American investors: Vivendi Universal wants you. (CFO Interview).

Paris-headquartered Vivendi Universal SA has grown tremendously in recent years from its historic base in the water business. It's now a huge media concern -- and claims to be the only truly global media company. In April, it began reporting in U.S. generally accepted accounting principles (GAAP) as well as French GAAP, hoping to gain recognition and additional U.S. shareholders. (Vivendi Universal and an environmental unit are both listed on the New York Stock Exchange as American Depositary Receipts, or ADRs.)

Financial Executive spoke with Guillaume Hannezo, Vivendi's 41-year old senior executive vice president and chief financial officer, about the company's strategies and its accounting practices.

Let's begin with an overview of what's been happening at Vivendi Universal over the last three years relating to direction and strategy.

GH To shorten the story of this company, stemming from the original Vivendi, it's quite simple: It used to be a utility company that developed quite a good knowledge and understanding of privatization and deregulation around the world. Benefiting from the telecom deregulation and the opening of the French telecom market to competition in the middle of the 1990s, it created a telecom operation, which at some point, was worth more than the original utility business.

At this point, there were choices made to [move] into the media business. There were three possible directions we could have taken: One would have been to dispose of the telecommunication and communication business; the second, to consolidate in telecom. And [third] the strategy that Chairman and CEO (since 1996) Jean-Marie Messier chose, out of his own vision, was anticipating the so-called convergence between content and access.

[Thus] we moved from having internally developed, out of nothing, this huge telecom operation in France, into restructuring an old media conglomerate, which was called Havas, and combining the synergies of the two companies that we merged with in 2000, Canal Plus and Seagram Co.

Today, we are making the final decisions to move this business to a pure play on communications. Once complete, this company has quite interesting characteristics. Like AOL Time Warner Inc., it's primarily a content company, trying to integrate content with some access businesses -- with pay-TV and mobile telephony, what we believe are the two most promising access businesses for the media business.

Second, among the media conglomerates, Vivendi Universal is probably the most global; with businesses and managers in locations around the globe, we have built something that is well-spread between Europeans and Americans. This is not a European company that has grown a U.S. operation, [nor] a U.S. company with overseas operations. It's probably the first to be truly global, which, in our content businesses -- cultural in some manner -- is a key advantage for the future.

Is being a truly global company what made you decide to change your accounting and reporting to conform to U.S. GAAP? Talk about the decision, and about some of the issues that you are dealing with now.

GH Yes, we are listed on the New York Stock Exchange (NYSE), and we are making a reconciliation of French GAAP P&L and U.S. GAAP P&L, so, basically, all the equivalencies and all the bridges have been built. Our U.S. shareholders will get Vivendi Universal first-quarter 2002 information in exactly the same send-out on recycled paper that they are used to.

Why we decided to do it is extremely simple: It is a big advantage to be truly global, [and] you cannot be a global company without accessing what is basically the biggest financial market in the world (the U.S.). This is critical for us.

I'm reading in newspapers about some of the issues that you're dealing with. It's now June; what do you expect will happen, as far as the attention your company is getting?

GH I think people will come to realize that we have been extremely unlucky in that we have moved to U.S. GAAP at the very moment when U.S. GAAP is being questioned -- in the post-Enron Corp. era. So, in this situation, a company that happens to be complex -- because it has moved fast, because of its corporate structure or because it's reporting in two different accounting standards -- looks suspicious. I think that the more we explain -- and we have done a great deal of this in our full-year accounting -- the more people will come to realize that, yes, we are more complex, because we report in two different standards.

I'll give one example [that is] very much in the middle of today's debate. We have only two U.S. QSPEs, qualified special purpose entities, which are fully disclosed and which are designed to optimize taxes and to optimize the cash proceeds of the disposals of two assets -- one for old real estate operations, which are being progressively disposed of, and the other for BSkyB (British Sky Broadcasting). What is very interesting is that when you look at French and U.S. accounting standards, it happens that one of them, the one concerning real estate, is off balance sheet in French GAAP but is on balance sheet in U.S. GAAP. And the other, the one concerning BSkyB, complies with U.S. standards for deconsolidation, but is on balance sheet in French GAAP.

We are reporting more than anyone else, because just having the lights set from two different perspectives makes it impossible to hide anything. I think we will probably bore people to death with this accounting thing; we will explain and explain and explain; and it will be extremely complex, [but also] extremely transparent. Some people may be uncomfortable with this complexity; some of that is just because, in translating one accounting standard to another, it's forcing some analysts and investors to ask questions they would never ask if they did not have the opportunity to look at the reality with two different lights.

In view of reporting in both French GAAP and U.S. GAAP, what is your take on the International Accounting Standards (IAS)? Are you in favor of moving to one global standard, and do you think it likely?

GH It might happen. We are prepared for anything. We are probably the only company translating European GAAP to American GAAP in as many businesses in the last three years: environment, construction, real estate, publishing, music, films, telecom, Internet. So we have some experience translating accounting standards.

I think that after what we've done, we can even take a third one, if required. It will not change the view the investor will have -- at least in a normal environment it doesn't change, if you disclose everything you are doing, and, most importantly, if you do what you are doing for cash reasons and not for accounting reasons, because this is the real management rule that we have to follow. There is no decision that can be taken under an accounting basis. Any decision has to be taken on a cash basis; and accounting is second. If you implement this philosophy, it is easy to report what you are doing to the investors in whatever language you are being asked to report.

