Vivendi Goes For Hell Or High Water

Business wires are reporting that Vivendi’s euro 1.63 billion (US$2.07 billion) deal to buy BMG Music Publishing is based on the “Hell Or High Water” approach, so called because the buyer bears the financial burden if the monopolies authorities object.

If the European Commission has a problem with the deal – it’s already facing opposition from the independent music companies – the German media giant gets paid its money just the same.

The French company knows the risks involved. It employed a similar strategy to BMG when it was a seller needing to see a quick cash return on assets.

During the Vivendi fire sale of 2002, a time when the company was said to be close to collapsing under a US$20 billion mountain of debt, it hived off its publishing interests, including the best-selling dictionaries put out by Larousse and Le Robert, for a reported euro 1.25 billion.

Lagardere, the purchaser, took all the risks on regulatory approval and the deal was done and Vivendi was paid within a couple of months.

Lagardere was making big money out of its aerospace business and producing cars for Renault, but what concerned the regulators was that it would give the company too much of the French publishing market. It has a huge stable of magazines including Elle and Car & Driver.

The EC approved the Vivendi purchase, but only subject to Lagardere disposing of the equivalent of half of its new assets. Waiting for the ruling – and then selling off the requisite assets – took Lagardere a little more than two years.

Some newspaper reports suggest the European regulators aren’t happy with this acquisition technique. It’s based on the principle that the risk of owning an asset falls on the buyer, leaving the vendor as custodian of a business that it’s already sold.

Vivendi appears to have hedged some of its bets by operating BMG Music Publishing as an entirely separate business to its own music publishing interests, thereby greatly cutting the cost of unraveling the two businesses should the EC rule against the deal.

The EC is also said to be concerned about the number of companies using this “Hell Or High Water” strategy. Cable operator Liberty Global is using it to buy Czech company Karneval for US$416 million, with JPMorgan and Deutsche Bank overseeing the deal.

Denver-based Liberty Global, Europe’s largest supplier of cable services, already owns the Czech Republic’s top cable provider, so there was regulatory risk inherent in buying the country’s number two.

However, the strategy is more common in the media sector because there are often extra layers of regulatory clearance needed due to heightened concerns about concentration.

– John Gammon