Vivendi’s Debt Sparks Sell-Off

If Monday’s ouster of flamboyant Chairman and Chief Executive Jean-Marie Messier was meant to calm the turmoil at Vivendi Universal, it didn’t work.

Bond downgrades by rating firms Moody’s Investors Service and Standard & Poor’s Corp. sparked near-panic selling in Paris, where Vivendi shares plunged 25% Tuesday to a 15-year low--the lowest since the October 1987 market crash. The S&P; report indicated Vivendi’s financial obligations this year could be $3 billion higher than many analysts had expected.

Suddenly, investors were less concerned about the media conglomerate’s fuzzy strategic focus and management woes than its ability to survive a severe cash crunch.

Vivendi’s new management now must negotiate at a disadvantage with the big European banks that control the company’s future and with potential buyers of properties that may need to be sold more quickly than originally planned, analysts said.

After a two-year buying spree, Vivendi Universal has amassed a debt of $30 billion, about half of it in media and communications.

Some of the company’s signature properties could go on the block, analysts said, including Universal Studios, Universal Music, French pay-TV unit Canal Plus and French wireless-phone company Cegetel.

The company has scheduled a board meeting in Paris today, during which directors are expected to address the liquidity crisis and the appointment of Messier’s successor. The top candidate is said to be Jean-Rene Fourtou, 63, vice chairman of the French-German drug firm Aventis.

But there are more immediate problems. While Moody’s dropped Vivendi’s credit rating to junk-bond status, S&P; sliced it to one notch above junk, with the explicit warning that the rating “would be lowered several notches” if the company does not secure “significant refinancing within the next few weeks.”

S&P; said Vivendi might have to come up with $6 billion to cover financial obligations this year.

That’s nearly double what the market was expecting, said Mark Harrington, an influential investor with J.P. Morgan & Co. in London, who added that he was concerned about the company’s ability to meet its short-term cash needs in the wake of the ratings downgrades.

The discrepancy was due mostly to various contingency payments that analysts had not factored into their calculations, including stock put options for company employees, he said. Under such options, the company agrees to buy back shares from the employees when they fall below a certain price.

“The market was taking the view that Vivendi would find a way to postpone these payments,” Harrington said. “There was little clarity on when these puts would be exercised.”

The downgrades caused concern among analysts that Vivendi’s lenders would cut off day-to-day financing.

Vivendi said last month it had 3.3 billion euros in credit available to cover its cash needs. That has since fallen to just 2.3 billion euros, according to a source familiar with the matter. The company drew down 500 million euros to pay off a loan related to its publishing business and pulled another 500 million euros in anticipation that lenders may not be willing to negotiate a new standby line of credit.

“There is an increased risk of a liquidation or bankruptcy scenario,” the source said.

Shares of French bank BNP Paribas, one of Vivendi’s leading creditors, posted their biggest drop in 3 1/2 years Tuesday over concerns that Vivendi may not be able to repay money owed to French banks.

The ratings downgrades “will increase their costs of borrowing and it will increase the urgency to dispose of things,” said Dennis Leibowitz, a money manager with Act II Partners in New York City and an investor in the company.

However, Leibowitz does not think the company is facing an imminent crisis. “They have plenty of marketable properties” to cover their obligations, Leibowitz said.

Vivendi spokeswoman Anita Larsen said the company had no response to the credit agency reports and added that Vivendi stood by a previous statement that it has enough credit to meet its cash obligations for the year. She said Vivendi had renegotiated covenants with lenders so any credit rating drops would not trigger accelerated loan repayments.

Part of the stampede out of Vivendi shares in the Paris stock market stemmed from a story in the French newspaper Le Monde that implied the company had used an accounting trick to boost earnings. Le Monde said Vivendi may have sought to increase profits improperly by adding income from its stake in Rupert Murdoch’s British Sky Broadcasting, or BskyB.

Vivendi quickly denied that, however, saying that the accounting treatment had passed muster with the U.S. Securities and Exchange Commission.

The market carnage was less severe in New York, where Vivendi sank $4.69, or 21%, on NYSE, to $17.76.

For all the punishment Vivendi is taking on Wall Street, the company’s underlying operating results have been fairly solid.The company did record the largest loss in French corporate history last year, reflecting steep losses in the value of its acquisitions.

That aside, Vivendi Universal posted healthy results last year, mostly on the strength of Universal Studios, which had record box office results, and Universal Music Group, the world’s largest music company. The company’s European telecom business also helped the bottom line.

The outlook for this year, however, is more uncertain.

Vivendi’s telecom business has also slowed and Universal Studios has a thinner slate of movies this year and isn’t likely to repeat its success of a year ago.

The biggest drains on Vivendi’s bottom line have been the company’s pay-TV arm, Canal Plus, which has struggled because of the rising costs of sports programming and the now-worthless European Internet portal Vizzavi, a joint venture with Vodafone.

Significantly, both businesses were cornerstones of Messier’s failed strategy to marry American media content--Universal movies, music and games--with European distribution.

Times staff writer Chuck Philips also contributed to this report.