Rivals wait to pick up the pieces of Messier's crumbling Vivendi empire

With £12bn debt Vivendi may need to sell some of its finest US and French media assets

Media tycoons on both sides of the Atlantic were yesterday licking their lips as the break-up of the Vivendi Universal empire looked increasingly likely.

Some of the choicest media assets in the US and France could now be put onto the market in an emergency disposal programme. Vivendi's debt levels are unmanageable and the whole strategy on which this integrated media giant was built has unravelled.

Under Jean-Marie Messier, the company was transformed from a dull but steady water and sewage business to a mighty media empire, second only to AOL Time Warner in size. A frenzied debt-financed acquisition spree at the height of the technology and media boom created this sprawling media conglomerate. But buying at the top of the market on a flawed vision of media convergence has left the company in an unsustainable position.

A firesale may now be necessary to extricate Vivendi from this hole. If that sounds undesirable, said one banker, it is, but there are real fires to put out.

Standard & Poor's yesterday estimated that Vivendi Universal's adjusted net debt stands at ¤19bn (£12bn). Its debt and contingent-liabilities repayment due by the end of this year are a massive ¤6.0bn and a further ¤2.8bn falls due in the first half of 2003.

Christopher Legge, at S&P, said: "Some of the ¤6bn [due] is covered but some refinancing is necessary through new bank facilities or whatever ... For a company like this, to have nearly a third of its debt due in the next few months is not what we would consider investment grade."

The final humiliation came yesterday when Moody's, another ratings agency, downgraded Vivendi's debt to junk status and the veracity of Vivendi's reported accounts were separately called into question. S&P retains an investment grade rating on the company, for now, judging that it will be able to fix the mess. Nicholas Bell, an analyst at Bear Stearns, said: "Some kind of restructuring is inevitable. The banks are now in the driving seat."

Mr Messier's concept was based on an amalgamation of content and distribution, with fixed-line and mobile phones and pay-TV distribution added to content interests in music, publishing and films. The promised convergence of media never came to pass. Consumers are not downloading music onto their mobile phones.

Worse though in the eyes of investors, Vivendi also held onto a majority stake in the old water business, a decision that made sense in the context of French political sensitivities (the government did not want this business to fall into foreign hands) but baffled the media industry.

That lack of coherence of the various media assets and the incongruity of the retained water is what makes a break-up now seem all the more likely.

Benedict Evans, an analyst at WestLB, said: "There are no synergies between a domestic fixed-line telecoms business, for instance and a pan-European mobile, just as there are none in owning a water business in France and a US movie studio."

Vivendi will try to convince its bankers to reschedule its remarkably short-term debt structure. But even if the banks agree, it will probably also have to make some quick divestments, to raise cash. It may be able to make this a limited disposal programme to relieve the immediate stress on the balance sheet.

However, there is a more extreme scenario that may be forced on the company if real panic sets in, which is a wholesale sell-off that would probably force Vivendi to choose between its French and US media assets.

The anti-Messier coup, orchestrated by the Bronfman family ­ holders of about 5.5 per cent of Vivendi after selling it their Universal film and music businesses ­ was sealed by two French banks, BNP Paribas and Société Générale. The banks refused to extend more loans to the company at the end of last week, creating a liquidity crisis that finally pushed out Mr Messier.

Now, with the bonds markets closed off, due to its junk rating, Vivendi is reliant on its banks for financing, which can now dictate terms for a wholesale restructuring. The banks must know that rushed divestments will not achieve good prices but that remains a possibility. But this is not a purely business decision ­ the future shape of Vivendi will be dictated as much by French politics as free market economics. One analyst at a French bank said: "The Government will not want French assets sold to foreigners.... So the only route is to dispose the US entertainment assets."

It makes more business sense for Vivendi to follow through the logic of Mr Messier's American acquisitions and focus on that part of the business, selling off water and the French media interests. Its most readily cashable asset is its stake in SFR, the French mobile operator. Vodafone, already a major SFR shareholder, is interested in buying the business outright.

WestLB's Mr Evans said: "Vodafone will move in on SFR. The only question is one of timing. The fact that Vivendi is in trouble opens up the possibility for Vodafone to gain control."

Aside from Canal Plus, Vivendi's French media businesses are not wholly owned and so its interests in its home country are structured like a holding company ­ not an attractive proposition for investors.

However, the French government will not want to see prize French assets such as Canal Plus, the pay-TV business worth up to ¤11bn which Rupert Murdoch would be interested in, fall to foreigners.

Vodafone's acquisition of SFR would be less contentious than a foreigner buying a content business. Canal Plus, on which the French movie industry is dependent, would be very tricky for a foreigner to acquire.

The man seen as likely temporary successor to Mr Messier, Jean-René Fourtou, vice-chairman of the drugs group Aventis, is thought to have the personal backing of President Jacques Chirac. He seems unlikely to be a man to upset the French establishment by turning over French media to outsiders. There are possible French buyers around ­ Lagardère is interested in Canal Plus ­ but a domestic buyer cannot be guaranteed.

That would leave a wholesale or limited US divestment move as a strong possibility. The value of the US assets is still put as high as ¤32bn. These include Universal Pictures and Universal Music, the world's leading record label.

AOL Time Warner does not seem to be in a position to pounce. Barry Diller, who runs Vivendi's US entertainment businesses, is certainly a possible buyer of these assets.

Sumner Redstone's Viacom and Mr Murdoch's News Corp can be expected to be already running the slide rule over Vivendi's American interests. Universal Music, worth perhaps ¤8.5bn, would plug a huge hole in News Corp's portfolio, which lacks music.

Also, Bertelsmann, the German media giant, wants to expand its BMG music arm.

There seem to be few doubts that the empire which the napoleonic Mr Messier built is finished. A smaller, humbler, French media champion will emerge.