INDEPENDENT RESEARCH Media
20th July 2017 From audience management to customer management Media TF1 & M6 coverage initiated
Finalised on 19th July In this report, we analyse the TV media sector, with a focus on free television groups in France. The impact of digitalisation on the market is M6 NEUTRAL EUR19.6 about to ramp up with the advent of customer data and targeted Bloomberg MMT FP Reuters MMTP.PA advertising, as well as the upheaval caused to the historical models of TV Price EUR19.875 High/Low 22.08/15.445 Market cap. EUR2,512m Enterprise Val EUR2,565m media. We nevertheless believe that these developments are opportunities PE (2017e) 18.7x EV/EBIT (2017e) 12.1x to be had in this new environment. We are initiating coverage of TF1 with
TF1 BUY EUR13.2 a Buy recommendation and a Fair Value of EUR13.2, and of M6 with a Bloomberg TFI FP Reuters TFI.PA Neutral recommendation and a Fair Value of EUR19.6. Price EUR11.51 High/Low 12.26/7.871 Market Cap. EUR2,413m Enterprise Val EUR2,141m The television sector has suffered from a radical upheaval of its PE (2017e) 19.5x EV/EBIT (2017e) 12.6x business model in recent years (surge in number of channels, fragmentation of audiences, competition from web players etc.). While these changes are far from complete, we are already gradually entering a new era, that of “Data TV”, which is set to disrupt business models by switching from a logic of mass audience management to a logic of customer management based on targeting and ultra-segmentation. Although these changes may seem to be a threat for historical TV media groups, we believe they are also opportunities to seize in this new landscape.
19/07/17 We are initiating coverage of TF1 with a Buy recommendation and a
116 Fair Value of EUR13.2. We welcome the group's initiatives in TV
111 production and consider that its new strategic directions should enable the group to restore sustainable EBIT margin growth and offer better risk 106 diversification. We also believe that the current valuation harbours upside 101 potential. 96 We are initiating coverage of M6 with a Neutral recommendation and 91 a Fair Value of EUR19.6. The group's rising dependence on the
Source Thomson Reuters STOXX EUROPE 600 MEDIA E STOXX EUROPE 600 advertising market, its lack of significant sources of leverage to margin growth and a valuation that looks fair at the current share price indeed prompt us to remain cautious.
Analysts: Thomas Coudry Frédéric Yoboué 33(0) 1 70 36 57 04 33(0) 1 56 68 75 54 [email protected] [email protected]
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Table of contents
1. Investment summary ...... 3 2. Introduction to the television sector: where do we come from, where are we going? ...... 7 3. TV 2.0: so far, so good ...... 9 3.1. Emergence of new players ...... 9 3.2. The powers at work are prompting the development of new uses ...... 10 3.3. Impacts well absorbed by the market ...... 14 4. TV 3.0: a new customer link set to disrupt models ...... 19 4.1. Millennials to step up change in uses ...... 19 4.2. OTT is merely in the teething stages ...... 22 4.3. An unavoidable merging of web and TV devices...... 24 4.3.1. Growth in advertising revenues is under threat for the major social media websites .. 24 4.3.2. Major social digital platforms are becoming media themselves ...... 25 4.3.3. Should historical TV media move into web territory themselves? ...... 26 4.4. Fundamental changes in the model still to come from audience to data ...... 27 4.5. “Delinearisation” between threats and opportunities ...... 30 4.6. Production and contents, the new crux of the matter ...... 32 4.7. Advertising market driven by customer data ...... 35 4.8. And what about telecoms/media convergence? ...... 39 5. Glossary ...... 46 TF1 Fair Value EUR13.2 BUY Coverage initiated ...... 47 “I want you on my Team” ...... 47 We are initiating coverage of TF1 Group with a Buy recommendation and Fair Value of EUR13.2. In a market in the throes of a digital revolution, we welcome the group's initiatives in TV production and consider that the new strategic directions should enable the group to restore lasting EBIT margin growth and offer better risk diversification...... 47 M6 Group Fair Value EUR19.6 NEUTRAL coverage initiated ...... 69 Looking for boosters ...... 69 We are initiating coverage of the M6 group with a Neutral recommendation and a Fair Value of EUR19.6. Despite good audience levels and advertising performances, coupled with sound financial management, the acquisition of RTL Radio France increases the group’s exposure to volatility in the advertising market and we see no strong catalysts in the short term, especially given the fall-off in the Diversification segment...... 69 Bryan Garnier stock rating system ...... 95
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1. Investment summary "Everything must change so that everything can stay the same" claimed Tancredi Falconeri in Giuseppe Tomasi di Lampedusa's famous novel "The Leopard". It remains to be seen whether the unavoidable fall in secular aristocracy played out in the novel can be compared with what's ahead for television groups. We do not think so. However, if these groups intend to pursue their more or less robust growth paths, for everything to stay the same, they will indeed have to change many things. And for the moment, what we have seen is probably nothing compared with what is to come.
For many years now, the television sector has suffered from a radical upheaval in its business model with a surge in the number of channels, audience fragmentation with the development of DTT, the emergence of new digital players in favour of technological transformation and changes in how video contents are consumed, amplified by the behavioural trends of the millennial generation.
Traditional television players have made huge efforts to transform, diversify and adapt their organisation and businesses to this disruption. More or less successfully, they have generally so far managed to absorb these developments and preserve their historical modals based on reach, mass audience and the associated advertising revenue.
While the changes mentioned are far from complete or having reached their pinnacle, it seems that we are already gradually entering a new era that we call Data TV and which is also going hand-in-hand with major transformations as shown below.
Fig. 1: Developments in the television sector: Bryan Garnier vision
Source: Bryan, Garnier & Co.
This new landscape is set to radically overhaul business models by gradually shifting from a logic of audience management based on reach and regularity, to a logic of customer management based on targeting and ultra-segmentation. At first glance, this highly digitalised environment is a threat to TV media. GAFA companies in particular are multiplying initiatives in contents and advertising and are capturing an ever-rising share of advertising investments.
However, we believe that this threat should not be overestimated and that opportunities exist for those that manage to best reinvent themselves and make the most of technological, demographical and regulatory developments.
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Experience shows that TV uses are resisting, year after year, like the TV advertising market (in terms of share of advertising spend). Admittedly, the millennial generation shows lower levels of TV viewing, but this trend is very gradual, and advertisers still demonstrate a strong interest in television for their communication. The advertising market is also picking up well, and we are forecasting an acceleration in growth in the television advertising market over the next three years.
Initiatives by GAFA groups in TV contents show that these contents still harbour very high value and that the classic social network or self-produced content model is not enough. TV contents seem to have more of a future than ever! In terms of know-how in content choice, production organisation and exposure, we can reasonably believe that TV media have a good head start.
All the new initiatives by digital players in TV contents imply increased opportunities in the TV production sector, that TV media groups are capable of exploiting, as shown by ITV in the UK and the TF1 group in France. We also believe that local contents remain just as relevant in this context, beyond the major global productions initiated by Netflix and similar companies.
While the gradual lack of differentiation between the internet and television that we are witnessing could be viewed as a threat, it is also harbour increased monetisation opportunities for TV media inventories, at low marginal costs (excluding initial investments), by developing advanced targeting abilities that are the strength of web players.
The delinearisation of contents ultimately "only" means replacing a programming grid by a recommendation engine, with the associated technology in addition. In our view, it does not fundamentally undermine the business of TV media groups, which is to know how to maximise exposure of a customer target to a given content. In contrast, it places technology and CRM at the heart of strategic and operating concerns.
Finally, changes in regulations that seem to be lagging by several years seem necessary and probable in order to accompany new uses and consumption methods and to place national players and powerful GAFA groups on an equal footing.
Note here that all of the developments discussed above are essentially long-term. From a financial markets perspective, we believe that short and medium-term catalysts will remain guided by audience share and the advertising market, which we consider have bright outlooks driven especially by an improvement in the economic backdrop in France. Whether for the short or long terms, we therefore have a reasonably optimistic view on the market in France.
We have taken the opportunity of this sector report to initiate coverage of the two main free television groups in France, namely TF1 Group, the leader, and its main challenger, M6 Group.
We are initiating coverage of TF1 Group with a Buy recommendation and Fair Value of EUR13.2.
In recent years, TF1 Group has suffered from pressure in the advertising market and the fragmentation of TV audiences. The group has since restored better momentum, driven by a market showing signs of a recovery and crucial operating and strategic initiatives.
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By making the most of opportunities arising from digital in particular, we believe TF1 Group will be able to optimise the profitability of its advertising revenues versus its programming costs revenue efficiency. We also welcome the group's positioning in production activities where we see genuine growth opportunities. As such, we are forecasting a CAGR in 2016-2019 revenues of 2.6%, driven by a recovery in advertising performances (CAGR of 0.9% over 2016-2019), but also ambitious development in production activities (8% 2016-2019 CAGR, organic growth and acquisitions).
On the back of better returns on investments in contents, the development of digital activities, growth in production activities and the roll-out of the "Recover" savings plan, we are forecasting a CAGR in 2016-2019 underlying EBIT of 22% (12.9% excl. sport events), with an underlying EBIT margin of 10.5% in 2019 vs. 6.3% in 2016 (8.1% excl. sport events).
Currently valued at 11.8x underlying EBIT, with a low leadership premium and a risk profile less dependent on the TV advertising market, we believe TF1 Group harbours genuine upside potential. Our Fair Value stands at EUR13.2, 14.7% ahead of the current share price.
We are initiating coverage of the M6 group with a Neutral recommendation and a Fair Value of EUR19.6.
The M6 group has cemented its position with TV viewers and advertisers, partly via the M6 channel, by adopting a strategy geared towards a target audience of women under 50 purchasing decision-makers. At a time when audiences are becoming more fragmented, the group has built on its expertise, generating momentum for the W9 and 6Ter channels and increasing its power ratio.
However, compared to the robust advertising revenues from its free channels, the sluggish performance of its Diversification operations and the forthcoming acquisition of RTL Radio France leave the stock significantly exposed to the advertising market, which, despite encouraging forecasts (2016-2019e CAGR of 1.0% in the television segment), remains volatile, uncertain and under pressure from digital platforms. We expect advertising to contribute around 68.7% of total revenues in 2017e and 72.4% in 2018e.
The integration of RTL Radio France creates opportunities for both commercial and operational synergies, but the transaction carries execution risks, with the radio market having fallen by an average of around 1.1% a year over the last three years. In 2018, when the deal will make its first full-year contribution, RTL is expected to generate 10.8% of the groups’ revenues and 10.2% of EBIT.
We value the company at 12.0x 2017e EBIT, which points to limited upside in view of the group's risk profile. We consider the stock fairly valued, with our Fair Value of EUR19.6, 1.4% below the current share price.
Digital upheaval is still clearly ahead of us and data TV is only in the teething stages with an army of millennials growing in the shadow of 20th century viewers. However, opportunities can arise from this turbulent backdrop. Success will depend on the ability of television groups to reinvent themselves, innovate, question their historical approaches and offer faultless execution in the operating roll-out of their new strategic directions. This is the price of transforming the threat into an opportunity. More than ever, TV media groups must apply Andrew Grove's famous dictum "Only the paranoid survive". And we consider that M6 is slightly less paranoid than TF1.
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Fig. 2: Exec Sum. Valuation TF1 Group and M6 Group
Company Valuation method Fair Value Recommendation WACC Growth rate to infinity EV/current EBIT 2017e
TF1 Group DCF 13,2 Buy 7,3% 1% 13,2
M6 Group DCF 19,6 Neutral 6,6% 1% 12,0
Source: Bryan, Garnier & Co; Thomson Reuters
Fig. 3: Exec.Sum. TF1 Group and M6 Group forecast, comparison with the consensus
EURm 2017e 2018e 2019e TF1 Revenues BG 2103 2162 2226 Consensus 2107 2152 2192 Current EBIT BG 193 178 235 Consensus 183 168 227 Current EBIT margin BG 9,2% 8,3% 10,5% Consensus 8,7% 7,8% 10,3% M6 Recurring Revenues BG 1299 1422 1436 Consensus 1379 1482 1508 Current EBIT BG 212 236 234 Consensus 231 247 253 Current EBIT margin BG 16,4% 16,6% 16,3% Consensus 16,8% 16,7% 16,8%
Source: Bryan, Garnier & Co; Thomson Reuters
Fig. 4: French advertising market forecast Advertising spendings (EURm, unless otherwise mentionned) 2015 2016 2017e 2018e 2019e Total spendings 13324 13319 13452 13587 13723 yoy growth 2,7% 0,0% 1,0% 1,0% 1,0% of which médias + digital 10881 11000 11121 11243 11367 yoy growth 4,9% 1,1% 1,1% 1,1% 1,1% of which TV 3242 3254 3287 3319 3353 yoy growth 0,6% 0,4% 1,0% 1,0% 1,0% TV Contribution to Medias and digital advertising 29,8% 29,6% 29,6% 29,5% 29,5% of which Digital 3216 3453 3677 3898 4112 yoy growth 29,2% 7,4% 6,5% 6,0% 5,5% Digital Contribution to Medias and digital advertising 29,6% 31,4% 33,1% 34,7% 36,2% of which Press 2450 2286 2149 2020 1899 yoy growth -8,7% -6,7% -6,0% -6,0% -6,0% Press Contribution to Medias and digital advertising 22,5% 20,8% 19,3% 18,0% 16,7% of which Outdoor 1169 1205 1210 1211 1211 of which Radio 721 712 705 698 691 of which Cinema 82 90 94 97 101 of which others (directories, mailings…) 2443 2319 2331 2343 2356 yoy growth -5,9% -5,1% 0,5% 0,5% 0,5% Source: Bryan, Garnier & Co ; IREP
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2. Introduction to the television sector: where do we come from, where are we going? For many years, the television sector has fallen prey to numerous upheavals that all have a common technological origin, namely the digitalisation of contents and their broadcasting.
Since the start of the 2000s, the development of digital terrestrial television (DTT) and TVoIP via triple play (3P) offers from telecoms operators has led to radical changes in the sector. Among the structuring transformations that have shaped what we call the TV 2.0 landscape, Digital TV, we would underscore especially: 1/ the emergence of non-linear content, 2/ the development of multi-screen consumption of TV services (computers, tablets, mobile phones, TV), 3/ a multiplication in the number of channels and content offers available, both fee-paying and free of charge (via DTT and the internet).
While these changes are still far from complete or having reached their pinnacle, it seems to us that we are already gradually entering a new era, that we describe here as Data TV and which is also accompanying major transformations.
Indeed, since this transformation concerns free TV media, we consider that the period now coming to an end has not yet fundamentally perturbed the link between the media and the end-customer (viewer). While the offer has been extended massively, the viewer that switches on their operator's set-top-box or turns on a television equipped with a DTT decoder finds themselves frequently exposed to a flow of TV channels between which they can "zap" freely. Under the stimulus of connected TVs and OTT content offers, what is now taking place in our view, is a radical shift towards a new relationship mode between the TV media and its viewers. More specifically, we are moving away from a "push" and channel-centric model whereby the viewer passively receives a flow of TV programmes, to an abundant "pull" and content-centric model, whereby the viewer looks for the contents that are the most relevant to them. We are moving from a model where the web and the TV are rivals to a model where the two universes are totally inter-penetrated (internet users and TV viewers are merging to become “TV users”). We are entering an era where mastering customer data is becoming a key factor for addressing TV viewers individually: we are moving from an era of managing mass audiences to an era of managing individual customers.
The chart below shows the transitions described above.
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Fig. 5: Change in television landscape: Bryan Garnier vision
Source: Bryan, Garnier & Co.
These trends are by nature very gradual since they are subject to developments in terms of demographics (ageing of the millennial generation), techniques (penetration of very high speed in each country) and regulations, but they are set to fundamentally impact incumbent TV media activities. Among the signs of this disruption that are still low in impact but emblematic in meaning, we would note: the development of the Molotov’s offer and its presence on Apple TV, discussions between telecoms operators and TV media groups on remuneration of the TV signal over IP, as well as reflection by telecoms operators on the dematerialisation of set-top boxes in the wake of a fully OTT offer.
This transition between what we designate as TV 2.0 on the one hand and TV 3.0 on the other, is what we aim to discuss in this report, along with its impact, the threats and opportunities that it presents for the two leading private groups in free TV in France, namely TF1 and M6, for which we are initiating coverage alongside this report.
In order to embrace the fairest vision possible of a sector whose borders are in the verge of (r)evolution, in this report, we discuss both moves underway in the free media segment (revenues primarily generated by advertising revenues), and those in the pay-TV segment (revenues stemming primarily from BtoC subscriptions). In contrast, we have ensured that we always distinguish clearly between these two categories of players.
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3. TV 2.0: so far, so good 3.1. Emergence of new players For several years now, we have noted three main areas where competition in the TV sector is intensifying:
Multiplication of free TV channels broadcast by DTT. On the back of technological developments and regulatory decisions, we have noted a multiplication in the number of channels broadcast free of charge on DTT. As Fig. 2 illustrates, between 2005 and 2012 in France, the number of national free TV channels rose from 7 to 27. The latest arrivals, LCI and FranceInfo were authorised by the CSA for broadcasting via free DTT in 2016. These changes were made possible especially by the switch to digital terrestrial television (DTT) and the halt to analogue TV, which freed up new frequencies (digital dividend). So far, no new digital dividends or additions of further channels on DTT are planned, and Paris Première (M6 Group, already on pay DTT) has already had its request to be switched to free TV refused by the CSA on several occasions.
Fig. 6: Change in national offer of free TV channels in France
New DTT New DTT New DTT Historical channels channels channels channels (2005) (2012) (2016) Total TF1 Group TF1 TMC HD1 LCI 5 NT1 M6 Group M6 W9 6ter 3 France Television Group France 2 France 4 France Ô France Info 6 France 3 France 5 Canal+ Group Canal+ Cnews C8 4 Cstar Arte France Arte 1 NRJ Group NRJ12 Cherie25 2 French Parliament LCP 1 SFR Media BFM TV Numero23 3 RMC Decouverte Lagardère active Gulli 1 Amaury Group L'Equipe21 1 Total 7 9 9 2 27 Source: Bryan, Garnier & Co.
Development of OTT content offer: on an international level, the offer is extremely varied and characterised by the ability to access content via applications or websites on PCs, tablets, smartphones or even televisions without the intermediary of a telecom operator or DTT. These primarily include offers from GAFA (Google, Apple, Facebook and Amazon) and social media (Facebook, Twitter etc.), as well as SVoD players (Netflix, Amazon Prime video, Youtube Red etc.). These offers are either free of charge (e.g.: Youtube, Dailymotion, Twitter) or payable (e.g.: Netflix, CanalPlay).
