A French Billionaire's Dream of Empire

(Bloomberg Gadfly) -- Next time Vincent Bollore, Vivendi's chairman and biggest shareholder, has a spare moment he should go see Werner Herzog's documentary about the Internet and its effect on modern life. The movie is a 98-minute piece of "branded content", funded by a software company.

Branded content would probably be at the heart of a potential tie-up between Vivendi and Havas, the Bollore-owned ad agency. A filing last month from Bollore Group disclosed the intention in the next six months to study “with Vivendi the synergies or links possible between their respective businesses in media and communications.”

As I've written before, it's hard to love a potential deal that seems to have much to do with Bollore's family legacy planning. His son Yannick is already CEO of Havas and on the Vivendi board.

But even if you ignored governance concerns about a deal where Bollore would effectively be buyer and seller, sticking an ad agency with 18,500 employees into a company that earns half its revenue from pay-TV and half from music isn't exactly an established model. We don't yet know what sweeteners Bollore might offer minority shareholders, but we can sure see the risks:

The strategic rationale is unproven:

Vivendi plus Havas would create a company unlike any other. It would add a third, largely unrelated, business to Vivendi's French pay-TV provider Canal Plus and Universal Music Group. Bollore would probably argue that Havas's expertise in creating commercials, advising brands, and data analytics would let Vivendi wring more value from its content. For example, Havas clients like Carrefour and Coca-Cola could be pitched campaigns using Universal's pop songs or Canal's movie and TV characters. Canal's studios could make branded content. It's not clear why the companies need to merge to deliver this, though. Couldn't it just be done via partnerships?

Few cost savings:

Vivendi would have to fall back on promises of a combined company selling more services and products. Such “revenue synergies” are unpopular with investors and often discounted in valuation analyses, prompting some acquirers to not detail them when they announce mergers (AT&T didn't bother with Time Warner.) Branded content, where Bollore sees most potential, is fashionable but unproven. Researcher PQ Media estimates the market for branded content was $26.5 billion in 2014 and will be worth $54.3 billion in 2020.

Conflicts of interest:

Havas earns about one-third of its 2.2 billion euros ($2.4 billion) of revenue by buying advertising space on TV, print, radio and online on behalf of clients. Media buyers are meant to plot out the best places to reach potential customers. If Havas was part of Vivendi, advertisers might wonder whether it was favoring its own channels. This would be acute in France, where Havas gets 18 percent of its revenue and Canal Plus owns TV channels.

Conglomerate discount:

The chief excitement about Bollore's arrival at Vivendi was that he'd rid the group of its conglomerate discount. For years the company was punished by investors, who lopped 10-15 percent from the sum of the parts value of its three telecoms units and three content businesses.

At first, Bollore tidied things up by disposing of four units. But his recent stake-building in Telecom Italia and purchase of games-maker Gameloft has given some analysts pause for thought. One told me he'd cut the discount to 5 percent after Bollore sold its telecoms businesses but had now lifted it again to 10 percent. Add Havas to the mix, with its unproven synergies, and that might increase yet again. Its 3.3 billion euro enterprise value could be wiped out post a Vivendi merger if a heavy discount was applied.

Given all of this, it's hard to dispel the notion that a merger will be based on Bollore's personal interest and desire to rationalize his media holdings. Like much in Vivendi's long, tumultuous history, the supposed rationale gets tacked on afterwards. Welcome to Brand Bollore.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Leila Abboud in Paris at labboud@bloomberg.net.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.