grow and strengthen its core media and content portfolio and is likely to use M&A for this purpose. Potential areas of expansion include the production of exclusive content and the acceleration of the global distribution of content. Vivendi's recent acquisition of Dailymotion from Orange SA (BBB/Stable) is a case in example.

There is also a strong opportunistic element to Vivendi's strategy, in our opinion, which is rooted in acquiring assets at appropriate valuations. Vivendi's 20% investment in Telecom Italia (BBB-/Negative) and 0.95% stake in Telefonica (BBB+/Stable) are opportunistic in our opinion, based on value creation and potential in the medium- to long-term to use the relationships and investments for content distribution. To this end, Vivendi's current management have historically had a good track record in other businesses they have managed.

We estimate that in addition to the dividend distributions already announced, Vivendi has headroom of between EUR3.5bn and EUR4bn within its current 'BBB' rating (excluding any litigation provisions and incremental EBITDA or dividends from new investments) while maintaining a normative dividend of around EUR1 per share in 2018. This would take Vivendi's FFO adjusted net leverage to between 2.0x and 2.5x.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Broadly stable revenues for Canal+, reflecting potentially some weakness in France offset by growth in international markets.
- UMG revenues to grow 8% YoY in 2015, slowing to 2% to 3% per year thereafter.
- EBITDA margins of 13.4% to 14% per year.
- Stable capital intensity with a capex-to-sales ratio of 2% to 3% per year.
- Dividends in line with company's announcement of EUR6.8bn between 2015 and 2017 and around EUR1 per share thereafter.
- Share buy backs of EUR2.7bn split equally over 2016 and 2017 (although we acknowledge this may not occur in the event of Vivendi's share price remaining above EUR20).
- A conservative cash charge assumption of EUR100m in 2015 and EUR945m in 2016 respectively, based on litigation provisions made by the company. No sale of minority investments e.g. 6% stake Activision Blizzard is assumed to offset this amount, as the company has made no decision on this.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- FFO adjusted net leverage higher than 2.0x-2.5x. A strategy tilted towards less predictable or advertising-driven businesses is likely to result in a leverage threshold at the lower end of the range.
- Pressure on free cash flow driven by significant underperformance in Vivendi's continuing operations.

Positive rating action is unlikely in the medium-term unless management pursues a more conservative financial policy.