New operator initiatives. In a number of markets, we have noted a merger of telecom networks and contents, with telecoms operators at work on this. While these initiatives are generally more focused on pay TV, we have nevertheless also noted movements between telecoms operators and free television, as shown in particular by SFR's takeover of BFM TV. We take a more in-depth look at the logic behind these mergers in chapter 4.8, with telecoms operators themselves under threat from OTT content players (cord cutting).
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The chart below shows the new competitive landscape in TV, according to the three focuses defined above.
Fig. 7: TV competition landscape: type of players and examples
Source: Bryan, Garnier & Co.
3.2. The powers at work are prompting the development of new uses Changes in the TV offer described above are driven by structuring trends:
The rising penetration of high speed and very high-speed internet access on the market is leading to more digital broadcasting (OTT offers available on the internet and access to television broadcasting via TV offers on operator IPs). Penetration of high and very high-speed access in the population is contributing to the removal of barriers to entry in the market, relative to an historical situation where terrestrial broadcasting was based on a resource managed more by the state and the regulator than by market laws. Within just a few years, we have switched from broadcasting based on a rare resource (electromagnetic spectrum) to broadcasting based on an abundant one (bandwidth). The two charts below illustrate this trend, in fixed-line and mobile, and highlight the fact that this momentum is still far from exhausted.
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Fig. 8: Number of high and very high speed connections in France (millions of lines)
30
25
20
15
10
5
0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016
Total Number of broadband subscriptions Number of very high speed connections (>30Mbps)
Source: ARCEP
Fig. 9: Change in number of subscribers to a TVoIP service in France (3P and 4P offers by operators, in millions of lines)
20
20
19
19
18
18
17
17
16
16 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016
Source: ARCEP
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Fig. 10: Change in mobile penetration in France and growth in 4G access (millions of lines)
80
70
60
50
40
30
20
10
0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016
Number of 4G active customers Total Number of mobile customers
Source: ARCEP
The development of new TV uses and consumption methods: the rising digitalisation of contents has favoured the emergence of a multi-screen usage going way beyond the TV framework and reaching out to tablets, computers and mobile handsets, as well as an increasingly non-linear usage (catch-up TV/Replay/TV On-demand, VoD, SVoD offers). Note that these new uses are prompting the parallel development of new formats, especially with series specifically adapted to mobile devises (e.g. Vivendi's Studio+ offer, mobile-only series produced by the company Blackpills). The charts below illustrate these trends, the rising use of devices other than television sets and the development of non-linear consumption (which we discuss further in chapter 4.5).
eMarketer projects that the time spent watching videos on digital devices (computers and mobile phones) will exceed the amount of time spent watching the television as of 2017, thereby marking at the same time an inversion in the uses between mobile phones and computers of respectively 2h04 and 1h41.
Fig. 11: Video time breakdown among adults in France (18 years and over)
03:52 03:48 03:50 03:50 03:58 04:07 03:51 03:51 03:46 03:31 02:47 03:16
2013 2014 2015 2016 2017e 2018e
TV (excluding digital) Digital
Source: eMarketer; Bryan, Garnier & Co ests.
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Fig. 12: Development of catch-up TV* in France
6,462
1,812
2011 2012 2013 2014 2015 2016
Catch-Up TV (million of views)
Source: CNC; Bryan, Garnier & Co ests.
To resume, the following chart presents a global vision of media uses by type of media and type of contents, their relative weight and their evolution.
Fig. 13: Overview of media uses in France
Source: eMarketer, Médiamétrie, Bryan, Garnier & Co ests.
Finally, the chart below illustrates changes in the French people's way of accessing television. Whereas we can clearly see an increase in the share of viewers receiving their TV via their DSL (or fibre) connection relative to DTT, further potential of 50% exists in households that do not use telecom operators' TVoIP (some use cable or satellite and others simply DTT).
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Fig. 14: Change in household TV reception methods
70%
60%
50%
40%
30%
20%
10%
0% DTT Reception ADSL (or Fiber) Satellite Cable
2011 2012 2013 2014 2015 2016
Source: CSA; Bryan, Garnier & Co ests.
We are at only at the start of All of the trends highlighted above are sustainable and the target towards which the market is moving the technical and behavioural seems clear: provision of TV services massively ensured by fixed-lined and mobile access provided by transformations affecting TV telecoms operators to the detriment of terrestrial broadcasting. While the transition is very gradual and consumption we are still only midstream, it should be underpinned by demographical changes on the one hand, and rising competition from telecoms operators in very high speed landline connections on the other hand, with an acceleration in fibre deployment in less dense areas and commercial arguments increasingly focused on contents (examples: Orange and Free partnerships with Canal+, development of SFR in proprietary contents, see chapter 4.8 of our note).
3.3. Impacts well absorbed by the market The structural changes described above have a three-fold impact on the market in our view:
Relative to historical media, the presence of new generalist, globalised web players with deep pockets and wide audiences, that we pool under the GAFA umbrella (Google, Apple, Facebook, Amazon) and which are capturing a rising share of the advertising market. We go further into detail concerning the positioning and threats associated with these players in chapter 4.3.
Increased market segmentation. Not all players have either sufficient means or visibility to get a foothold with generalist offers to far larger targets. They position themselves in more restricted customer segments (young viewers, women, older viewers etc.) or in products (specific areas of interest). This is notably the case in France with new DTT channels.
Emergence of a long-tail strategy where even small players have their place. Relayed on social network platforms and often present in their own media supports (websites, applications), players can win significant market share in aggregate terms. Note for example the success of Vice Media, or the emergence of Brut media in France.
Viewed from the free TV market, the impact of the changes described above are therefore the following:
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Revenues generated by TV advertising are under pressure from digital. As Fig. 15 shows, the TV advertising market is resisting, but the surge in internet advertising is huge.
Fragmentation of audiences. The rocketing number of channels has led to a deterioration in audience share for historical channels in favour of new DTT channels.
Just a few years ago, in the early 2000s, television (and to a far lesser extent cinema) was the only mass consumer audio-visual media. The rising momentum of the internet, as it took shape as a new fully- fledged media format, gradually ate into other media types, primarily the press, representing a rising share of advertisers' media mix.
In 2016, the "display" advertising market (advertising banners on websites) represented 35% of internet investments vs. 55% for "search" (Google primarily, revenues stemming from internet searches resulting in sponsored links), or respectively EUR1.2m and EUR1.9m. Growth in display advertising of 14.5% in 2016 was driven by 1/ high growth in the video market of 35% to EUR417m, representing 35% of display purchases, 2/ the development of mobile usage, which represents 41% of investments in digital and which leapt 60% in 2016, and finally, programmatic buying, up 51% corresponding to 53% of spending in display or EUR639m. Excluding social networks, programmatic buying represents 29% of display spending at EUR186m, up 29%.
Fig. 15: French advertising market by media type
11% 11% 11% 11% 11% 11% 11%
23% 21% 28% 26% 34% 31% 30%
24.0% 29.6% 31.4% 14.4% 19.4% 21.1% 22.6% 7.0% 6.7% 6.8% 7.0% 7.0% 6.6% 6.5%
32.5% 31.2% 30.8% 30.6% 31.1% 29.8% 29.6%
2010 2011 2012 2013 2014 2015 2016
TV Cinema Radio Internet Press Outdoor Ad
Source: IREP; Bryan, Garnier & Co ests.
Among the platforms generating the most advertising revenues, we identify not only the heavyweights of Google and Facebook (which account for 20% of global advertising spend) and other social networks or content-sharing platforms such as SnapChat, Twitter, Instagram, Dailymotion etc. but also e- commerce websites (Amazon etc.), which are aiming to expand their advertising revenues.
In terms of fragmentation, the chart below shows the audience shares taken by the new channels to the detriment of historical channels.
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Fig. 16: Fragmentation of DTT audiences (viewers 4 years and over)
100%
2% 4% 6% 8% 80% 9% 14% 18% 21% 21% 21% 21% 21% 21% 22% 60%
40% 73% 70% 67% 67% 65% 64% 63% 61% 58% 20%
0% 2009 2010 2011 2012 2013 2014 2015 2016 2017e
Historical channels 2005 Free DTT channels 2012 Free DTT channels
Source: Médiamétrie; Bryan, Garnier & Co ests.
However, while the number of DTT channels more than tripled between 2005 and 2012, the number of television groups "only doubled" (see Fig. 6 at the start of this report). Indeed, compensate for their audience losses, historical groups have increased their OTT offer, either by creating new channels as M6 Group did with 6Ter and W9, or by taking over recently created channels as Canal Group did with C8 and Cstar, and with TMC and NT1 for TF1 Group. Lost audience share on a group level was therefore limited as shown by the chart below.
Fig. 17: DTT audience share by television group (4 years and over)
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0% TF1 Group M6 Group France TV SFR M ed ia Canal Group Others
2011 2012 2013 2014 2015 2016
Source: Médiamétrie; Bryan, Garnier & Co ests.
In order to win back some audience share in this fragmented universe, consolidation seems to be the most suitable option. This nevertheless faces restrictive regulations aimed at preventing excessive concentration in the sector in France, as presented in the focus below. In addition, even when these measures do not apply, the Competitions Authority limits a merger between two channels on specific measures as proposed by the CSA. Indeed, the Competitions Authority obliged the TF1, TMC and
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NT1 advertising units to remain independent (this order expired in 2015 and the NT1, TMC and HD1 advertising departments where therefore grouped together in the new TNT1 offer).
Focus: anti-concentration legislation in the French media sector.
Four main laws aim to prevent excessive concentration in the sector:
1/ A shareholder cannot own more than 49% of the capital of a terrestrial TV channel whose audience share exceeds 8%.
2/ A same group cannot own more than seven DTT channels (pay and free).
3/ A non-European shareholder cannot own more than 20% of a radio or DTT channel.
4/ A same group cannot own both national DTT channels, national radio stations and national daily newspapers representing more than 20% of total broadcasting.
It remains to be seen how the above-described moves have been reflected in the advertising revenues of the groups in question. The chart below shows the change in TV group advertising market share relative to changes in their audience share (power ratio). Note that since January 2009, the reform of the audio-visual landscape banned all advertising after 8p.m. on France Televisions channels.
Fig. 18: Free channels’ power ratio by media group (4 years and plus)
M6 Group 1.72
TF1 Group 1.63 1.63 1.58
Others 0.54
0.41 France TV 0.35 0.36
2011 2012 2013 2014 2015 2016
Source: Company Data; CSA; IREP; Médiamétrie; Bryan, Garnier & Co ests.
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Fig. 19: Advertising revenue of free channels by group (EURm)
3,500
3,000
2,500
2,000
1,500
1,000
500
0 2011 2012 2013 2014 2015
TF1 Group M6 Group France Television Others
Source: Company Data; CSA; Bryan, Garnier & Co ests.
Between 2011 and 2015, the power ratio deteriorated for TF1 whereas it improved for the M6 Group, primarily due to better targeting and greater segmentation of its audience we believe.
At this stage, we can conclude that the French TV media have suffered more from the rise in competition in the traditional TV offer (given the multiplication in the number of channels allowed by DTT) than from growth in pure digital players. We nevertheless believe that the switch to the TV 3.0 era could further complicate this landscape.
Fig. 20: Change in advertising revenues from TF1 and M6 free channels (base 100)
105
100
95
90
85
80 2011 2012 2013 2014 2015 2016
TF1 Group M6 Group TV Ad Market
Source: Company Data; Bryan, Garnier & Co ests.
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4. TV 3.0: a new customer link set to disrupt models 4.1. Millennials to step up change in uses TV consumption remains at a robust level today, as shown by the chart below.
Fig. 21: Daily TV viewing time
05:31 50 years+ 05:02
04:33
04:04 4 years+ (total audience) 03:36 Housewives -50 years 03:07 UMC individuals 02:38 15-34 years+ 02:09 4-14 years+ 01:40 2009 2010 2011 2012 2013 2014 2015 2016
Source: Médiamétrie; Bryan, Garnier & Co ests.
This data clearly includes new consumption methods such as catch-up TV, but only on TV set. Besides, catch-up TV penetration is constantly rising over all age categories as shown below, and it widely contributes to the rise in TV consumption on 4 screens.
Fig. 22: Catch-up TV penetration rate by age group
100%
80%
60%
40%
20%
0% 15+ years 15-24 years 25-34 years 35-49 years 50+ years
2011 2012 2013 2014 2015 2016
Source: CNC; Bryan, Garnier & Co ests.
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Traditional uses upset by the In contrast, a different development clearly emerges depending on the age range observed. For young ramp-up of millennials in the targets (0-14 yrs and 15-34 yrs), TV consumption falls sharply over time, while video consumption population increases. Around 17% of young people aged 15 to 24 state that they use catch-up TV on a daily basis, vs. 13% for the 25-34 year group and just 7% for the above-50 age-group. As such, we could assume that this trend is set to weigh on overall TV consumption as the age categories succeed each other. In these age groups, the time spent on social media (Facebook, Twitter…), free video platforms (Youtube, Dailymotion…), but also SVoD platforms (Netflix, Amazon Prime Video, CanalPlay and SFRPlay en France) is rising. End 2016, Médiamétrie estimated that video total viewing time (DET) on computers was 19 minutes for young people aged between 15 and 34-year-old (c. +30% yoy), representing 42% of the total video consumption in France on this same device.
Fig. 23: Allocation of video time in 15-24-year age group and comparison with all 15+ age groups
15-24 years 70% 6% 3% 20%
1% 15+ years 88% 5% 6%
Live on TV set Digital TV VOD/SVoD Other video usage
Source: Médiamétrie; Bryan, Garnier & Co ests.
In Europe, the Digital TV Research institute estimates that the SVoD market is set to rise from 24.2 million subscribers at the end of 2015 to 55.2 million by 2021, driven by the UK, namely a penetration rate of 31.5% of households. Concerning France, GFK estimates the SVoD market at 2.2m subscribers at end-2016 with Netflix having 1.4 million subscribers, CanalPlay 600,000, and the remainder spread between minor players (FilmoTV, Gullimax, TFOUmax, Afrostream…). Note that these figures do not include the SFR Play offer, included in the SFR fixed-line bundles.
The emergence of these low-cost pay TV offers (Netflix is available from EUR7.99 incl. tax), or their inclusion in operator offers (SFR Play, but also CanalSat Panorama at Free and Orange since end-2016), has given rise to a new trend, namely the increasing cannibalisation of free TV by a new pay TV offer for younger targets. As an example, this trend explains the interest France Télévisions has in the launch of a proprietary SVoD offer. Developing an offer like this is no easy feat however. Indeed, TF1 launched its own offer early 2016, but one limited to children, while M6 abandoned its initial aims in this field in early 2016, with the closure of Pass M6.
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The development of low- One of the major brakes to developing an attractive SVoD offer in France stems from legislation on cost SVoD services places a the chronology of media (see chart below), which notably imposes a 36-month time-frame between a risk on traditional players film coming out in cinemas and its broadcast on an SVoD platform. Negotiations were recently started which they are struggling to address between the various players in the field with a view to changing this time frame, but were not conclusive and it is unlikely that the framework will change significantly in the short term. Recently Canal+ again voiced its demand to benefit from a window in broadcasting of fiction reduced to six months.
However, the media chronology does not apply to series or to films that are not shown in cinemas. While it is not ideal for the SVoD market, the regulatory framework therefore favours players such as Netflix which has both the financial clout to invest heavily in exclusive content, and the distribution power to make investments in its own platforms profitable, while at the same time limiting the reaction capacity of national players. Note also that SVoD players not domiciled in France are not obliged to broadcast local programmes made in France or Europe.
Fig. 24: Simplified media chronology
Source: Bryan, Garnier & Co
We have already seen that TV viewing time is under pressure due to the behaviour patterns of the millennial generation and fresh competition stemming from SVoD. However, OTT platforms, i.e. available via the web and independent of operator internet access, are what is tending to distract viewers away from the classic TV screen.
TV consumption equipment More fundamentally still, pressure on TV viewing time also goes hand-in-hand with another structuring is also being shaken up by trend for the sector, namely the way TV contents are viewed. This is changing massively, with rising the millennial generation consumption of viewing by internet, on alternative equipment to traditional TV screens such as mobile phones, tablets and PCs, as well as connected TVs.
This trend is visible for all media types, but especially for TV which saw its individual viewing time boosted by the increase in non-linear usage, as shown below.
Fig. 25: Daily individual TV viewing by media types
2014 2015 2016
TV on all screens 03:44 03:50 03:51
Live on TV set 03:36 03:36 03:33
Digital TV (Delayed + Catch-up + Live) 00:08 00:14 00:18
ow. Replay 00:08 00:08 Non-linear on TV set 00:05 00:08 00:10
ow. Replay 00:05
Non-linear on other screens 00:03 00:06 00:08
Source: Médiamétrie; Bryan, Garnier & Co ests.
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4.2. OTT is merely in the teething stages The trends described above are clearly driven by the development of pure web/OTT players on the new screens mentioned above, but also, as a reaction, by the multiplication of OTT initiatives from traditional TV players (historical TV channels, cable-operators etc.). Some of these initiatives are set out in the chart below.
Fig. 26: Overview of OTT initiatives: pure players, operators and broadcasters (non-exhaustive)
Source: Bryan, Garnier & Co
It is now impossible for historical players not to roll out their TV offer on multiple devices.
The development of OTT Note that telecoms operators are also launching their pay offers in OTT content (e.g. SFR Sport) and initiatives is now generalised not limiting themselves to exclusive offers for their 3P customers. For instance, some French operators have even chosen Android TV as the operating system for their set-top boxes (e.g.: Freebox Mini 4k and Miami Box at Bouygues Telecom), thereby abandoning a degree of control over the customer environment.
The changes stemming from the web and materialised by TV uses on the new screens impact ways of interacting with the TV set and its content. We are moving from a very channel-centric "zapping" model to a more content-centric "picking" approach. This fairly extreme illustration is tantamount to saying that we will no longer ask ourselves the question "what's on TF1 tonight?", but more "what film do I fancy watching?".
Growth in connected TV One brake nevertheless remains to the widespread adoption of this model, namely that TV screens will step up changes in uses themselves are not very connected yet. By connected TV, we mean an internet capable television that can access OTT content just like computers do, without the restrictions of a proprietary environment or internet access provider.
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Fig. 27: Various forms of connected TV
Source: Bryan, Garnier & Co
French citizens still receive television mainly via DTT or an internet operator's set-top box (and via satellite for pay TV) as shown below, contrary to the US for example, where the use of connected TV is far more widely developed.
Fig. 28: Equipment rate of connected devices in France vs. the US
85% 73% 61%
45% 43% 29% 28% 23% 27%
7%
Tablet Smartphone Enable Smart TV Multimedia Video game device (i.e. Apple console TV, etc.)
France USA
Source: CSA; Nielsen; Bryan, Garnier & Co ests.
