Umg, Vivendi Report Lower Mid-year Results

Universal Music Group (UMG) reported results for the first half of 2002 lower than the same period last year. Meanwhile, parent Vivendi Universal (VU) posted a huge loss on write-downs and provided an update on its restructuring efforts.

UMG had first-half operating income of 169 million euros ($166 million), down 28% from the same period last year. Excluding gains on the sale of a stake in MTV Asia to Viacom and the sale of real estate related to office moves, operating income fell 45%. A&R costs rose and margins shrunk, which analysts say was a result of discounting and a product mix featuring lower-margin soundtracks, such as O Brother, Where Art Thou? Revenue fell 4% to 2.87 billion euros ($2.82 billion).

Universal Music & Video Distribution continued to dominate U.S. market share: Through June 30, it accounted for 30.2% of current U.S. album sales, up from 27.8% in the same period last year, according to Nielsen SoundScan (Billboard, July 20).

In the second quarter, UMG had operating income of 142 million euros ($139 million), down 14% from last year; without the special gains, income fell 38%. Revenue fell 2% to 1.51 billion euros ($1.48 billion); excluding foreign-exchange fluctuations, sales rose 0.2%.

Overall, VU had a first-half net loss of 12.3 billion euros ($12.1 billion), or 11.32 euros ($11.10) per share, stemming from an expected goodwill-impairment charge of 11 billion euros ($10.8 billion). The charge, which reflects declines in the value of assets VU has acquired, includes 3.5 billion euros ($3.43 billion) related to music. In the first half of last year, VU had net income of 22 million euros ($21.6 million), or 0.02 euros ($0.02) per share. Thanks to acquisitions made within the past year, revenue rose 8% to 29.99 billion euros ($29.43 billion).

Despite its "extraordinarily strong international assets," chairman/CEO Jean-René Fourtou says VU has a "liquidity problem" because of how its 19 billion euros ($18.64 billion) of debt is structured. Fourtou says this will be eased by a 3 billion euro ($2.94 billion) credit facility that VU hopes to finalize by the end of this month.

Even so, rating agencies Standard & Poor's and Moody's Investors Service both cut their ratings on VU further, citing concerns about cash flow. VU now carries a below-investment grade, or "junk" rating, from both firms.

To improve its credit rating, VU will sell at least 10 billion euros ($9.8 billion) of assets during the next two years, beginning with "non-core" holdings and publisher Houghton Mifflin.

For now, analysts and media executives consider a sale of UMG unlikely, given its solid results and an apparent absence of able or willing buyers. A complete strategic plan will be finalized at VU's Sept. 25 board meeting.