Deutsche sees buying opportunity in Vivendi

By Ronda Fears

Nashville, Tenn., July 9 - The equity and debt markets' divergent views on Vivendi Universal have created an excellent opportunity in the company's exchangeable bonds, said Deutsche Bank Securities Inc. European convertible analysts.

Vivendi has a 1% exchangeable due 2003 that converts into BSkyB and a 2% exchangeable due 2006 that converts into Vivendi Environment.

"The current spread on Vivendi bonds is suggesting that bankruptcy is highly probable," said Deutsche analysts Michael O'Connor, Frank Kennedy and Clodagh Muldoon in a report Tuesday.

"Short-term (one-year) bonds are yielding over 18%. The debt markets remain focused on the risk that default occurs and this has caused some forced selling of bonds. However the assets of the company suggest that bondholders should be repaid, if necessary through the default process."

In the face of what's going on the credit markets, the analysts noted that Vivendi's equity capitalization remains higher than the total nominal value of the debt.

"Despite the company's recent troubles, a market capitalization in excess of €19 billion suggests that bankruptcy is an unlikely event. This divergence of valuation between equity and debt markets is unsustainable in the longer term," the analysts said.

"There is a clear imbalance between the debt and equity markets. Equity investors who have not lost faith with the company should take advantage of the high yields (more than 18% for one year) offered by Vivendi's exchangeable bonds. Indeed we believe the balance of risk reward offered by these bonds provides an excellent opportunity for any accounts that wish to play the Vivendi restructuring story."

Liquidity is the key problem, the analysts said, not Vivendi's assets.

"The current problems at Vivendi predominantly stem from a severe shortage of liquidity created by a ludicrously short debt maturity profile. A distinct tightening in the wider corporate credit markets has exacerbated this, pushing the company perilously close to default," the analysts said.

"While debate rages about the total value of Vivendi's assets, their overall quality remains intact. Indeed S&P in its recent credit review stated that Vivendi's portfolio of businesses retains investment grade characteristics despite the company's deteriorating liquidity situation."

The analysts said Vivendi's new management will need to immediately focus on restoring value to debtholders, and "only through this can value be restored for shareholders. In short we believe that there will have to be a swing in strategy in favor of bondholders."

The imbalance between the debt and equity markets has created opportunity, the analysts said.

Vivendi's BSkyB exchangeable, a €1.44 billion issue, matures in close to one year and currently yields over 18.25%. The Vivendi Environment exchangeable, a €1.8 billion issue, is putable in March 2003 and yields 18.29% to the put.

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