In France, GFK estimates the number of users of connected multimedia devices (e.g. Apple TV) at 500,000 while the number of Smart TVs that are actually connected stands at between 5 and 10% according to managers at LG France (bearing in mind that around 23% of households owned a smart TV, the total number of users is therefore close to one million).
In our view, things are changing in France on this front, and the trend could gain momentum in view of technical developments (improved ergonomics in particular) and demographical developments (impact of millennials). In addition, as shown previously, Anglo-US countries are already well advanced compared with France, whether for connected TVs or SVoD. An emblematic symbol of this trend in France is the development of Molotov TV and its availability on the Apple TV.
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Focus on Molotov TV.
Created by Pierre Lescure (founder of Canal+), Jean-David Blanc (founder of Allociné) and Jean-Marc Denoual (former director of strategy and innovation at FT1), notably financed by TDF and Sky and launched mid-2016, the Molotov service offers a new approach to TV consumption. On a pure OTT model, Molotov offers an interface inspired by streaming platforms such as Netflix and Spotify. Ergonomics and user experience are at the heart of the development. The platform offers direct or catch-up access to programmes and enables a search by programme category, presenter, actor etc. It also enables the viewer to watch a programme from the beginning ("start-over") or to bookmark it in order to save it and watch it later. Molotov's business model is based on a Freemium logic. The free service is limited to 35 channels (including 27 free DTT channels) and 10 hours of bookmarks (saved files, recordings). For access to several screens at the same time and 100h of bookmarks, customers are charged EUR3.99 incl. VAT a month. Meanwhile the offer at EUR9.99 incl. VAT provides access to premium channels (Cine+ channels). We can question the economic model of such a platform, but apart from operator TV applications, it is currently the only free OTT offer enabling aggregate access to all French channels. As such, the platform not only proposes a new programme offering but also a new user experience, breaking away from the traditional zapping approach still in place today, even via operators' boxes, despite gradual changes in this respect. In addition, the notion of channel numbers is missing, and content is highlighted. In early-April 2017, the platform claimed it had one million subscribers (who were active or still are) and aims to double this figure by the end of 2017. One notable fact: the application is available on the Apple TV since the beginning, such that it can be viewed on a TV screen and not exclusively on alternative devices (computers, tablets, smartphones). The application is also available on Google's Chromcast, and on Samsung and LG connected TVs. According to Molotov, users are spread between smartphones (40%), tablets and computers (40%) and television sets (20%). People using the Molotov TV solution on a connected television spend more than 2h40 a day, vs. 80 minutes on other devices.
The reason why television groups present in France agreed to offer their flows on a platform like this was that they could see both an economic and strategic interest, since this type of platform is a potential relay for audience in an increasingly OTT environment where their proprietary applications may not suffice. However, the approach remains cautious with neither TF1 nor M6 offering their catch-up television programme on the platform, reserving it for their own applications and operators.
4.3. An unavoidable merging of web and TV devices With growth potential in All of the above-described developments (connected TV, OTT offers, SVoD, new consumption advertising revenues under methods in the millennial generation, alternative to TV screens) testify to a same fundamental trend, threat, social media namely that we are gradually moving into a world where there is no difference between a TV screen platforms are looking at premium TV content and screens on other devices for using TV services (computers, tablets, smartphones) on an increasingly services web-based model. In contrast, we have noted an increasing trend for GAFA and social media platforms to develop premium contents, the historical preserve of TV media.
4.3.1. Growth in advertising revenues is under threat for the major social media websites Historical growth in advertising spending in digital has stemmed from factors that are showing signs of running out of steam. . On the one hand, growth in the inventory (volume effect) of the sites in question is set to weaken as their visitor rate trends towards an asymptotic level in a given market.
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On the other hand, the rise in advertising pressure prompts the risk of a deterioration in the customer experience and hence a decline in the visitor rate. For several years now, the use of ad- blockers has been rising, enabling internet users to stop being annoyed by overly intrusive advertising. Concerned about the risk weighing on digital investments, Google has even started to develop its own “smart” ad blocking solution in order to support the USD63.8bn in revenues generated by advertising in 2016. The tool should be launched on Chrome in early 2018. This is also why websites are calling for non-intrusive online advertising technologies such as that developed by Teads, recently bought by the group Altice. In addition, this is the reason for the development of brand content, product placement and other new advertising formats to win internet users’ loyalty.
In France, with the contribution of the French Advertisers Union (UDA), the various players in the field are working on writing charters or creating labels enabling formats that address users’ dissatisfaction. On an international level, the "Coalition for Better Ads" (founded by the major IAB associations in Europe and the American Association of Advertising Agencies in the US) and major players in the digital industry (Facebook and Google in particular) are working on publishing standards for online adverts in order to improve the customer experience and slow momentum in ad-blockers. An interesting point, that emphasis the role of platforms such as Molotov TV, is the impossibility of adding an ad blocker to applications for which video flows are not accessible via a web browser.
Finally, the ability of web publishers to leverage diverse customer data in order to offer better targeting than on TV is now clashing with the complexity generated by the depth of the catalogue of available inventories. Advertisers have limited visibility on the space they buy and their ROI is becoming complex to measure. As an example, the criticism levelled by a number of advertisers against Google in the US a few weeks ago was edifying. Indeed, at end-March, Verizon, At&T, GSK and Johnson & Johnson in particular decided to suspend their advertising campaigns on Youtube after The Times newspaper revealed that their spots were shown before extremist videos. Despite the corrective measures undertaken by Google, control of digital advertising inventories, as well as the measure of visioning, remains a genuine challenge for web advertising agencies. Note on this subject that at the end of 2016 Facebook admitted a miscalculation in the average duration spent watching video on its platform, thereby misleading its advertising clients.
4.3.2. Major social digital platforms are becoming media themselves Given the impact of the trends described above, traditional social media platforms are seeking to optimise the valuation of their inventory and their audience by moving to a logic of price from a logic of volume and maximum advertising pressure. In this respect, they are committing themselves massively to the TV path by buying content and setting up partnerships.
Twitter for example has clearly stated its ambitions in TV: the social network claims 800 hours of live events in Q1 2017 (+30% vs. 2016) thanks to sporting events broadcasting (NFL, MLB, WNBA in particular), as well as concerts and musical events (American Music Awards for example). The company recently announced the launch of a continuous information channel in partnership with Bloomberg (for free).
Facebook is also set to launch Facebook TV, its home video contents creation solution, competing directly with Netflix. Mark Zuckerberg recently underscored again the fact that video is a priority for the group. The social network leader took a giant step in this direction by announcing at the end of June-2017 that it would broadcast several Champions League football matches live for US viewers. In addition, as already indicated, Google and Amazon have already launched their SVoD services,
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respectively, Youtube Red (not available in France yet) and Amazon Prime Video (available in France since end-2016).
While Apple only offers one VoD service on the iTunes store, it is unlikely to stop there. Although the company has not yet reached an agreement with major US groups to launch an attractive SVoD service, it has just recruited two former executive managers from Sony Pictures Television in order to develop its video business, which ought to ramp-up between now and the end of 2017.
4.3.3. Should historical TV media move into web territory themselves? Historical TV media groups The web/TV convergence discussed above is prompting historical media groups to fight back by are now investing in web moving into the territory of these new players themselves, with two distinct and complementary logic based on segmentation development focuses: and targeting
Expanding the presence of historical TV media on social networks. In order to capture part of the value that has gone to social media, TV groups are developing both the presence of their brands and historical products and also new brands and contents, often via M&A operations, as shown in table 29.
Fig. 29: Main TF1 and M6 initiatives on social networks
Source: Bryan, Garnier & Co
The TF1 and M6 group websites show the growth rates that underscore the rising popularity of digital viewing modes and the need for media groups to position themselves efficiently. MyTF1 posted average annual growth of 37% in mobile visitors between 2014 and 2016, rising from 2.2m to 5.7m unique visitors. In all, 1.3bn views (+15% yoy) were counted on all media formats and the digital platforms attract 12.4m visitors. This trend is similar at M6, whose 6Play website is hugely popular since it was overhauled at end-2015 with 1.5bn views in 2016, or growth of 25% compared with the previous year.
Improvement in targeting capacities. Based on customer data stemming from the TV over IP and OTT content users, as well as big data technologies, TV groups are developing advanced advertising targeting capacities. The aim is to implement targeted advertising, which is suited to the viewer depending on the data collected from their account. This is one of the reasons why M6 and now also TF1, request that customers sign up before being able to use its 6Play application. Although targeted advertising is currently subject to strict regulatory restrictions in
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France, media groups are multiplying their initiatives in this field and acquisitions of technology companies in online advertising and customer targeting as shown in table 31.
The web/TV convergence described above is presented in the chart below:
Fig. 30: Web/TV convergence: momentum at work
Source: Bryan, Garnier & Co
Fig. 31: Main acquisitions in the ad tech segment by telecoms/TV groups
Company Buyer Date of transaction
Teads Altice 2017
Audience partners Altice 2017
Yahoo Verizon 2017
Sticky ads TV Comcast 2016
Invidi AT&T 2016
Tapad Telenor 2016
AOL Verizon 2015
FreeWheel Comcast 2014 adapt.tv Verizon 2013
Source: Bryan, Garnier & Co
4.4. Fundamental changes in the model still to come from audience to data The moves described above seem fundamental in that they reflect changes in the business models of historical TV media groups from a mass audience logic towards a logic of ultra-segmentation. This seems to be a major technological, cultural and organisational disruption for the sector. We are switching from a content-centric model to a customer-centric model, from a volume logic based on
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maximising market share to a value logic based on maximising revenue per customer, from an exposure logic to a genuine ROI transformation logic.
In the traditional free TV market, a premium is offered to the leader in market share terms, namely the price paid for an advertising spot of a given duration rises exponentially with the market share of the broadcaster in a given target. The aim is therefore to have the best contents possible for attracting a maximum audience, with mass audience therefore highly valued. The web model is based on a double ability to 1/ understand the customer (here the viewer) and 2/ the ability to push them the most relevant contents/adverts for them.
In digital, the value of advertising space is directly correlated to the transformation of the visit into a future purchase. The size of the space is not so much what counts, but more the knowledge of the customer and the ability to value it. In this respect, note that certain social media do far better than others with the emblematic example as illustrated in Fig. 33 of Facebook, which values its customers far better than Twitter, generating around twice the amount of revenues per customer than Twitter, which is reflected in the EV/Sales multiple noted in Fig. 32. For the moment then, Facebook shows a far better ability to value its inventory than its rival.
In the traditional TV media model, any rise in audience share (and hence value) is associated with hefty investments in contents. In the web social network model, it costs money to acquire customers, but once the customer is acquired, monetisation can take place at a fairly low marginal cost as knowledge of the customer is fine-tuned and targeting capacities are developed. We believe that in addition of the reach, this is one of the main explanations of the valuation gaps between social media and traditional TV media groups as shown in Fig. 32.
Fig. 32: Social networks and TV media valuation multiples
EV/Sales EV/EBIT
Hist. TV media
TF1 (avg 5y) 0,9 11,0
M6 (avg 5y) 1,2 8,0
Prosieben (avg 3y) 3,0 12,2
Mediaset (avg 5y) 1,3 14,5
Social media
Facebook (avg 5y) 7,5 15,0
Twitter (avg 2y) 5,5 40,0
Twitter (avg 1y) 4,0 30,0
Source: Reuters; Bryan, Garnier & Co ests.
Fig. 33: Total revenues and revenues per client at Twitter and Facebook.
Year 2016 Facebook Twitter
Revenues (USDbn) 27,638 2,530
No. of customers (average, billions) 1,726 0,312
Rev. per cust. per month (USD) 1,33 0,68
Source: Company Data; Bryan, Garnier & Co ests.
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As such, we believe that significant and as-yet untapped value creation potential exists for a number of TV broadcasters on the back of a better monetisation of their digital inventories and customer knowledge, without this monetisation necessarily involving rising contents costs.
Monetisation could materialise via 1/ the development of non-linear consumption of TV programmes, for which targeted advertising is already allowed, and 2/ the development of targeted advertising on live television, which currently provides all the advertising clout of web space (in particular retargeting mechanisms, which enable advert displays on a given site to be personalised according to the interest internet users have shown on other web sites). And this is just the start (see focus below).
Focus on targeted TV: status and regulations
For a same programme broadcast live or on replay, targeted TV implies adapting advertising spots to suit viewers’ profile. This practice is currently highly supervised by the CSA. In terms of free TV, targeted advertising is banned on TV screens (due to a decree from 1992), irrespective of the reception method (DTT, IPTC, cable, satellite). The only exception to this rule is regional TV (for example, regional interventions on France 3 or the BFM Paris channel). In contrast, targeted advertising is allowed on TV screens for replay programmes and is also allowed on screens other than traditional TV screens (tablets, computers, smartphones) on the live and the replay programmes. Note interestingly here that regulations are defined by screen type and usage type, which may seem excessive in a sector where "ATAWAD" (AnyTime AnyWhere AnyDevice) behaviours are gradually becoming the norm. Even for usages cases permitted by regulations, broadcasters are only at the experimentation stage: TF1 has undertaken experiments on TV screens for replay programmes, while M6 carried out a test during the Euro2016 football tournament concerning the live signal on other screens. Note that direct-to- consumer publicity is only of interest if qualified customer data is available upstream thereby helping to differentiate the specific interests of different viewers. For TV media, we are therefore only in the teething stages of targeted TV ad. In contrast, we are not ruling out a change in regulations that could accompany millennial uses and the rising competition from web players in the advertising market. SFR Media in particular is clearly pushing for a relaxing of regulations since it has a large amount of qualified customer data via SFR Telecom.
The SNPTV estimates that if the targeted/segmented advertising market was authorised in France, with the ability of geolocation, the TV advertising market could grow by EUR220m out to 2022. The impact would be gradual over the time it takes to develop customer knowledge, optimise targeting and above all adapt infrastructure (upstream at the broadcaster and downstream at the box levels in the case of TVoIP). We believe a change in regulations on this subject is possible before the end of the year.
These changes nevertheless remain a significant challenge for groups such as TF1 and M6, whose two main historical channels remain highly focused on winning mass market audience, especially in the priority target segment "women under 50 purchasing decision-makers".
And this is just the beginning. As shown above, targeted publicity only concerns a low share of usages at present. In addition, TF1 and M6's main initiatives in data consist of rolling out advanced data-mining capacities. Note in particular the roll-out of the TF1 DPM (Data Management Platform) with Adobe, and the strengthened partnership between M6 and Qinten. The new commercial offers launched recently (GRP Data at TF1, Data advisor at M6) are essentially aimed at developing insights and tracking the efficiency of advertising.
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Although the groups are admittedly threatened by web players, we nevertheless believe that digital TV 3.0 presents opportunities to monetise these inventories and customers (viewers) that remain widely unexploited.
4.5. “Delinearisation” between threats and opportunities The question we ask is how did free-TV groups manage to maximise their audience and advertising revenues in the past?
We believe that the two following key skills lie at the heart of traditional TV groups' know-how:
The ability to identify and buy or produce the "right" contents and programmes. Here "right" designates how appealing the programmes are and their ability to meet the expectations of the commercial target audience.
The ability to aggregate these programmes into an efficient grid. This means organising the right programme mix (stocks vs. flows, fiction vs. entertainment vs. documentaries vs. news etc.) in a coherent time sequence, in order to optimise their exposure and maximise audience shares at every moment of the day.
We discuss the first of these points in chapter 4.6 of this document. However, we believe the second point is just as important if not more important. For example, the "Mentalist" series broadcast by TF1 enjoyed a success in France that it did not see with other broadcasters in other countries. We can presume that the broadcaster's ability to efficiently expose the contents (showcase the contents in the best way possible in the right place at the right time) is one of the factors that makes a difference.
The question of the future of linear programming is therefore structuring, since in the case of a programmed disappearance, one of the main areas of expertise of historical TV groups looks threatened. “Delinearisation” (or non-linear consumption) indeed designates the possibility for the viewer to choose when they would like to watch a programme, without being restricted by a set time for its broadcasting.
The threat of non-linear Paradoxically, we do not consider this a huge threat for several reasons: 1/ the logic of recommendation programming seems over- in non-linear programming can substitute the logic of a linear programming grid. The ability of TV estimated media groups to efficiently expose their contents can remain a strong competitive advantage. 2/ Opportunities to monetise the audience exist and non-linear inventories remain widely unexploited. 3/ Proprietary programmes of channels remain very attractive even under replay services.
Concerning the first point, a programming grid such as those in place at TF1 and M6 is the equivalent of a recommendation engine for a group like Netflix. In the first case, the aim is to define a relevant sequence of programmes for a targeted majority, while in the second, the aim is to push appropriate programmes at a given moment to a given viewer. The logic is indeed similar. In both cases, the viewer is key and the appeal or relevance of the programme proposed to them is a determining factor in its monetisation capacity. In contrast, in the second case, the technical component (collection and analysis of customer data, recommendation engine, efficiency analysis) gets the better of the editorial component. There is no conceptual revolution, the viewer still needs to be guided in their choice. However, there is a technical and organisational development, with a necessary adaptation of expertise.
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In chapter 4.1, we saw that the duration of non-linear content consumption remains modest but is tending to increase in the younger target category, driven especially by OTT competition. The trend is slow and gradual and we believe that media groups have the time to adapt their know-how, their allocation of resources and their organisation to these new areas of expertise. However, those that have the best recommendation ability in "push" mode will have a powerful competitive advantage. Under this framework, we attribute a premium to the largest players. Indeed, we believe that the quantity of data collected is vital for the efficiency and the quality of the recommendation tool. As an example, Netflix, which relies on a global algorithm, uses (for certain programmes) statistics produced in a given country to launch the programme in a new market, thereby accelerating the learning curve and the relevance of recommendations.
Concerning our second point, delinearisation presents a double opportunity. An opportunity to value better targeting on the one hand and larger inventories on the other hand. Relative to linear programmes that viewers sometimes watch passively just because they are on, non-linear programmes are by definition actively chosen by viewers. Where linear programming brings together a wide target audience, replay programmes highlighted by the recommendation algorithms described above, need to offer far more precise targeting and hence lead to better advertising monetisation per viewer. At the same time, the available content offer increases massively. This is a long-tail analogue trend present in e-commerce. Replay inventories of TV channels contain a week's worth of programmes, whereas VoD/SVoD services contain several thousand programmes available at all times, and therefore provide the possibility of better returns on a given content portfolio. However, here again, the challenge is to efficiently push programmes to suitable customers/viewers, and thereby maximise their consumption and make them more loyal to the platform concerned. We believe that these opportunities are currently under-exploited and that the sources of advertising revenue stemming from consumption of non-linear contents only represents a very low share of overall advertising revenues (<5%) at TF1 and M6.