Will you focus now on your media and entertainment businesses? How are the current economic conditions globally affecting overall performance? And, tell us about your marketplace: your biggest obstacles, opportunities, regulatory issues, share price compared with your industry.

GH It's a large question. If I begin with, not the share price -- which is the most disappointing thing we have to report -- but on the rest, the operation itself, we have not been hurt a lot by the economic slowdown. The reason [is] we are not exposed to advertising, as revenues [come] basically from subscription businesses -- which are highly resilient -- and the sale of books, movie tickets, TV, etc. So we are basically half-and-half subscription-driven (in our paid-TV businesses and telecom businesses), and just selling entertainment products, which are a little bit less resilient than subscriptions, but much more resilient than advertising to an economic slowdown.

Our advertising exposure -- advertising as a proportion of our turnover -- used to be one percent; with the absorption of USA Entertainment, it's jumped to 3.5 percent of our revenue. But, seen from the point of view of Vivendi Universal, the big question mark on the economic uncertainty is not how fast advertising will recover.

The business models in our industry are moving to more complex combinations between sales of products, subscriptions and advertising. The way we see the advertising market moving -- toward more fragmentation of audiences and more targeted advertising -- is, for us, more an opportunity than a threat.

Obviously, some areas of our businesses are affected by economic conditions, and/or by technology. This is mostly music. In music, we are increasing our market share in a very soft market -- this being more due to piracy than to economic conditions. And on pay-television in France, we are suffering more from the cost side -- like most European tech media operators -- from the fact that some movies and sports rights had been renewed in 1999-2000, at the top of the bubble, and this is probably the segment of the economy for which it will take an additional two years to rebound back to normal.

All in all, there is a simple conclusion on our resilience: we are the only media company that has not issued a profit warning in 2001. Our guidance, which was set in October 2000, was revenues up by 10 percent; they were up by 9.9 percent. We said EBITDA (earnings, before interest, taxes, depreciation and amortization) would be up by about 35 percent in October 2000; actually it was up 34 percent over 2000 pro forma and 37.5 percent over our initial 2000 guidance. The last element of our gain was an operating free cash flow, between 1.2 billion euros and 1.5 billion euros, and we have actually published an operating-free cash flow (EBITDA less capital spending and working capital) of 2 billion euros.

These figures are even more improved in Q1 02, where we've improved our operational free cash flows over the [previous] quarter. [This] proves that if the EBITDA target is met, the free cash flow generation is even better than the EBITDA, and that the free cash flow improvement is higher than the EBITDA improvement; [that is] generally considered as a sign that the EBITDA improvement is sound and results from real operating performance.

As we are the only media company to not have issued a profit warning in 2001, and we are improving our cash flows and increasing our market share in all of our businesses, there must be something not too rotten in this company.

Finally, as the CFO of this major global conglomerate, will you "get personal" and discuss, first, having to uproot your family and move to the U.S., and then on the business side, discuss your role in the top finance spot.

GH This is a very interesting experience on both a personal and professional basis. On the personal side, moving to the U.S. for the few years' time it takes for this integration to be totally completed, I enjoy very much, and my family enjoys, because it is a great experience.

Where it helps in the job is if you want to become global in some manner, you cannot be in newspapers, television, movies, music, books -- or try to understand this business in different countries -- without at some point of your life having been in a position to read the [local] newspaper, watch TV and to pay your bills. This is true, by the way, for Americans as well, and there are a lot of American financiers at Vivendi Universal who have expatriated to Paris.

On what I do here, what's great is that for the first time, we are not going to focus on deals because we are not going to make any acquisitions this year. We will stabilize the perimeter of this company for a couple of years now. So, for the first time I will not get absorbed into making deals, and I will have the ability to be more and more absorbed into management, budget and a deep understanding of the economy, investment, internal growth, internal investment projects. The usual CFO, instead of doing budgets, wants to do M&A. I am exactly the opposite, and happy to be so.

RELATED ARTICLE: VIVENDI UNIVERSAL

A multi-cultural, multi-content, multi-access company of five business areas with major properties consisting of:

Music. Universal Music Group (UMG) with labels such as: Decca, MCA, Motown and a talent roster including Andrea Bocelli, Elton John, Bon Jovi, Diana Krall, Shania Twain.

Publishing. Vivendi Universal Publishing with top French brands: Robert Laffont, Pion-Perrin, Les Presses-Solar-Belfond and Pocket, and Houghton Mifflin in the U.S.; reference and educational software.

TV & Film. Universal Studios Group and Canal+ with global brands in production and distribution: StudioCanal, Universal Pictures, USA Networks; Universal Studios Recreation Group with theme parks worldwide.

Telecommunications. Groupe Cegetel operates Cegetel (fixed) and SFR (mobile) in France; others in Egypt, Hungary, Kenya, Monaco, Spain.

Internet. Vivendi Universal Net includes these brands: Vizzavi, MP3.com, Allocine, i(france), Education.com, Flipside.

Environmental Services. Vivendi Environment includes Generale des Eaux, USFilter and Culligan (water); Onyx (waste management); Dalkia (energy); Connex (transportation).