For our third point, it is important to note that the flagship live TV programme flows are watched just as much on replay as they are live (proportionally), as indicated in the following chart.
Fig. 34: Types of programmes consumed Live vs. Replay
Non-linear consumption 20.5% 46.5% 20.5% 12.5%
Live consumption 36.8% 29.0% 20.5% 13.8%
Documentaries, magazines, information Movies Entertainment Others
Source: Médiamétrie; Bryan, Garnier & Co ests.
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As such, incumbent TV channels have a competitive advantage in this respect, unlike non-linear OTT offers that do not (yet?) offer this type of programme. Moreover, we do not see development of new contents formats (Studio+ and Blackpills offers to respond to "mobile snacking" for example), as a threat in this non-linear universe. In contrast, we consider that delinearisation, which enables any programme to be halted at any point and to be picked up later, is a means of avoiding the need for adapted formats even in a situation of mobility. The size of smartphones used to view programmes tend to increase constantly, as shown below, thereby making specific contents less necessary.
Fig. 35: Smartphone sales depending on screen size (million units)
2000 1750 1500 1250 1000 750 500 250 0 2015 2016 2017e 2018e 2019e 2020e 2021e
0"-4" 4"-5" 5"-5.5" 5.5"-6" 6"-7"
Source: IDC; Bryan, Garnier & Co ests.
In all, we believe excessive fears concerning the threats that delinearisation could have on historical TV players are unfounded. Admittedly, OTT competition is expanding in this growing niche, but TV media seem to have what it takes to resist, or even develop opportunities stemming from this new consumption method. Here again, the key will be controlling customer data.
4.6. Production and contents, the new crux of the matter In this section, we attempt to assess what impact the context described above could have on contents and strategies of players in the sector.
As the number of new OTT content players has multiplied, the audio-visual contents market has rapidly expanded, with a rising offer of audio-visual production on a global scale. According to FX Network research, the number of series produced in the US has more than doubled over 10 years, with GAFAs being the main drivers behind this increase in production. As mentioned in chapter 4.3, growth is driven by the development of both TV OTT players and social media, which have entered the contents and premium video field.
We have already discussed initiatives by Facebook, Google and Amazon in TV and video. Although the iTunes store provides a VoD service, Apple seems to be lagging in this field but looks ready to pull out the stops. While it has yet to reach an agreement with the major US groups to launch an attractive SVoD service, the group launched its first video production "Planet of the Apps" in June, and has just recruited two former managing directors from Sony Pictures Television in order to expand its video business. The business should ramp-up between now and end-2017.
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Rising demand for contents For TV groups, this is both a threat and an opportunity is leading to higher costs, but On the one hand, competition in acquiring the best contents is strengthening, costs are increasing and is an opportunity in the production sector it is becoming vital for players to secure their access to key contents. TV groups are therefore aiming to enhance their control of contents, possess their own audio-visual formats by developing their internal production units and via strengthened partnerships between broadcasters and producers.
In France, this aim is stumbling against strict legislation that aims to protect small producers and therefore imposes independent production quotas on TV groups, limiting the ability of these groups to control their access to contents, but also to generate revenues stemming from the export of their programmes internationally. Indeed, the law sets a minimum contribution to development of audio- visual works production at 15% of full-year revenue from the previous year (12.5% for heritage productions only). 60% of this contribution must be reserved for independent productions (namely less than 15% owned by the publisher) and 74% in the case of a heritage contribution only. Agreements making the framework more flexible can nevertheless be signed between publishers and producers, as was the case for TF1 in May 2016, when the group reaffirmed a contribution of 12.5% in favour of creating heritage productions, with a maximum share of investments focused on independent production lifted to 36% vs. 26% previously, with the 10% corridor representing a zone of flexibility, enabling TF1 to obtain more extensive rights (linear and non-linear).
This type of agreement could become increasingly widespread to the point that regulations are relaxed under rising pressure from GAFA companies, whose financial clout could lead to predatory behaviour to gain the best contents on the market. As we already noted in terms of media chronology, the current regulatory and legislative framework, which aims at preserving the French ecosystem, does not look very well suited to the threats stemming from GAFA companies.
As an example, the Scènes de Ménage series broadcast by M6 and produced by M6 Studio and Noon is less exposed to predation by third-party players than is Plus belle la Vie, broadcast on France Télévisions, but produced by a previously independent producer now owned by TF1.
This threat hanging over TV publishers and causing higher contents costs, is nevertheless an opportunity for the audio-visual production sector. A number of media groups have therefore decided to expand aggressively in the production field. The table below sets out the main recent initiatives in this field on a European scale.
Fig. 36: Acquisitions of production companies by media groups - major recent operations
Company Acquirer Price
Discovery All3Media GBP500m Liberty Global
ITV Talpa Media GBP355m
ITV Mammoth Screen undisclosed
ITV Tetra Media Studio USD530m
ITV World Productions undisclosed
Vivendi Banijay/Zodiak EUR100m (26,2% share)
TF1 Newen undisclosed
TF1 Tuvalu Media Group undisclosed
Source: Bryan, Garnier & Co.
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This table shows the particularly pro-active strategy of the UK's leading free TV group, ITV. Under the impetus of former CEO Adam Crozier, the group operated a genuine shift into production enabling it to reduce its dependence on TV advertising from 64% of revenues in 2010 to 47% in 2016. The group now generates more than GBP1.4bn in contents, more than half of which in the UK. A good example is the huge success of the Downtown Abbey series produced by the group.
In France, based on the ITV model, TF1 stood out for its acquisition of Newen at end-2015 (which itself took a majority stake in the leading Dutch independent producer Tuvalu Media Group in early 2017), and is showing an aim to expand in contents production. However, M6 is currently refusing to go down this road, highlighting the risk of mixing customers and rivals. Newen still derives 80% of revenues from outside TF1 and would especially like to step up its international development via Tuvalu in particular.
The objective in production is two-fold, namely to bet on market development internationally, but also on local market development, driven by new global media players. Indeed, we believe it will be difficult for globalised OTT content players to free themselves from local products. An example of this is the initiative by Netflix with Marseille and Osmosis, production of the latter is due to start in 2108. At this stage, the partnership between the SVoD platform and TF1 has limited itself to broadcasting of the first episodes of Marseille in a "free-to-air" format on the TF1 channel, and we can imagine that producing/co-producing this type of content is an opportunity for the future. The success of Marseille has nevertheless been mixed, and whatever the outcome, this example shows that: 1/ even GAFA groups will aim to expand their offer in local contents to get a foothold in France, 2/ it is not that easy to produce this type of content and we believe that success should necessarily rely on local productions.
Other initiatives also illustrate the attractive potential harboured in the audio-visual production sector, notably that of Xavier Niel, Mathieu Pigasse and Pierre-Antoine Capton with the creation of Mediawan.
Focus: Mediawan
Mediawan was created in 2015 by Xavier Niel, founder and majority shareholder of Iliad, Mathieu Pigasse, CEO of Lazard France and shareholder in Le Monde and Les Inrockuptibles, and Pierre- Antoine Capton, founder and manager of 3e œil Productions (the biggest French independent audiovisual producer). Mediawan is a "Special Purpose Acquisition Company" or SPAC, floated on Euronext in April 2016. The company raised EUR250m during its IPO and aims to multiply acquisitions in the traditional or digital audio-visual production sector. Mediawan is aiming to make the most of rising demand for contents and new uses in a context whereby the group considers it important to consolidate small players and reach critical mass, especially in order to generate cross-platform synergies. In early 2017, Mediawan acquired AB Productions, a major French-speaking producer and distributor in Europe, for EUR274m. Mediawan also recently announced a project to acquire Clarke Costelles & Co, a producer of historical documentaries, including the widely acclaimed "Apocalypse".
While the development of internal production, hampered by the regulatory context, should enable TV groups to better secure their contents, build competitive advantages and control costs better, we believe the development of the third-party production business should enable them to expand sales, especially export sales) while reducing their exposure to the advertising market.
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4.7. Advertising market driven by customer data We have already seen how customer data is set to become the key to the digital and TV advertising market. In this context, GAFA groups are set to pursue development of their advertising revenues (driven especially by the launch of a certain number of video/TV services as already mentioned). Revenues stemming from search platforms (Google especially) and social networks (Facebook in particular) are especially likely to account for a rising share of advertising spend.
In 2017, 20% of global advertising investments are already being poured into Google and Facebook and the two groups represent two-thirds of advertising revenues in digital in France according to the French e-advertising observatory (SRI study, Udecam and PWC), with this set to rise by 17.5% in 2017 on Magna intelligence estimates. Meanwhile e-commerce sites (Amazon and eBay in particular) are also aiming to change their business models and expand in advertising. Market places are moving towards a model whereby the advertising sold will gradually replace the commission fees paid by sellers. As is the case for Google and social networks, e-commerce sites have highly qualified customer data at their disposal that can be made profitable, on condition that powerful targeting tools are put in place in order to exploit their inventories as well as possible. Amazon recently launched a new tool enabling it to link its data to advertiser audiences, as Facebook and Google already do. Amazon's latest earnings indeed testify to a surge in the platform's "other revenues"(+60%), which include advertising revenues. While Amazon is still far from Google or Facebook in this respect, its customer data potential is huge as is its ability to value this. In France, Amazon claimed it had 21 million unique visitors in 2016.
The following chart sets out Magna Intelligence forecasts for changes in the media mix (December 2016), on a global scope.
Fig. 37: Change in media mix - global advertising spend
55%
50%
45%
40%
35%
30%
25%
20% 2016 2017 2018 2019 2020 2021
TV - share of total advertising Online - share of total advertising
Source: Magna Intelligence.
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As such, digital investments should represent half of total advertising investments within four years, with search and social media platforms bringing their contribution to 75% of digital investments.
In this context, we propose our own estimates for changes in the advertising market in France, based on the following factors:
GDP growth underpinning the rise in the overall advertising market: we have based ourselves on the latest OECD forecasts for 1.4% growth over the next three years. Note that GDP growth does not necessarily rhyme with a recovery in advertising spend and we note a lag/inertia between the recovery in one or the other. Although GDP growth has improved constantly since 2012, advertising investments in the French market did not pick up before 2015. In 2016, investments were stable, despite GDP growth of 1.1%. We have followed the recovery trend in the French advertising market, driven by the country's economic recovery, and presume growth of 1% over 2017, 2018 and 2019, in line with IREP’s forecasts.
Increase in digital investments: we expect the share of digital investments in overall advertising spend (excluding directories, non-addressed mailing publicity and print-outs) to rise from 31% in 2016 to 36% in 2019, driven by growth in search and social networks (up 20% over 2016), the development of advertising revenues by e-commerce players and also change in TV uses towards more non-linear OTT content. Note here that the historical TV media groups are set to capture an increasing volume of digital investments via their strengthened presence on the internet and digital platforms.
Regulatory easing in targeted TV advertising: with an impact likely towards end-2018/2019, we are forecasting a generalisation in targeted advertising to all TV services, therefore enabling better resistance to growth in digital investments. We presume that geolocation of viewers remains banned and forecast EUR40m in incremental TV advertising market relative to the current trend, as show in Fig. 40. As such, the share of TV advertising spend only falls from 29.6% in 2016 to 29.5% in 2019 (excluding directories, unaddressed publicity mailings and print-outs).
Constant decline in press with radio spending under pressure. The printed press as well as radio, which does not have the same targeting capacity, is set to continue suffering to the benefit of digital, with the trend amplified by the development of television direct-to-consumer advertising. We therefore assume a decline in the press plus radio contribution to net advertising spend from 27.3% in 2016 to 22.8% in 2019 (excluding directories, unaddressed publicity mailings and print-outs).
Our forecasts are set out below.
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Fig. 38: Forecast change in net advertising spend in France
16,0
EURbn 14,0
Total net adv market 12,0
10,0
8,0
6,0 Digital adv market 4,0
2,0 TV adv market
0,0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: IREP, Bryan Garnier & Co est.
We are therefore looking for growth in TV advertising investments of 1% in 2017, 2018 and 2019, and expect growth in digital advertising spend of 6.5% in 2017, 6.0% in 2018 and 5.5% in 2019.
Fig. 39: Forecast change in net advertising spend mix in France 100%
90% 32% 31% 31% 30,6% 31,1% 29,8% 29,6% 29,6% 29,5% 29,5% 80%
70% 6,6% 6,47% 6,34% 6,21% 6,08% 7% 7% 6,8% 7,0% 7,0% 60% 16,7% 20,8% 19,3% 18,0% 50% 23% 26% 31% 30% 28% 34% 10,7% 40% 10,9% 10,8% 10,7% 11,0% 30% 11,0% 11,3% 11% 10,8% 20% 11% 34,7% 36,2% 29,6% 31,4% 33,1% 24,0% 10% 19% 21% 23% 14% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Internet outdoor press cinema radio TV - best case
Source: IREP, Bryan Garnier & Co est.
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Fig. 40: Change in TV share of net advertising spend, impact of targeted advertising
33,0%
32,5%
32,0%
TV - Real 31,5%
31,0%
30,5%
30,0% TV - best case
29,5%
TV - trend case 29,0%
28,5%
28,0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: IREP; Bryan, Garnier & Co ests.
Fig. 41: Detailed forecasts for change in advertising spend in France
Advertising spendings (EURm, unless otherwise mentionned) 2014 2015 2016 2017e 2018e 2019e Total spendings 12972 13324 13319 13452 13587 13723 yoy growth -2,3% 2,7% 0,0% 1,0% 1,0% 1,0% of which médias + digital 10375 10881 11000 11121 11243 11367 yoy growth -1,3% 4,9% 1,1% 1,1% 1,1% 1,1% of which TV 3222 3242 3254 3287 3319 3353 yoy growth 0,1% 0,6% 0,4% 1,0% 1,0% 1,0% TV Contribution to Medias and digital advertising 31,1% 29,8% 29,6% 29,6% 29,5% 29,5% of which Digital 2489 3216 3453 3677 3898 4112 yoy growth 4,6% 29,2% 7,4% 6,5% 6,0% 5,5% Digital Contribution to Medias and digital advertising 24,0% 29,6% 31,4% 33,1% 34,7% 36,2% of which Press 2683 2450 2286 2149 2020 1899 yoy growth -8,7% -8,7% -6,7% -6,0% -6,0% -6,0% Press Contribution to Medias and digital advertising 25,9% 22,5% 20,8% 19,3% 18,0% 16,7% of which Outdoor 1174 1169 1205 1210 1211 1211 of which Radio 726 721 712 705 698 691 of which Cinema 81 82 90 94 97 101 of which others (directories, mailings…) 2597 2443 2319 2331 2343 2356 yoy growth -6,1% -5,9% -5,1% 0,5% 0,5% 0,5%
Source: IREP; Bryan, Garnier & Co ests.
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4.8. And what about telecoms/media convergence? ROI levels on We provided an overview of the new media players that are disrupting the market (GAFA, telecoms telecoms/media operators) in section 3.1. These include the major social media networks that would like to ramp up in convergence strategies seem value terms (Youtube, Twitter, Facebook), GAFA companies that are aiming to extend their services uncertain, but these lead to higher contents costs and portfolios in order to better recruit customers and make them loyal (Amazon, Apple), but also telecoms oblige all players to take players, some of which are accelerating their own investments in contents under a vertical integration action logic.
These moves in the telecoms universe are not entirely new. Jean-Marie Messier's strategy at Vivendi in early 2000 was based on the same paradigm, before it failed. Without getting into too much details of the case here, we nevertheless identify the major reason for this failure as being the hefty investments made in a string of acquisitions that did not generate the synergies hoped for, especially given the unsuitable technology at the time. Things have changed massively since then, notably the natural link between content and communication channels has strengthened massively given the digitalisation of broadcasting and contents. Data, fixed-line and mobile transport is now just as important as voice transport as shown by the development of multi-screen and mobile contents consumption (see Fig. 11), the explosion in mobile data usages and the rising number of customers that watch TV via their internet access provider (see Fig. 14). Contents are now key for telecoms operators: they are both the cause and the consequence of the development of very high speed networks. The question now concerns the content sourcing model and whether the convergence between telecoms and media is now unavoidable.
Indeed, two opposing strategies are still prevailing in the market:
A vertical integration strategy, illustrated especially by the major US operators and by the Altice group, which consists of acquiring media groups, producing proprietary contents and buying exclusive rights in order to develop a proprietary audio-visual offering (re. illustration Fig. 42).
A partnership strategy, which aims at offering a broad range of contents from third-party suppliers via commercial and distribution agreements. In France, this is typically the model put in place by the Bouygues group, which despite being the majority shareholder of Bouygues Telecom and TF1, would like to maximise the interest of its two subsidiaries independently of each other (note that Vivendi had the same approach under the chairmanship of Jean-René Fourtou, with a strategy maximising the interest of Canal+ on the one hand, and SFR on the other). Operators defending this position see the activity of a telecoms operator as above all being to provide connectivity.
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Fig. 42: Main recent telecoms/media merger operations
Telecom operator Deal type Target Date of transaction
Altice M&A Media Capital 2017 (ongoing)
Altice M&A NextRadio TV 2016
Altice Commercial partnership NBC Universal 2016
Altice Commercial partnership Discovery 2016
Altice Rights acquisition Premier League 2015
Altice Rights acquisition Champions and Europa League 2017
AT&T M&A Time Warner 2017 (ongoing)
AT&T M&A Direct TV 2015
BT Rights acquisition Premier League 2015
Comcast M&A NBCUniversal 2011
Comcast M&A Dreamworks animation 2016
Liberty Global Equity investment ITV 2014/2015
Orange Commercial partnership HBO 2017
Orange Spain Rights acquisition La Liga 2016
Proximus Rights acquisition Jupiler Pro League 2017
Telefonica M&A Canal+ Spain 2015
Telefonica Rights acquisition La Liga 2016
Verizon M&A Yahoo 2017 (ongoing)
Verizon M&A AOL 2015
Vivendi Equity investment Telecom Italia 2015/2016
Vivendi Equity investment Mediaset 2016
Vodafone Spain Rights acquisition La Liga 2016 Source: Bryan, Garnier & Co. Note that the two stances are not necessarily exclusive: despite the forthcoming launch of the SFR Radio channel (cinema and series) and the presence of its own SVoD offer, SFR Play, Altice has just signed a distribution partnership with Netflix. Altice also enables access to beIN SPORTS opposite its sports offer SFR Sport. Meanwhile concerning Orange, while it is a hardened defender of a partnership strategy, it publishes the Orange Cinema Series (OCS) bouquet internally and this is also distributed via third-party operators.
We have taken a deeper look into the logic motivating telecoms/media vertical integration strategies. We believe this stance results from a dual defensive/offensive strategy:
A defensive strategy above all. On the one hand, we believe that telecoms operators are facing a risk of their business becoming a commodity ("dumb pipe"), with value being shifted from access to contents. This risk is even more visible in markets like France where the heightened competitive environment prevents the hefty investments made in network innovations (4G, FTTH etc.) from being valued. This is materialised in a race for volumes and extreme promotional intensity at the expense of value per customer. On the other hand, telecoms operators are threatened with losing the customer tie in value-added services: even if the customer is still billed by the telecoms operator for its access, the surge in OTT content offers carry just as many risks for the operator of losing some of the ties with customers. These ties are fundamental for operators to get to know their customers and hence better value them. Finally, in a backdrop where content offers are becoming vital for the customer promise,
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Followed by a pro-active strategy. Operators in favour of vertical integration in telecoms/media believe that the operator is the best placed to generate returns on the hefty investments made in contents, for several reasons. Firstly, they have the opportunity of amortising contents over very wide customer bases, while on the other hand they are at the heart of access to contents via customers (fixed- line and mobile), and finally, they natively possess huge amounts of customer data. In doing so, convergent telecoms/media operators are aiming to carve themselves both a share of advertising market value and of the pay-TV market. For pay-TV in particular, we remain dubious over the value that could be captured in fragmented markets that generate little or no money (in France, beIN SPORTS and Canal+ are losing money). Telecoms/media convergence therefore aims either to limit the loss of value or to gain value via contents. The question is therefore what ROI can be generated on contents.
For an operator, generating returns on investments in contents is achieved in three main ways:
Via the sale of value-added services in the form of options. In addition to the standard telecoms offer, customers can subscribe to a certain number of additional contents services. The price is generally high since the cost of contents is amortised over the sole customer base effectively interested in the offer. However, in contrast, this "high" price is acceptable for customers that consider the content in question important. This is typically the strategy rolled out by Orange for selling its OCS bouquet.
Via a premium bundle strategy. This involves raising the price of offers at the same time as including additional contents in the form of bundles. Unlike value-added services, here the contents offer is tied to the access offer and the price attributed to contents is lower, since the cost is amortised over the entire customer base, including customers that are not specifically interested by the contents in questions and who subscribe to the bundle for other reasons. Two very different cases can therefore be identified, namely a forced application of this price strategy (opt-out mode) to the entire eligible customer base, or a restricted application to new ranges sold to new customers. In the first case, the impact is immediate but can generate dissatisfied customers and hence churn issues (a right to free cancellation is generally provided), whereas in the second case, the impact is smoothed over time. The first case was typically the price strategy implemented by SFR in 2015/2016.
By an impact on commercial performance. This strategy consists of focusing on the enhanced offer since new contents are included, to increase customer recruitment and loyalty. Here there is no need to increase prices since the surplus net sales generated, and hence the customer base, is what amortises costs. Naturally, this strategy is only relevant in the case of fixed-cost contents (purchase of sporting rights for example). The three approaches above are not mutually exclusive. To illustrate this, we have looked at the example of the rights to broadcast the Champions League/Europa League acquired by Altice/SFR for the 2018- 2012 seasons, for an estimated annual amount of EUR375m, and analysed the profitability opportunities via each of the three approaches described above.
The main assumptions of this analysis are as follows: a total BtoC base of 18.5 million customers (six million fixed-line customers, 12.4 million mobile subscriber customers), average fixed/mobile ARPU of EUR28.9, an average margin on variable costs of 75% (including acquisition and loyalty costs) for incremental retained/acquired customers, and 100% for general incremental ARPU generated. The results of our analysis are set out in the table below.
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Fig. 43: SFR investment in European football league broadcasting rights: analysis of return on investment
Breakeven analysis - content returns Y1 Y2 Y3 Total 3 years
Content costs (EURm) 375 375 375 1125
Sc.1 - Value added options
Option price / cust / month (EUR, all taxes included) 10,1 10,1 10,1
Number of options sold (m) 2,8 3,7 3,7
Penetration rate (%) 15% 20% 20%
Additional revenues (EURm) 307 409 409 1125
Net impact (EURm) -68 34 34 0
Sc.2a - Premium bundles - "Opt out"
Price increase (EUR, all taxes included) 1,9 1,9 1,9
Price impact (%) 6% 6% 6%
Penetration rate (over broadband base) 100% 100% 100%
Additional revenues (EURm) 375 375 375 1125
Net impact (EURm) 0 0 0 0
Sc.2b - Premium bundles - "Opt in"
Price increase (EUR, all taxes included) 4,9 4,9 4,9
Price impact (%) 15% 15% 15%
Penetration rate (%) 25% 40% 50%
Additional revenues (EURm) 245 391 489 1125
Net impact (EURm) -130 16 114 0
Sc.3 - Net adds boost
Additional net adds 1,2 1,6 1,6
Customer base impact (%) 6% 9% 9%
Additional revenues (EURm) 307 409 409 1125
Net impact (EURm) -68 34 34 0
Source: Company Data; Bryan, Garnier & Co ests.
In scenario 1, new options of EUR10 incl. VAT would need to be sold to 20% of the customer base in order to make the investment profitable. In scenario 2a, ARPU over the entire customer base would have to rise by 6% in order to make the investment profitable, but this price policy would probably generate customer churn, not taken into account here. In scenario 2b, 50% of the customer base would have to enter the new bundles sold at an average price 14% higher (+EUR5 incl. VAT). Finally, in scenario 3, the overall customer base would have to increase by almost 10% over three years via better recruitment and better loyalty. In all, even over an extensive customer base such as SFR's, these investments look very difficult to turn profitable in all cases.
In Europe, another operator stands out for its aggressive contents/container convergence strategy, namely UK group BT, which invested heavily in rights to broadcast the Premier League football tournament (GBP738m over three years in 2013 and then GBP960m in 2016) and the Champions League (GBP897m in 2015). The main results of this strategy are illustrated below. As with SFR, the ARPU impact was visible, with a far less obvious impact on net sales. This strategy enabled the operator to post higher performances, but here too the return on investment is questionable. Assuming that these investments turned around the group's KPIs (-3.2% in net customers and +6.3% in average annual
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APRU between 2009 and 2013 compared with +0.4% and +7.3% after this period), we estimate the incremental revenue at around GBP1bn compared with contents costs of GBP1.501bn between Q2 2014 and Q2 2017. Note that this model does not take account of additional broadcasting costs (journalists/animators, consultants, technical means...).
Fig. 44: The BT case in the UK
BT Consumer ARPU Growth BT Consumer Revenue per quarter First Premier (in mGBP) 10.0% League First European Broadcasting Cup 1,400 Broadcasting 9.0% First European First Premier 1,200 Cup Broadcasting 2010 League 8.0% 2011 1,000 2012 7.0% 800 2013 2014 600 6.0% 2015 400 2016 5.0% 2017 200
4.0% 0 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 Q2 Q3 Q4
Source: Company Data; Bryan, Garnier & Co ests.
Note that the SFR case-study is limited to the scenario whereby the operator maintains exclusive rights. However, exclusivity is often not maintained fully. The two reasons for this are either financial (search for additional profitability levers in the case where the telecoms lever proves insufficient), or regulatory (dominant position issue or access/content related sale). For this latter point, note indeed that national regulators are often reticent to grant operators an overly strong position in contents or inversely. In Italy, AGCOM obliged Vivendi to reduce its stake in Mediaset (30%), or in Telecom Italia (25%). In Spain, the CNMC has always obliged Telefonica to offer all or some of its football rights for sale. Meanwhile, in France, the CSA and the ARCEP are careful and it seems clear that they would not allow a telecoms operator to develop an overly dominant position in key contents.
Several methods for "disposal" of exclusivity exist:
Distribution of contents by rival operators via commercial agreements (example: OCS).
Making an OTT content offer available independently of the operator (example: SFR Sports).
Disposal of some of the rights acquired (example: Telefonica with football broadcasting rights in Spain).
In all cases, this intrusion by telecoms players is a genuine threat for traditional pay-TV groups since telecoms operators have both higher financial clout and access to larger customer bases. If exclusivity is not fully maintained, the increase in content costs is tangible (+165% for the Champions League/Europa League acquired by Altice for France) in a pay-TV sector that is already suffering: in France, Canal+ (excl. CanalSat) and beIN SPORTS are losing money as is Mediaset Premium in Italy. The two ways out are therefore 1/ a partnership agreement between contents providers and operators, like the discussions underway between Canal+ and Orange, 2/ a merger between contents
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providers, such as that between 21st Century Fox and Sky, or Canal+ and beIN SPORTS France (agreement refused by the competitions authorities in 2016, but which could resurface following the relaxing in June 2017 of the regulatory orders imposed on Canal+ since the merger with TPS).
In this context, the OTT content approach used by certain telecoms operators could prove interesting for pay-TV providers. In France, the availability of SFR Sports as OTT content provides SFR the responsibility of making its rights profitable, but enables Canal+ customers to have access to the sporting contents of their choice without necessarily de-subscribing from their entire bouquet (since end-2016, the Canal+ offers are marketed in a modular format).
Free TV is not absent from So far, we have primarily mentioned telecoms/media convergence in the pay-TV sector. However, free telecoms/media TV is not saved by these moves, even though they are rarer. Behind merger initiatives between free TV consolidation moves. The and telecoms groups are Altice, which bought NextRadioTV in France (the Alain Weill group that battle for customer data and monetisation is again at the notably owns BFM TV, the leading news channel in France available on DTT, as well as the RMC radio heart of the rationale behind station), and is in discussion with Prisa to buy its 95% stake in Media Capital, the leading free TV and these operations. radio group in Portugal.
Despite having TF1 and Bouygues Télécom among its subsidiaries, the Bouygues group has no integration strategy for the two businesses. The rationale behind a free-TV/telecoms merger is two- fold:
Leveraging editorial units from the free-TV universe to develop/create new channels offered on pay-platforms and inversely. For example, Altice launched SFR Sports on the back of the RMC editorial teams which are very present in sport. Certain radio emissions are now filmed and broadcast directly on SFR Sport. Similarly, Altice relied on BFM and RMC to launch two new information channels, BFM Sports and BFM Paris (local news). These channels can therefore be launched at a lower cost, enabling optimal amortisation of the group's investments in contents over a multitude of supports and formats, and hence increased advertising power, i.e. a better power ratio.
Enabling advertising units to offer an integrated multiplatform media inventory, and above all to leverage the customer knowledge developed in the telecoms universe in particular to better monetise advertising on free media (and inversely). Altice is notably capable of offering direct-to-consumer advertising on its local BFM Paris channel.
This latter point justifies Altice's acquisition of Teads in early 2017. Here, we are switching from a two- dimensional telecoms/media convergence strategy to a three-dimensional strategy of telecoms/media/advertising.
As such, we are back to the battle over customer data and monetisation as discussed in chapter 4.4.
Here we understand the hidden challenges of free channel publisher waging a remuneration from telecoms operators. At first glance, this is a debate between the value of the contents (offered by the publisher) and the value of bandwidth (offered by the operator). Tough, a settlement had been found in the past: assuming the equivalence of the two services, the parties had decided to pay no remuneration to each other, whether for contents or for bandwidth. However, the value captured by operators has increased since then and now includes customer data and the ability to monetise it. In an OTT content
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Note that SFR has taken this subject to the CSA. In our valuation assumptions, we do not include a premium relative to the outcome of these negotiations. We nevertheless estimate that this can only be positive for media groups for the following reasons:
It is highly likely that discussions between TF1 and Bouygues Telecom are conclusive, according to the latest declarations by Bouygues' management, which owns the two businesses. An agreement would place sharp pressure on the three other operators.
An equilibrium point exists whereby an agreement could be concluded for an amount that is both significant for media groups and low for each of the operators individually.
Independently of a financial agreement, these discussions could be an opportunity for media groups to reach a beneficial agreement on the sharing of customer data.
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Media
5. Glossary
3P: Triple Play access from internet access providers, offering access to the internet, landline telephone communications and access to television.
Access Prime time: block of broadcasting before the prime time and taking place from 18h to 20h.
DEI: Individual viewing time (IVT), designates the time spent watching/listening to TV or radio relative to the population as a whole.
DET: Total viewing/listening (TVT) time for a TV or radio media relative to viewers/listeners.
DSL: "Digital Subscriber Line", high-speed land line internet access technology, based on copper cabling to the historical telephone network, delivering speeds of less than 30Mbps.
DTT: Digital Terrestrial Television, designates the free television offer broadcast by terrestrial digital networks.
FTTH: "Fibre To The Home", very high speed land-line internet access, based on end-to-end fibre optic infrastructure, delivering speeds of more than 100Mbps.
GAFA: "Google Amazon Facebook Apple", apart from these four players, this designates major global US web players. We could notably add Microsoft and Netflix.
GRP: Gross Rating Point, advertising pressure indicator corresponding to the average number of advertising contacts obtained over 100 individuals in the target group.
Millennials: we are targeting people aged between 15 and 34-year-old
OTT: "Over The Top" designates all of the digital services and platforms accessible on the internet, independently of equipment and telecoms operator interfaces providing access.
Replay (or catch-up television): This viewing method designates the ability to watch programmes broadcast on television via a digital platform after they have been broadcast a first time live
STB: "Set Top Box", designates an internet access supplier's appliance enabling connection to the television via DSL or fibre.
SNEP : « Syndicat National de l'édition Phonographique »
SVoD: Subscription Video On Demand, designates digital video rental platforms by subscription.
VoD: Video On Demand, designates digital purchase or video rental platforms.
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INDEPENDENT RESEARCH TF1 20th July 2017 “I want you on my team” TMT Fair Value EUR13.2 (price EUR11.51) BUY Coverage initiated
Finalised on 19th July We are initiating coverage of TF1 Group with a Buy recommendation Bloomberg TFI FP and Fair Value of EUR13.2. In a market in the throes of a digital Reuters TFI.PA revolution, we welcome the group's initiatives in TV production and 12-month High / Low (EUR) 12.3 / 7.9 consider that the new strategic directions should enable the group to Market capitalisation (EURm) 2,413 Enterprise Value (BG estimates EURm) 2,141 restore lasting EBIT margin growth and offer better risk diversification. Avg. 6m daily volume ('000 shares) 276.0 Free Float 48.8% In recent years, TF1 Group has suffered from pressure in the advertising 3y EPS CAGR 57.4% Gearing (12/16) 16% market and the fragmentation of TV audiences. The group has since Dividend yields (12/17e) 2.43% restored better momentum, driven by a market showing signs of a recovery and crucial operating and strategic initiatives. YE December 12/16 12/17e 12/18e 12/19e Revenue (EURm) 2,063 2,103 2,162 2,226 EBITA EURm) 45.7 170.3 155.2 234.7 By making the most of opportunities arising from digital in particular, we Op.Margin (%) 2.2 8.1 7.2 2.2 Diluted EPS (EUR) 0.20 0.59 0.51 0.77 believe TF1 Group will be able to optimise the profitability of its EV/Sales 1.08x 1.02x 0.97x 0.90x advertising revenues versus its programming costs revenue efficiency. We EV/EBITDA 6.0x 4.5x 4.7x 4.0x also welcome the group's positioning in production activities where we see EV/EBITA 48.7x 12.6x 13.5x 8.6x P/E 58.0x 19.5x 22.6x 14.9x genuine growth opportunities. As such, we are forecasting a CAGR in ROCE 2.8 8.6 7.9 11.6 2016-2019 revenues of 2.6%, driven by a recovery in advertising performances (CAGR of 0.9% over 2016-2019), but also ambitious
12.4 development in production activities (8% 2016-2019 CAGR, organic
11.4 growth and acquisitions).
10.4 On the back of better returns on investments in contents, the development 9.4 of digital activities, growth in production activities and the roll-out of the 8.4 "Recover" savings plan, we are forecasting a CAGR in 2016-2019 7.4 18/01/16 18/04/16 18/07/16 18/10/16 18/01/17 18/04/17 18/07/17 underlying EBIT of 22% (12.9% excl. sport events), with an underlying TF1 (TV.FSE.1) SXX EUROPE 600 MEDIA EBIT margin of 10.5% in 2019 vs. 6.3% in 2016 (8.1% excl. sport events).
Currently valued at 11.8x underlying EBIT, with a low leadership premium and a risk profile less dependent on the TV advertising market, we believe TF1 Group harbours genuine upside potential. Our Fair Value stands at EUR13.2, 14.7% ahead of the current share price.
Analyst: Sector Analyst Team: Thomas Coudry Richard-Maxime Beaudoux 33(0) 1 70 36 57 04 Gregory Ramirez [email protected] Dorian Terral Frédéric Yoboué
r r TF1
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 2,092 2,004 2,063 2,103 2,162 2,226 Change (%) -% -4.2% 2.9% 2.0% 2.8% 3.0% Adjusted EBITDA 167 212 372 472 445 507 EBIT 117 141 45.7 170 155 235 Change (%) -% 21.2% -67.6% 273% -8.8% 51.2% Financial results 1.4 (2.1) (5.7) (0.90) 0.0 0.0 Pre-Tax profits 118 139 40.0 169 155 235 Tax (29.8) (42.3) (5.9) (51.1) (46.6) (70.4) Minority interests 6.3 3.4 2.3 3.1 4.0 4.0 Net profit 419 103 44.0 127 111 166 Restated net profit 103 103 44.0 127 111 44.0 Change (%) -% 0.2% -57.4% 188% -12.8% -60.2% Cash Flow Statement (EURm) Operating cash flows 108 137 229 364 367 411 Change in working capital 12.7 8.4 14.5 (37.6) (8.8) (26.1) Capex, net (36.9) (57.6) (205) (249) (260) (271) Dividends (117) (317) (167) (58.6) (58.6) (58.6) Net debt (497) (701) (187) (272) (320) (401) Free Cash flow 119 76.7 16.7 125 147 179 Balance Sheet (EURm) Tangible fixed assets 176 170 174 174 174 174 Intangibles assets 582 557 798 793 786 785 Cash & equivalents 501 703 420 526 574 654 current assets 2,355 2,372 2,123 2,231 2,325 2,412 Other assets 611 115 121 82.8 84.8 86.8 Total assets 3,724 3,214 3,216 3,281 3,370 3,457 L & ST Debt 4.4 2.3 234 254 254 254 Others liabilities 1,680 1,450 1,490 1,470 1,508 1,487 Company description Shareholders' funds 2,040 1,762 1,493 1,557 1,609 1,716 As France’s leading mainstream Total Liabilities 3,724 3,214 3,216 3,281 3,370 3,457 Capital employed 1,623 1,124 1,386 1,380 1,384 1,411 television company, TF1 Group Ratios operates and develops five freeview Operating margin 5.57 7.04 2.22 8.10 7.18 2.22 channels and several special-interest Tax rate (25.40) (30.41) (14.75) (30.19) (30.00) (30.00) pay-TV channels as well as their digital Net margin 20.03 5.15 2.13 6.03 5.12 2.13 offshoots. The TF1 group’s businesses ROE (after tax) 20.60 5.74 2.79 7.96 6.66 9.52 today cover the entire audiovisual ROCE (after tax) 5.36 8.74 2.81 8.62 7.85 11.65 Gearing 0.22 0.13 15.64 16.31 15.78 14.79 value chain, including production Pay out ratio 27.97 307 380 46.23 53.00 35.27 activities. Number of shares, diluted 211 212 210 209 209 209 Data per Share (EUR) EPS 1.95 0.47 0.20 0.59 0.51 0.77 Restated EPS 1.95 0.47 0.20 0.59 0.51 0.77 % change -% -% -% -% -% -% BVPS 9.48 8.22 7.11 7.42 7.65 8.14 Operating cash flows 0.51 0.65 1.09 1.74 1.75 1.96 FCF 0.56 0.36 0.08 0.60 0.70 0.86 Net dividend 1.50 0.80 0.28 0.28 0.28 0.28
Source: Company Data; Bryan, Garnier & Co ests.
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Table of contents
1. Investment Case ...... 50 2. Changes in the group's relation to advertising ...... 51 3. Ambitious diversification into production ...... 57 4. A widening digital offer ...... 59 5. Significant margin improvement potential ...... 61 6. Valuation ...... 62 6.1. Change in share price ...... 62 6.2. DCF ...... 62 6.3. Multiples ...... 64 7. Appendices ...... 66 7.1. Group revenue and EBIT by business ...... 66 7.2. TF1 group income statement ...... 67 7.3. TF1 group cash flow forecasts ...... 68 7.4. Shareholding structure ...... 68 Bryan Garnier stock rating system ...... 69
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TF1
1. Investment Case
The reason for writing now Despite pressure from digital, we see signs of a recovery in the advertising market. In addition, TF1 has implemented an aggressive savings plan, while its development in production is only in the teething stages and we hope that regulations could be eased in targeted advertising on television.
Valuation We have a Fair Value of EUR13.2, based on a DCF valuation, namely a 14.9% premium relative to the current share price, valuing the TF1 group at 13.2x 2017e underlying current EBIT.
Catalysts Growth in the share price could stem from: 1/ regulatory changes in targeted advertising, 2/ a recovery in the advertising market, 3/ growth in the production market, 4/ a group savings plan, 5/ growth in digital platforms.
Difference from consensus We believe the consensus is over-estimating the threat from digital media, which is also a source of opportunities for margins in our view, while also under-estimating the group's development potential in production.
Risks to our investment case The main risks to our scenario are the following: 1/ economic pressure on advertising budgets, 2/ faster development of social media in TV contents, 3/ rising momentum of e-commerce players in the advertising market, 4/ difficulties in turning around the group's audience share, 5/ poor execution of the digital transition, 6/ no easing of regulatory restrictions in targeted advertising.
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2. Changes in the group's relation to advertising The TF1 Group was created in 1987 following the privatisation of TF1. It boasts a leading position in the French audio-visual landscape alongside its main rivals France Télévisions and M6.
TF1 Group's revenues include advertising revenues (74.2% of sales) from its five free-to-air channels (TF1, TMC, NT1, HD1 and LCI), its various theme-based channels on pay-TV (TV Breizh, Histoire Ushuaïa and Serieclub), and its digital and cross-media advertising agency TF1 Publicité, as well as revenues from production/distribution of audio-visual rights (10.5% of sales), consumer distribution (9.1% of sales), and cable and satellite (2.3% of sales).
Fig. 1: Historical breakdown of TF1 group activities
TF1 GROUP SEGMENTS 2012 2013 2014 2015 2016
REVENUE
Broadcasting - - - 1,736.1 1,669.9
ow TV advertising on free platforms 1,566.0 1,488.0 1,476.7 1,469.9 1,455.3
% of growth 3.6% -5.0% -0.8% -0.5% -1.0%
Studios and entertainment - - - 268.2 392.8
% of growth - - - - 46.5%
Total Ad Revenue 1,686.8 1,594.3 1,575.5 1,554.2 1,530.1
% of growth -7.4% -5.5% -1.2% -1.4% -1.6%
Other revenues 528.4 481.0 516.3 450.1 532.6
% of growth -33.8% -9.0% 7.3% -12.8% 18.3%
TF1 Group revenue 2,215.2 2,075.3 2,091.8 2,004.3 2,062.7
% of growth -15.4% -6.3% 0.8% -4.2% 2.9%
VERTICAL ANALYSIS 2012 2013 2014 2015 2016
REVENUE
Broadcasting - - - 86.6% 81.0%
ow TV advertising on free platforms 70.7% 71.7% 70.6% 73.3% 70.6%
Studios and entertainment - - - 13.4% 19.0%
Total Ad Revenue 76.1% 76.8% 75.3% 77.5% 74.2%
Other revenues 23.9% 23.2% 24.7% 22.5% 25.8%
Source: Company Data; Bryan, Garnier & Co ests.
TF1 had an audience share of 27.5% in 2016, vs. 28.6% and 14.1% for its rivals France Télévisions and M6 respectively. With still unrivalled media reach today, the TF1 channel garnered an average of 20.4% of viewers in 2016 relative to 13.4% for France 2 and 10.2% for M6. Given this leadership in audience numbers, TF1 obtained 44.7% of total net television advertising spend in 2016. Note that this level of domination is partly possible thanks to the restrictive regulatory framework concerning advertising on the state-run channels broadcast by France Télévisions.
With an average audience share of 22% over the past five years, TF1 is the leading figure and contributed up to 74.2% of audience share on the group's free channels in 2016. According to statistics collected by Médiamétrie, the leader in audience measurement in France, the TF1 channel boasted 70
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TF1
out of the 73 best audience scores in 2016, excluding any sporting events. Three programmes broadcast by TF1 ranked in the top three spots, namely the Enfoirés show (11.1 million viewers), and the films Qu’est ce qu’on a fait au bon Dieu and Les Tuche, both co-produced by TF1 Films Production (respectively 10.6 and 8.5 million viewers). Apart from events and films broadcast on an ad hoc basis, the group has always had a portfolio of federating and long-lasting reality TV shows such as The Voice: la plus belle voix (6th season) and Koh-Lanta (16th season), which boasted French viewer numbers of more 7m and 6m respectively in 2016.
Fig. 2: Audience share of free-to-air channels by group (4 years and over)
35%
30%
25%
20%
15%
10%
5%
0% TF1 Group M6 Group France TV SFR M ed ia Canal Group Others
2011 2012 2013 2014 2015 2016
Source: Médiamétrie; Bryan, Garnier & Co ests.
Fig. 3: Breakdown of TF1 group audience share
35%
30%
25%
20%
15%
10%
5%
0% 2009 2010 2011 2012 2013 2014 2015 2016
TF1 TMC NT1 HD1 LCI
Source: Médiamétrie, Garnier & Co ests.
However, as (Fig. 2) above shows, the TF1 group has seen its audience share decline in a competitive backdrop that is changing radically. Indeed, the group has suffered a plunge in audience numbers on the TF1 channel, probably due to its more generalist positioning compared with certain rivals, and has not managed to offset this downturn with the development of its DTT offer, which despite posting
52
TF1 growth has only partly made up for the decline at the historical channel as shown in Fig. 3. The TF1 channel's audience share has dwindled over time from 26.1% in 2009 to 20.4% in 2016, whereas if we include the group's other free channels, its audience share narrowed by 260bp over the same period. The TF1 group has taken the full brunt of the huge increase in the number of free-to-air TV channels, as well as the multiplication in entertainment sources offered primarily by the increasing adoption of mobile uses. This includes the popularity of video sharing platforms such as Facebook, YouTube and Twitch, which monopolise a significant and rapidly expanding amount of viewing time (1h23 on social networks vs 4h47 for TV in 2016), and the advent of new viewing formats made possible by the delinearisation of television and momentum in SVoD services. All of these developments are discussed in detail in our sector note published today.
Fig. 4: Change in audience shares of seven historical channels
30,0%
25,0%
20,0%
15,0%
10,0%
5,0%
0,0% TF1 France 2 France 3 Canal+ France 5 M6 Arte
2009 2010 2011 2012 2013 2014 2015 2016
Source: Médiamétrie; Bryan, Garnier & Co ests.
We believe that the group's relative underperformance (see Fig. 2) after 2012 is the result of its overly high dependence on the TF1 channel and its generalist positioning, which the new channels HD1 and LCI have not managed to completely offset. As such, advertising revenues on the group's free channels totalled EUR1.455bn in 2016, but have fallen 0.7% on average over the past three years. This downturn is primarily due to the fall in the channel's audience share (-1.6% on average a year), partly made up for by a slight increase in the advertising market (+0.4%) and its higher power ratio (+0.6% on average a year), which is the ratio between the group's share in the advertising market and its audience share.
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TF1
Fig. 5: Advertising revenues (EURm) of TF1 group free channels
+0.4%*
-1.7%*
+0.6%*
-0.7%*
Source: Company Data; IREP; CSA; Bryan, Garnier & Co ests. * CAGR 2013-2016
Before 2016, when the group consolidated Newen (which contributes EUR135m to revenue on our estimates), the group's advertising revenue was constantly falling, not only due to the deterioration in its audience share, as explained above, but also due to pressure on the advertising market as discussed in our sector report. The contribution from advertising to the TF1 group's revenue nevertheless remained generally stable over this period as shown by Fig. 5.
We believe that the historical perception of the TF1 group, seen through the TF1 channel as an admittedly leading media group but with fragile audience share given its generalist positioning, is about to change on a lasting basis on the back of various factors:
Higher requirements for returns on investments in contents.
A lower dependency on advertising revenues for the group, given its rising diversification into digital and especially production activities. This is discussed further in chapter 3.
Besides, the group’s performance should be supported by a recovery in the TV advertising market, driven over the short term by an improvement in economic conditions, and further out, by a beneficial relaxing in regulations (in targeted advertising in particular).
Developments in the French advertising market are discussed in more detail in our sector report. On the back of healthy economic conditions, we are forecasting 1.1% growth in the historical media + digital market over the next three years, halfway between IREP's forecast for 2017 (1.5%) and WPP’s forecast (+0.7%). Growth in digital is again likely to come at the expense of press advertising, with a growth rate in line with the previous years. We also hope to see the possible benefits of a regulatory easing in targeted advertising on television by 2019.
The group's guidance is for a stabilisation in market share in 2017, driven in particular by the repositioning of its DTT channels (and the success of TMC especially), as well as the rising momentum of LCI. We have a bullish assumption for 2017, but believe the group could suffer from more negative
54
TF1 comparison with the year-earlier period as of 2018 (less potential on DTT channels to offset pressure on the TF1 channel). As such, for 2018, we return to forecasts for a slight downturn in audience share, close to performances seen in recent years.
Fig. 6: Change in the TF1 group's advertising market share
EURm (unless otherwise mentioned) 2015 2016 2017e 2018e 2019e
TV advertising market 3 242 3 254 3 287 3 319 3 353
% yoy growth 0,6% 0,4% 1,0% 1,0% 1,0%
TF1 Group free channels advertising revenues 1 470 1 455 1 464 1 467 1 472
% yoy growth -0,5% -1,0% 0,6% 0,2% 0,3%
TF1 Group TV advertising market share (%) 45,3% 44,7% 44,6% 44,2% 43,9%
Source: IREP; Company Data; Bryan, Garnier & Co ests.
At the same time, the TF1 group has embarked on an important strategic plan aimed at generating better returns on its investments in contents. The group's strategy based on media reach has long relied on hefty investments in its programming grid to the detriment of margins. Its leadership position could only be sustained by excessive investment in contents, and hence, at the expense of profitability rates. As such, programming costs for free channels excluding sporting events and net of replacement programmes totalled EUR970m in 2016, representing 66% of advertising revenue on free channels vs. 54.5% for the M6 group (EUR432m excluding sporting events).
The plan driven by the new management team requires greater care upstream in content investments, in order to only retain the most profitable contents, as well as stricter requirements in the use of profitability levers for programmes bought, in particular by exploiting the multiple number of broadcasting platforms as far as possible.
Areas of action include the roll-out of budgetary arbitrage moves in favour of programmes with higher margins, maximum exposure to investments on all of the group's channels, improving visibility on digital platforms (cross-operations between the group's TV channels and its websites, extending the duration of replay? etc.).
While the group has pledged to maintain average annual programming costs for its free channels at EUR980m (excluding major sporting events) over the next three years, we believe it should be able to improve leverage on revenues.
As such, we are forecasting a gradual optimisation in the ratio between advertising revenues and the cost of contents as shown in the table below. Indeed, we consider that wide room for improvement exists relative to rival group M6, which is already extremely efficient in this area.
Fig. 7: Change in investment efficiency in contents (advertising revenues vs programming costs)
Content efficiency 2012 2013 2014 2015 2016 2017e 2018e 2019e
Total Group Adv. Revenue 1687 1594 1576 1554 1530 1547 1557 1570
Total Programming costs excl. Major sport events -980 -947 -920 -929 -961 -992 -970 -980
Progr. Costs as % of free TV adv revenue 58,1% 59,4% 58,4% 59,8% 62,8% 64,1% 62,3% 62,4%
Source: Company Data; Bryan, Garnier & Co ests.
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TF1
Note that in our model, we are forecasting EUR52m in additional costs for broadcasting of the FIFA 2018 world cup football tournament, and EUR5m for the 2019 rugby world cup, net of rights resale.
The table below shows change in TF1's advertising revenue and its contribution to total revenue.
Fig. 8: Example: change in advertising revenues and percentage of revenues
ADV contribution 2012 2013 2014 2015 2016 2017e 2018e 2019e
Total Ad Revenues (EURm) 1687 1594 1576 1554 1530 1547 1557 1570
% of total revenues 76,1% 76,8% 75,3% 77,5% 74,2% 73,5% 72,0% 70,6%
Source: Company Data; Bryan, Garnier & Co ests.
Among the factors helping to decrease the group's dependency on advertising revenues is the development of production activities, which play an important role. We discuss this point in the next chapter.
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TF1
3. Ambitious diversification into production The group's studios and entertainment segment is made up of five businesses: Newen Studios, TF1 Droits Audiovisuels – TF1 International, TF1 Vidéo, Téléshopping, and TF1 Entertainment. In 2016, revenues from the segment rocketed 46.5% to EUR392.8m driven in particular by the acquisition of Newen (-2% estimated excluding Newen). With revenue that we estimate at EUR130m in 2016 and EBIT margin of around 15%, Newen contributed positively to overall EBIT margin, which rose from 8.7% to 10.7% in 2016. The production company represented by TF1 Production, TF1 Films Production and Newen Studios, has enabled the group to become present throughout the value chain in the audio-visual market. Within these various entities, the company creates content or acquires audio-visual rights that can be exploited firstly with the launch of films in cinemas, and then in physical and digital formats, and finally via SVoD.
Fig. 9: Simplified media chronology Source: Bryan, Garnier & Co ests.
The acquisition of 70% of Newen Studios in early 2016 illustrated the group's aim to step up its development in production not only in France, but also abroad. Indeed, in addition to the reputation built up by Newen Studios in France with productions such as Plus Belle la Vie and Braquo (winner of the International Emmy Award in 2012), the company is very present in Germany, Spain and the Netherlands (where it owns Tuvalu Media Group, the leading independent production company), and in Canada. Note that French regulations restrict TF1 to not placing more than 26% of its production orders with a dependent company (i.e. one in which it owns more than 15% of the capital), although this can be raised to 36% via ad-hoc requests.
Fig. 10: Newen Group Presentation
Source: AFP
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TF1
As set out in our sector note, the upstream diversification strategy undertaken by the group is motivated by momentum in contents made possible by the multiplication of video offers on digital platforms (Netflix, MyCanal, Amazon Prime Video, etc.). These platforms not only produce original content, but are also shaking up demand for local independent production in order to accommodate cultural complexities. This aspect could be accentuated by draft laws on harmonising the audio-visual media services directive (AMS) that dictates obligations to contribute to producing European audio-visual and cinema works and which does not currently apply to video-on-demand services registered abroad such as Netflix.
We believe the group's aggressive strategy in production has a two-fold interest. Indeed, it enables the group to:
Diversify its revenues and hence its risk by reducing its dependency on the advertising market.
Position itself in a high-margin growth sector, allowing it to underpin growth in its profitability.
We are forecasting development in production activities driven by both organic growth at companies already acquired as well as further bolt-on acquisitions. The group's guidance targets at least 33.3% of its ad revenue coming from its five free-to-air channels by 2019. We have an estimated rate of 33.9%, or 31.6% excluding acquisitions. We assume average organic growth at Newen and other production activities of 2.5% a year, and some acquisitions in production for a total amount of EUR120m over 3 years, generating at full-term EUR75m in revenue and EUR12m in EBIT per year. Note here that TF1's size seems to be a significant competitive advantage in order to expand aggressively in the production sector (ability to carry out multiple operations, pre-empt the best targets etc.).
Apart from the production businesses, the group's "Studios & Entertainment" business includes TF1 Entertainment, which houses board games mostly inspired by the group’s TV game shows, such as Money Drop, Vendredi tout est permis. This market grew by 4% in 2016 to EUR265m and the group has an 8% market share. Licencing contracts also exist between TF1 Entertainment and industrial companies such as the Ushuaïa brand, which is operated by L’Oréal.
Below, we set out our forecasts for change in TF1's Studios & Entertainment division.
Fig. 11: Change in Studios & Entertainment revenue and contribution to overall group revenue
Studios and entertainment 2015 2016 2017e 2018e 2019e
Total Studios & entertainment Revenue 268.2 392.8 407.6 450.1 494.7
% of total revenue 13.4% 19.0% 19.4% 20.8% 22.2%
Source: Company Data; Bryan, Garnier & Co ests.
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TF1
4. A widening digital offer Whereas digital admittedly captures a rising share of the advertising market as pointed out in chapter 2, as we explained in our sector note:
The TV advertising market is resisting well to growth in digital.
The interest in premium content (as opposed to self-produced content by internet users), the core business of TV media groups, is not weakening both in terms of TV users or advertising.
Digital still represents widely untapped monetisation opportunities for TV media groups.
If it is well exploited, the development of uses and what we call the switch to TV 3.0, could provide more opportunities than threats for audio-visual players that know how to make the most of it. Indeed, digital consumption of television by internet users in catch-up mode or via additional contents is not only an opportunity to diversify revenues in a high-growth market compared with advertising on traditional televisions sets, but also a genuine source of leverage that could take the form of information synergies possible thanks to collection of data concerning internet users' preferences.
In order to make the most of this new audio-visual environment, TV media groups need to:
Maximise their presence on digital platforms (roll-out of TV offer on catch-up platforms, MCN, other web sites etc.).
Roll-out of big data tools suitable for 1/ collecting, 2/ developing and 3/ exploiting end customer knowledge.
Propose commercial offers suited to advertisers, providing them both optimal targeting and a precise measure of the efficiency of their campaigns.
In this backdrop, we believe that size is a significant competitive advantage. The more customer data that can be collected, the more information can be crossed and the more qualified the information is. Recommendation algorithms are better and the offer is more interesting for advertisers. Note also the multiplication in the number of partnerships between media groups in order to offer advertisers the widest-reaching and most comprehensive offers possible. The latest example in France is Gravity (which houses Les Echos-Le Parisien, Lagardère, M6, Condé Nast, L’Equipe, Prisma, SFR, Fnac Darty and Solocal), which is a pooling of customer data and advertising tools of the various members in the alliance.
TF1's efforts in digital only represent 5% of revenue at present, but have been stepped up in recent years with a genuine aim to accompany linear and non-linear multi-screen viewing trends. In 2016, MyTF1 positioned itself as the leading catch-up television platform in France and had almost 1.4bn viewings with growth of 19% over mobile. Exclusively digital content such as première showings or bonus episodes are made available to internet users and help boost traffic on the website. The TF1 group has nevertheless taken longer than its rival M6 to impose subscription to its MyTF1 catch-up platform and to collect qualified data on its customers. Today, TF1 claims it has 12m profiles on MyTF1 and is targeting 20m by 2018, vs 17m already at M6. Note here that in 2015, INSEE counted 60,392m French people aged over 15. A level of 20m subscribers corresponds to a penetration rate of one third of this target.
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TF1
At the same time as these initiatives on the MyTF1 platform, the group's development in digital is based on investments and partnerships aiming to strengthen the contents offer, especially in the millennial age-group target, and at expanding the group's presence on social networks, with the aim of maximising synergies between the various units. The group has therefore focused on developing Multi Channel Networks (MCN) such as Finder Studios (15m fans) with whom it is co-operator via TF1 Publicity, and MinuteBuzz (8m visitors a day), in which TF1 acquired a majority controlling stake in December 2016. MCNs are producers of video contents solely available on social networks such as Facebook, Instagram, Twitter, SnapChat and YouTube, destined for the millennial age-group and favouring "mobile snacking" (intensive consumption of short videos).
Perhaps even more important than the additional contents offer that can be distributed on proprietary sites, these investments provide an opportunity to improve targeting of the advertising offer thanks to data collection. In order to view videos on all of the platforms, users must create an account, which is often attached to one or several social networks and this combination provides access to information concerning the internet users.
Analysis of the data collected is helped by the development of a data management platform (DMP) in partnership with Adobe, which responds to "big data" analysis issues. A concrete example of a service developed by this technology is the GRP Data offer implemented by TF1 Publicity since 2015. The group's advertising unit positioned itself as the first European advertising department to offer TV advertisers another type of targeting than socio-demographic GRP with the possibility of targeting different customers in 44 markets (example of targeting yoghurt buyers).
This TV 3.0 dimension, which places data at the core of the TV reactor, is key: it represents an opportunity to improve advertising efficiency and targeting for a virtually zero marginal cost. We believe the potential of this Data TV is not yet captured in TF1's prospects.
As such, we are forecasting growth of more than 10% in overall advertising revenues excluding free channels, thanks to the development of revenues from digital, despite pressure on advertising revenues from pay-TV, as shown in the chart below. Indeed, we estimate growth in the digital advertising market in France at 6% a year (see sector note), slightly faster than in previous years, such that the TF1 group's digital media should be able to post a significantly higher performance given the very low start-point.
Fig. 12: Change in TF1 group advertising revenues
ADV split 2012 2013 2014 2015 2016 2017e 2018e 2019e
Total Ad Revenue 1687 1594 1576 1554 1530 1547 1557 1570
Free channels Adv. revenues 1566 1488 1477 1470 1455 1464 1467 1472
% growth -5,0% -0,8% -0,5% -1,0% 0,6% 0,2% 0,3%
Other platforms Adv. revenues 121 106 99 84 75 83 90 99
% growth -12,0% -7,1% -14,7% -11,3% 10,5% 8,4% 10,1%
% of total adv. revenue 7,2% 6,7% 6,3% 5,4% 4,9% 5,3% 5,8% 6,3%
Source: Company Data; Bryan, Garnier & Co ests.
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5. Significant margin improvement potential TF1's profitability has suffered from both the previously-discussed loss of momentum in the TF1 channel's audience, which has taken a toll on the group's advertising revenues, and sluggish performances in pay-TV. Between 2012 and 2016, EBIT margin narrowed from 9.0% to 6.3%. In addition, probably in view of its history as a state-run group, but also and above all, its leadership strategy imposing hefty investments in contents, TF1 has had a recurring single-digit EBIT margin for many years now, well below its main rival on the French market, the M6 group. We believe that things should improve massively in the future based on the following four factors:
An improvement in the relation between advertising revenues and content investment enabled by a new group policy and the maximisation of contents exposure to all platform types as described in chapter 2.
The ramp-up in production activities, which carry higher margins than traditional advertising, as presented in chapter 3.
The roll-out of an aggressive savings plan, under the framework of the "Recover" plan.
The development of digital, enabling an improvement in advertising efficiency at a marginal cost of close to zero, as presented in chapter 4.
Concerning the savings plan, the group is not aiming to reduce its investments in contents, which guarantee its leadership position, its power ratio policy and its brands image. In contrast, it intends to reduce other recurring operating costs (support, commercial and marketing costs etc.) by around EUR25-30m as of 2017. The group has already proven its capacity to execute a savings plan with a EUR85m reduction in programme and non-programme costs from mid-2012 to 2014.
Therefore, given 1/ the favourable track record, 2/ a target that looks reasonable (EUR30m in savings represents 4.3% of the 2016 cost base excluding programmes, depreciation and amortisation, taxes, provisions and "other operating spending", and 3/ the healthy results achieved in Q1 (EUR5.6m in savings), we are assuming it delivers the top-end of the range with EUR30m in savings generated as of 2017, partly offset by the rise in variable costs in relation to growth in production activities. The group announced it is targeting a double-digit underlying EBIT margin by 2019 compared with 6.3% today (8.1% excluding Euro 2016). We have assumed a target of 10.5% for 2019 (10.8% excluding Rugby world cup). The table below shows change in the TF1 group's underlying EBIT margin and the contribution to growth of its various businesses. Fig. 13: Change in underlying EBIT at TF1 and contribution to various activities
EURm 2012 2013 2014 2015 2016 2017e 2018e 2019e TF1 Group Revenue 2215 2075 2092 2004 2063 2100 2163 2230 Group current EBIT 200 147 117 158 129 193 178 235 % margin 9,0% 7,1% 5,6% 7,9% 6,3% 9,2% 8,3% 10,5% ow Broadcasting 135 88 150 129 179
% margin 7,8% 5,2% 8,8% 7,5% 10,3%
% contribution to total group EBIT 85,2% 67,6% 77,5% 72,2% 76,1% ow Studios and entertainment 23 42 43 50 56
% margin 8,7% 10,7% 10,7% 11,0% 11,3%
% contribution to total group EBIT 14,8% 32,4% 22,5% 27,8% 23,9% Source: Company Data; Bryan, Garnier & Co ests.
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6. Valuation 6.1. Change in share price
Fig. 14: Change in TF1 share price (base 100)
132,0
127,0
122,0
117,0
112,0
107,0
102,0
97,0
92,0 30/12/2016 30/01/2017 28/02/2017 31/03/2017 30/04/2017 31/05/2017 30/06/2017
TF1 (TV.FSE.1) CAC 40 SXX EUROPE MEDIA
Source: Thomson Reuters
The TF1 share performed very well in H1 reacting well to the healthy Q1 earnings published by the group, and better macro-economic outlook in France. The current TF1 share price is up 21.8% YTD, outperforming the CAC 40 and the Stoxx Europe Media index.
6.2. DCF Our DCF model values the TF1 group's equity at EUR2.75bn, for overall enterprise value of EUR2.56bn. We value TF1 Group at 13.2x underlying EBIT for 2017e, for a 2016-2019e CAGR of 22.0% (12.9% excluding major sport events), whereas the average peer valuation in the European market shows a multiple of 11.0x 2017e EBIT for a 2016-2019e CAGR of 6.8%. Our valuation therefore shows an EV/EBIT to growth ratio of 1.0 (excluding major sport events), whereas peer multiples show an average of 1.6.
Our model is based on the following assumptions:
Revenues: we see average annual growth in revenue of 2.6% over 2016-2019 (including 2.0% over 2017e), driven by the recovery in the advertising market and the development of production activities.
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EBIT: underlying EBIT growth should be robust over the next two years at 22.2% on average over 2016-2019e (including 49.5% over 2017e, notably given the lack of major sporting events over the year), driven primarily by cost savings, the development of production activities and higher profitability levels on investments in contents.
At end-2016, the group had a positive net cash position with total debt of EUR234m and cash of EUR420m. We expect a total of EUR120m in investment spending over the coming three years to focus on acquiring new companies in the production field. The recurring CAPEX is expected to rise by 12.5% in average between 2016 and 2019e.
The company has a positive net cash position, and for the cost of capital we have taken the cost of equity, namely 7.0%, with a beta of 0.8, corresponding to the group's historical two- year beta vs the CAC 40, reduced by 0.05 to capture the impact of a rising diversification in revenues (in comparison, we have assumed a beta of 0.7 for the M6 group). We assume a risk premium of 7.0% and a risk-free rate of 1.6%.
We have assumed a growth rate to infinity of 1%.
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Fig. 15: Discount rate calculation
Inputs
Risk free rate 1.6%
Market risk premium 7.0%
Βeta 0.8
Cost of equity 7.3%
WACC 7.3%
Source: Bryan, Garnier & Co ests.
Fig. 16: DCF model
EURm 2016e 2017e 2018e 2019e Sale 2063 2103 2162 2226 Change in sales 2.9% 2.0% 2.8% 3.0% EBIT 46 170 155 235 As % of sales 2.2% 8.1% 7.2% 10.5% Tax rate 14.8% 30.2% 30.0% 30.0% Net Op. Profit after Tax 39 119 109 164 + D&A and prov. 258 262 267 272 Cash flow from op. 297 381 376 437 - Net investments (incl. m&A) -205 -249 -260 -271 - change in WCR 15 -38 -9 -26
Free cash Flow 106 94 107 139 Discounted FCF 91 96 117 Sum of disc. FCF 1153 + disc. terminal value 1409 - net debt 240 - minorities 0 - provisions -55 Equity 2747 Nbre of shares (fully dilluted) 209 Target Price 13.2
Source: Company Data; Bryan, Garnier & Co ests. 6.3. Multiples The share price currently values the TF1 Group at 11.8x 2017e underlying EBIT, in line with the average valuation of the group over the past three years (and vs. 10.9x EBIT over the past five years, as shown in Fig. 18). This valuation seems low in view of three-year underlying EBIT growth prospects, with the multiple plunging to 9.1x for the consensus out to 2019.
Note also that over the past five years, the TF1 group was trading on an EBIT multiple around 38% higher than rival group M6 (10.9x vs. 7.87x). This “premium” (explained partly by accounting differences) now looks low at 9%. While this could be explained by a narrowing in the advertising performance differential between the two groups in recent years, it nevertheless seems exaggerated.
We value the TF1 group at 13.2x 2017e underlying EBIT and 10.9x underlying 2019e EBIT.
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Fig. 17: EBIT and peer multiples
EV/Current EBIT 2017e 2018e 2019e TF1 Group (consensus) 11.8 11.7 9.1 TF1 Group (BG) 13.2 14.4 10.9 M6 Group (consensus) 10.9 10.7 9.6 M6 Group (BG) 12.0 10.8 10.8 ITV 10.1 8.1 5.3 Prosieben 10.9 10.8 9.3 Mediaset 12.2 11.8 7.3 Average (consensus) 11.0 10.3 7.8 TF1 Group vs average 7.6% 13.6% 15.9% TF1 Group vs M6 (consensus) 9.1% 9.9% -5.0%
Source: Thomson Reuters; Bryan, Garnier & Co ests.
Fig. 18: TF1 group historical multiples
20 18 16 14 12 10 8 6 4 2 0 Feb-16 Feb-15 Feb-14 Feb-13 Feb-12 Aug-16 Aug-15 Aug-14 Aug-13 Aug-12 Nov-16 Nov-15 Nov-14 Nov-13 Nov-12 May-16 May-15 May-14 May-13 May-12 EV/EBIT (FWD) Avg 5y
Source: Thomson Reuters
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7. Appendices 7.1. Group revenue and EBIT by business TF1 GROUP SEGMENTS 2014 2015 2016 2017e 2018e 2019e
REVENUE
Broadcasting - 1,736.1 1,669.9 1,695.7 1,711.4 1,731.1
ow TV advertising of Free Platforms 1,476.7 1,469.9 1,455.3 1,464.2 1,467.2 1,471.8
% of growth -0.8% -0.5% -1.0% 0.6% 0.2% 0.3%
Studios and entertainment - 268.2 392.8 407.6 450.1 494.7
% of growth - - 46.5% 3.8% 10.4% 9.9%
Total Ad Revenue 1,575.5 1,554.2 1,530.1 1,546.8 1,556.8 1,570.5
% of growth -1.2% -1.4% -1.6% 1.1% 0.6% 0.9%
Other revenues 516.3 450.1 532.6 556.5 604.8 655.4
% of growth 7.3% -12.8% 18.3% 4.5% 8.7% 8.4%
TF1 Group Revenue 2,091.8 2,004.3 2,062.7 2,103.3 2,161.6 2,225.9
% of growth 0.8% -4.2% 2.9% 2.0% 2.8% 3.0%
EBIT MARGIN
Broadcasting - 7.8% 5.2% 8.8% 7.5% 10.3%
ow TV advertising of Free Platforms - 4.5% 3.0% 0.0% 0.0% 0.0%
Studios and entertainment - 8.7% 10.7% 10.7% 11.0% 11.3%
Group current EBIT margin 5.6% 7.9% 6.3% 9.2% 8.3% 10.5%
VERTICAL ANALYSIS 2014 2015 2016 2017e 2016e 2016e
REVENUE
Broadcasting - 86.6% 81.0% 80.6% 79.2% 77.8%
ow TV advertising of Free Platforms 70.6% 73.3% 70.6% 69.6% 67.9% 66.1%
Studios and entertainment - 13.4% 19.0% 19.4% 20.8% 22.2%
Total Ad Revenue 75.3% 77.5% 74.2% 73.5% 72.0% 70.6%
Other revenues 24.7% 22.5% 25.8% 26.5% 28.0% 29.4%
EBIT
Broadcasting - 85.2% 67.6% 77.8% 72.2% 76.1%
ow TV advertising of Free Platforms - 42.2% 33.5% 0.0% 0.0% 0.0%
Studios and entertainment - 14.8% 32.4% 22.5% 27.8% 23.9%
Source: Company Data; Bryan, Garnier & Co ests.
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7.2. TF1 group income statement TF1 GROUP INCOME STATEMENT 2014 2015 2016 2017e 2018e 2019e
Total SALES 2,091.8 2,004.3 2,062.7 2,103.3 2,161.6 2,225.9 ow Total adv. 1,575.5 1,554.2 1,530.1 1,546.8 1,556.8 1,570.5 ow Other revenues 516.3 450.1 532.6 556.5 604.8 655.4
Share of adv. rev. 75.3% 77.5% 74.2% 73.5% 72.0% 70.6%
Share of rev. Excl. Free platforms adv. 29.4% 26.7% 29.4% 30.4% 32.1% 33.9%
Total operating expenses (1,975.3) (1,846.3) (1,933.3) (1,909.9) (1,983.1) (1,991.2)
CURRENT OPERATING PROFIT 116.5 158.0 129.4 193.5 178.4 234.7 current operating margin 5.6% 7.9% 6.3% 9.2% 8.3% 10.5%
OPERATING EBITDA 166.6 212.1 372.3 472.2 445.4 507.0 operating EBITDA margin 8.0% 10.6% 18.0% 22.4% 20.6% 22.8%
OPERATING PROFIT 116.5 141.2 45.7 170.3 155.2 234.7 operating margin 5.6% 7.0% 2.2% 8.1% 7.2% 10.5%
Cost of net debt 1.1 1.1 (1.2) (0.9) - -
PROFIT BEFORE TAXES 117.9 139.1 40.0 169.4 155.2 234.7
Taxes (29.8) (42.3) (5.9) (51) (47) (70)
% of taxable income -25.4% -30.4% -14.8% -30.2% -30.0% -30.0%
Joint ventures and associates 15.0 6.5 9.9 8.6 2.0 2.0
NET PROFIT FROM CONTINUING OPERATIONS 103.1 103.3 44.0 126.8 110.7 166.3
Profit margin 4.9% 5.2% 2.1% 6.0% 5.1% 7.5%
NET PROFIT 419.0 103.3 44.0 126.8 110.7 166.3
Diluted EPS 1.95 0.47 0.20 0.59 0.51 0.77
Source: Company Data; Bryan, Garnier & Co ests.
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7.3. TF1 group cash flow forecasts TF1 GROUP CASHFLOW SUMMARY 2014 2015 2016 2017e 2018e 2019e Recurring EBIT 116.5 158.0 129.4 196.8 197.2 236.1 % of growth -20.6% 35.6% -18.1% 52.1% 0.2% 19.7% EBIT margin 5.6% 7.9% 6.3% 9.4% 9.1% 10.6% D&A 50.1 54.1 242.9 259.2 261.9 264.6 % of sales 2.4% 2.7% 11.8% 12.3% 12.1% 11.9% Change in working capital 12.7 8.4 14.5 -76.4 -22.3 -45.4 Others -71.2 -83.2 -158.2 -75.3 -75.4 -70.8 Cash flow from operations 108.1 137.3 228.6 304.2 361.4 384.5 Capex, net -36.5 -57.4 -205.1 -209.3 -220.2 -231.1 % of sales -1.7% -2.9% -9.9% -10.0% -10.2% -10.4% Acquisitions, net 307.5 526.9 -177.0 -10.0 -10.0 -10.0 % of sales 14.7% 26.3% -8.6% -0.5% -0.5% -0.4% Others 45.1 -36.7 66.5 0.0 0.0 0.0 Cash flow from investing 316.1 432.8 -315.6 -219.3 -230.2 -241.1 Free cash flow 424.2 570.1 -87.0 84.9 131.2 143.4 FCF margin 20.3% 28.4% -4.2% 4.0% 6.1% 6.4% FCF yield 18.3% 20.3% -4.4% 3.4% 5.2% 5.7% Share buyback 0.0 -40.0 -21.4 0.0 0.0 0.0 Dividends -117.2 -317.3 -167.3 -58.6 -58.6 -58.6 Payout* 76.8% 169.6% 141.0% 46.5% 49.0% 35.9% Dividend yield* 13.3% 8.2% 3.0% 2.3% 2.3% 2.3% FCF coverage** 3.6 1.6 -0.5 1.4 2.2 2.4 Change in debt, net -2.6 -1.2 -5.7 0.0 0.0 0.0 Others 2.7 -9.0 -0.1 -0.9 0.0 0.0 Cash flow from financing -117.1 -367.5 -194.5 -59.5 -58.6 -58.6 Change in cash position 307.1 202.6 -281.5 25.4 72.5 84.8 Cash at beginning of period 191.1 498.2 700.8 419.3 444.7 517.2 Cash at end of period 498.2 700.8 419.3 444.7 517.2 602.0 Source: Company Data; Bryan, Garnier & Co ests. * As of announced period ** FCF / (Buyback + Dividends) 7.4. Shareholding structure Fig. 19: TF1 shareholding structure
Bouygues Autres 43.9% 48.8%
Salariés 7.3% Source: Company Data
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INDEPENDENT RESEARCH M6 20th July 2017 Looking for boosters TMT Fair Value EUR19.6 (price EUR19.88) NEUTRAL Coverage initiated
Finalised on 19th July We are initiating coverage of the M6 group with a Neutral recommendation Bloomberg MMT FP and a Fair Value of EUR19.6. Despite good audience levels and advertising Reuters MMTP.PA performances, coupled with sound financial management, the acquisition of 12-month High / Low (EUR) 22.1 / 15.4 RTL Radio France increases the group’s exposure to volatility in the Market capitalisation (EURm) 2,512 Enterprise Value (BG estimates EURm) 2,565 advertising market and we see no strong catalysts in the short term, especially Avg. 6m daily volume ('000 shares) 125.3 given the fall-off in the Diversification segment. Free Float 43.4% 3y EPS CAGR -1.0% Gearing (12/16) 4% The M6 group has cemented its position with TV viewers and advertisers, Dividend yields (12/17e) 1.41% partly via the M6 channel, by adopting a strategy geared towards a target audience of women under 50 purchasing decision-makers. At a time when YE December 12/16 12/17e 12/18e 12/19e Revenue (EURm) 1,279 1,299 1,422 1,436 audiences are becoming more fragmented, the group has built on its EBITA EURm) 244.3 212.4 235.9 234.4 expertise, generating momentum for the W9 and 6Ter channels and Op.Margin (%) 19.1 16.4 16.6 19.1 increasing its power ratio. Diluted EPS (EUR) 1.20 1.06 1.18 1.17 EV/Sales 1.86x 1.98x 1.79x 1.74x EV/EBITDA 6.1x 7.2x 6.7x 6.7x However, compared to the robust advertising revenues from its free EV/EBITA 9.7x 12.1x 10.8x 10.7x P/E 16.5x 18.7x 16.9x 17.0x channels, the sluggish performance of its Diversification operations and ROCE 28.9 17.7 19.2 19.0 the forthcoming acquisition of RTL Radio France leave the stock significantly exposed to the advertising market, which, despite encouraging M6-METROPOLE TV SXX EUROPE 600 22.2 forecasts (2016-2019e CAGR of 1.0% in the television segment), remains volatile, uncertain and under pressure from digital platforms. We expect 20.2 advertising to contribute around 68.7% of total revenues in 2017e and 18.2 72.4% in 2018e.
16.2
14.2 The integration of RTL Radio France creates opportunities for both commercial and operational synergies, but the transaction carries 12.2 18/01/16 18/04/16 18/07/16 18/10/16 18/01/17 18/04/17 18/07/17 execution risks, with the radio market having fallen by an average of around 1.1% a year over the last three years. In 2018, when the deal will make its first full-year contribution, RTL is expected to generate 10.8% of the groups’ revenues and 10.2% of EBIT.
We value the company at 12.0x 2017e EBIT, which points to limited upside in view of the group's risk profile. We consider the stock fairly valued, with our Fair Value of EUR19.6, 1.4% below the current share price. Analyst: Sector Analyst Team: Thomas Coudry Richard-Maxime Beaudoux 33(0) 1 70 36 57 04 Gregory Ramirez [email protected] Frédéric Yoboué
r r M6
Simplified Profit & Loss Account (EURm) 2014 2015 2016 2017e 2018e 2019e Revenues 1,258 1,250 1,279 1,299 1,422 1,436 Change (%) -% -0.6% 2.3% 1.6% 9.5% 1.0% Adjusted EBITDA 328 324 387 354 377 376 EBIT 207 199 244 212 236 234 Change (%) -% -3.9% 22.7% -13.1% 11.1% -0.6% Financial results 3.7 2.0 0.80 2.0 2.0 2.0 Pre-Tax profits 211 201 245 214 238 236 Tax (87.4) (87.1) (94.0) (82.3) (91.4) (90.8) Minority interests 0.20 (0.10) 0.10 0.0 0.0 0.0 Net profit 123 115 153 134 149 148 Restated net profit 123 115 153 134 149 148 Change (%) -% -6.7% 33.0% -12.3% 10.8% -0.6% Cash Flow Statement (EURm) Operating cash flows 202 157 269 260 277 293 Change in working capital (43.8) (65.2) (21.0) (14.9) (15.1) 1.3 Capex, net (115) (127) (144) (144) (144) (144) Dividends (107) (108) (108) (107) (107) (107) Net debt (239) (149) (140) 52.7 29.1 (9.9) Free Cash flow 84.9 48.2 123 115 131 146 Balance Sheet (EURm) Tangible fixed assets 121 209 240 244 249 254 Intangibles assets 186 118 115 228 228 228 Cash & equivalents 261 176 174 202 225 265 current assets 927 813 855 892 932 974 Other assets 30.4 50.4 51.2 138 136 134 Total assets 1,264 1,190 1,261 1,502 1,545 1,589 L & ST Debt 2.4 21.6 26.4 34.6 255 255 Others liabilities 681 585 619 825 606 610 Company description Shareholders' funds 581 584 616 643 684 725 The M6 group is a French multi-media Total Liabilities 1,264 1,190 1,261 1,502 1,545 1,589 group. It owns several television Capital employed 337 454 521 740 758 759 channels as well as production and Ratios distribution activities. The group has Operating margin 16.46 15.93 19.11 16.35 16.59 19.11 also diversified into the production of Tax rate (41.46) (43.31) (38.35) (38.40) (38.40) (38.40) Net margin 9.79 9.19 11.95 10.32 10.45 11.95 music, shows, and is involved in ROE (after tax) 21.24 19.70 24.78 20.84 21.71 20.37 sports ROCE (after tax) 35.96 24.89 28.91 17.67 19.17 19.02 Gearing 0.41 3.70 4.28 5.38 37.21 35.14 Pay out ratio 86.93 93.99 70.48 80.03 72.21 72.65 Number of shares, diluted 126 127 127 126 126 126 Data per Share (EUR) EPS 0.98 0.91 1.20 1.06 1.18 1.17 Restated EPS 0.98 0.91 1.20 1.06 1.18 1.17 % change -% -% -% -% -% -% BVPS 4.60 4.60 4.86 5.09 5.41 5.73 Operating cash flows 1.60 1.24 2.12 2.05 2.19 2.31 FCF 0.67 0.38 0.97 0.91 1.04 1.16 Net dividend NM 0.80 0.28 0.28 0.28 0.28
Source: Company Data; Bryan, Garnier & Co ests.
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Table of contents
1. Investment Case ...... 72
2. Increased reliance on advertising ...... 73
2.1. Successful focus strategy on Television activity ...... 73 2.2. Acquisition of RTL Radio France ...... 76 2.2.1. Despite an attractive acquisition price and some synergies … ...... 77 2.2.2. … radio is losing steam as a media platform in France… ...... 77 2.2.3. … which emphasizes the group’s exposition to the ad market volatility...... 81
3. Digital needs to further strengthen ...... 83
4. Limited visibility for the other activities ...... 85
5. Margin upside constrained by the declining Diversification division ...... 87
6. Valuation ...... 89
6.1. Share price performance ...... 89 6.2. DCF ...... 90 6.3. Multiples ...... 92
7. Appendices ...... 93
Bryan Garnier stock rating system ...... 95
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1. Investment Case
The reason for writing now Up to this point, the M6 group has rolled out a successful strategy geared towards a target audience of women under 50 purchasing decision-makers, generating substantial added value for shareholders. We are now approaching a technological crossroads, which we refer to in our sector report as "TV 3.0", when households will face strategic choices that will have a major impact in the medium term.
Valuation With a Fair Value of EUR19.6, 1.4% below the current share price, we believe that the opportunities offered by the stock are already priced in at the current level. The group’s stronger exposure to the advertising market and lack of momentum in the Diversification segment leave little scope for any surprises above the consensus.
Catalysts The share price performance will depend on: 1/ advertising investments in television, 2/ the performance of the group’s free channel audiences, 3/ regulatory developments affecting advertising, 4/ growth in the group’s digital operations, and 5/ the integration of RTL Radio France
Difference from consensus The consensus seems to be based solely on the quality of the group’s audiences and advertising revenues, without taking the lack of prospects for diversification fully into account.
Risks to our investment case The risks associated with our scenario are: 1/loss of audience share, particularly for the M6 channel, which represents over 80% of the free channels’ advertising revenues, 2/ a downturn in the advertising market, which accounts for 68.7% of the group’s revenues for 2017e, 3/ the risk that regulatory constraints on targeted advertising will not be eased, and 4/ execution risks associated with the integration of RTL Radio France.
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2. Increased reliance on advertising 2.1. Successful focus strategy on Television activity The M6 group is France’s third-largest audio-visual player after France Télévisions and TF1 Group. In 2016, these groups’ respective audience shares were 14.1%, 28.6% and 27.5%. Due to advertising restrictions on France Télévision’s channels, the company ranks second in the advertising market with 24.4% market share in the free channel segment in 2016.
The group’s revenues are split between three activities: 1/ Television, which represents 67% of revenues and 81% of operating profit, and mainly consists of advertising revenues generated by the group’s free channels (M6, W9, and 6Ter) and pay channels (Paris Première, Téva, SérieClub, M6 Music, M6 Boutique La Chaîne and Girondins TV); 2/ Production and Audio-visual Rights (9% of revenues, 4% of EBIT) of the SND entity; 3/ Diversification (25% of revenues, 20% of EBIT), which includes the contribution from digital platforms (6Play, clubic.com, radins.com, etc.) and teleshopping, together with investments in events and sport (F.C. Girondins de Bordeaux).
To make the above figures easier to interpret, they are based only on recurring revenues and operating profit, i.e. they exclude "other operating revenues" (EUR77m in 2016) largely made up of non-recurring revenues such as capital gains on the sale of F.C.G.B. soccer players and, in 2016, EUR50m in contractual compensation paid by Orange when the "M6 mobile by Orange" deal came to an end.
Fig. 1: M6 Group revenues by segment
M6 GROUP SEGMENTS 2014 2015 2016 2017e 2018e 2019e REVENUE Group Ad Revenue 796.9 813.9 853.3 916.0 1,054.1 1,074.3 % of growth -1.5% 2.1% 4.8% 7.4% 15.1% 1.9% Other Revenue 461.0 435.9 425.4 382.6 367.8 361.8 % of growth 3.7% -5.4% -2.4% -10.0% -3.9% -1.7% Recurring Revenue 1,257.9 1,249.8 1,278.7 1,298.7 1,421.9 1,436.1 % of growth 0.4% -0.6% 2.3% 1.6% 9.5% 1.0% ow Television 813.2 822.1 855.8 873.6 888.2 903.0 % of growth -2.0% 1.1% 4.1% 2.1% 1.7% 1.7% ow Free to air Ad 750.1 762.0 792.9 810.4 825.0 839.8 % of growth -1.7% 1.6% 4.1% 2.2% 1.8% 1.8% ow others 63.1 60.1 62.9 63.2 63.2 63.2 % of growth -5.5% -4.8% 4.7% 0.5% 0.0% 0.0% ow Production and Audiovisual Rights 111.4 93.6 97.6 93.9 93.3 93.3 % of growth 3.8% -16.0% 4.3% -3.8% -0.7% 0.0% ow Diversification 333.0 333.7 325.0 291.4 283.9 285.1 % of growth 5.4% 0.2% -2.6% -10.3% -2.6% 0.4% ow RTL Radio France - - - 39.7 156.5 154.7 % of growth - - - - 294.4% -1.2% ow Others 0.4 0.4 0.3 - - - Other operating revenues 12.9 11.3 77.1 34.2 34.2 24.2 Total Operating Revenue 1,270.8 1,261.1 1,355.8 1,332.9 1,456.1 1,460.3 % of growth 0.2% -0.8% 7.5% -1.7% 9.2% 0.3%
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VERTICAL ANALYSIS 2014 2015 2016 2017e 2018e 2019e % of Recurring Revenue Television 64.6% 65.8% 66.9% 67.3% 62.5% 62.9% Production and Audiovisual Rights 8.9% 7.5% 7.6% 7.2% 6.6% 6.5% Diversification 26.5% 26.7% 25.4% 22.4% 20.0% 19.9%
RTL Radio France - - - 3.1% 11.0% 10.8% % of Total Revenue Television 64.0% 65.2% 63.1% 65.5% 61.0% 61.8% Production and Audiovisual Rights 8.8% 7.4% 7.2% 7.0% 6.4% 6.4% Diversification 26.2% 26.5% 24.0% 21.9% 19.5% 19.5% RTL Radio France - - - 3.0% 10.8% 10.6% Other operating revenues 1.0% 0.9% 5.7% 2.6% 2.3% 1.7%
Source: Company Data; Bryan, Garnier & Co ests.
One of the group’s major strengths lies in its focus strategy on the target audience of women under 50 purchasing decision-makers, which is the key segment targeted by advertisers. Since the arrival of free HD channels in 2012, unlike the other historical players such as TF1 Group and France Télévisions, M6 has managed to offset the erosion in its audience share by the new HD channels by taking this strategic position. As a result, its market share in its target segment rose from 20.8% in 2014 to 22.2% in 2016. We also attribute this increase partially to the strong performance of the W9 and 6Ter channels (Fig. 4). The company has solid expertise when it comes to creating and broadcasting original thematic programmes during the weekday prime time access period (6-9pm), a highly popular slot among female viewers (with shopping and house-hunting programmes such as Les Reines du Shopping, Chasseurs d’appart, etc.). Over the years, M6 has skilfully positioned its programme schedules to take advantage of areas in which its rivals were less active.
Fig. 2: Audience share of the main TV companies (4 years+)
35%
30%
25%
20%
15%
10%
5%
0% TF1 Group M6 Group France TV SFR M ed ia Canal Group Others
2011 2012 2013 2014 2015 2016
Source: Médiamétrie; Bryan, Garnier & Co ests.
The group’s clear strategy and good performances with the public enable it to generate better returns from advertising per audience rating point. Although its reach - defined as the number of viewers exposed to an advertising campaign - is smaller than that of TF1, particularly in prime time (3 to 4 million viewers on average for Top Chef, versus around 7 to 8 million for The Voice), its appeal for advertisers lies in its ability to attract more regular viewers and a better targeting of its audience,
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M6 which provides a stronger guarantee in terms of GRP (Gross Rating Points). Over the last three years, the group’s power ratio (advertising market share to audience share) has risen by an average of 0.7% per year, standing at 1.72 today versus 1.63 for TF1.
Fig. 3: Power Ratio: M6 group vs TF1 group
1.80
1.75
1.70
1.65
1.60
1.55
1.50 2011 2012 2013 2014 2015 2016
M6 Group's Power Ratio TF1 Group's Power Ratio
Source: Company Data; IREP; Médiamétrie; Bryan, Garnier & Co ests.
We expect the group’s power ratio to remain stable in the short/medium term, with growth in advertising revenues being sustained by growth in the advertising market and audience share gains for the free channels:
As explained in our sector review, we have a projected 2017e growth of 1.1% in advertising spending in all traditional media and internet. These assumptions are based on economic growth of 1.2% to 1.5% in France. We believe that digital platforms will capture most of this growth, with the increase in internet investments remaining stable at over 6.5% in 2017e. Among the traditional media, television is likely to benefit from both improved conditions in the advertising market and the investments undertaken by large players to develop increasingly sophisticated, tailored solutions for their advertisers (e.g. the partnership between M6 Publicité/M6 Web and Accenture, which relied on artificial intelligence). We therefore expect the TV advertising market to grow by 1.0% (+60bps yoy) in 2017e.
As shown in the chart below, the W9 and 6Ter channels have successfully filled the gap left when the group’s historical channel saw a slight decrease in its market share following the 2012 audience fragmentation (the sharp increase in the group’s audience in 2012 should be corrected from the 2012 European championship effect). In 2016, 6Ter staged the group’s best relative performance, contributing 10% to the group’s audience, versus 8% in 2015. As reflected in its 1.4% audience share in 2016, versus 1.1% in 2015, the channel’s programmes appeal to the under-50s, especially during the access prime time period. The M6 group achieved average audience share growth of 13.8% for the first five months of 2017, versus 13.6% for the same period in 2016. We expect this robust performance to continue, stripping out the non-recurring euro effect recorded in June and July 2016.
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Fig. 4: Audience share of the M6 group’s channels
16% 14% 12% 10% 8% 6% 4% 2% 0% 2009 2010 2011 2012 2013 2014 2015 2016
M6 W9 6TER
Source: Médiamétrie; Bryan, Garnier & Co ests.
In the past, advertising revenues from the group’s free channels contributed 66.7% of overall revenues, outperforming the TV advertising market by 90bps, with an average growth of 1.3% between 2013 and 2016. We expect the TV segment to contribute 65.5% in 2017e with revenue growth of 2.1%. The company is more reliant on TV revenues due to the downturn in the Production and Audio-visual Rights segment (see Section 4), which in 2017 will be hurt by unfavourable comps (-3.8% in 2017e versus +4.3% in 2016) and changes in the scope in the Diversification segment (see Section 4), in particular the loss of the "M6 mobile by Orange" licensing contract (-10.3% in 2017e versus 1.7% in 2016).
Fig. 5: M6 group free channels’ estimated revenues
EURm (unless otherwise mentioned) 2015 2016 2017e 2018e 2019e
TV advertising market 3,242.0 3,254.0 3,286.5 3,319.4 3,352.6
% yoy growth 0.6% 0.4% 1.0% 1.0% 1.0%
M6 Group Free channels ad revenues 762.0 792.9 810.4 825.0 839.8
% yoy growth 1.6% 4.1% 2.2% 1.8% 1.8%
% market share 23.5% 24.4% 24.7% 24.9% 25.0%
Source: Company Data; IREP; Bryan, Garnier & Co ests. 2.2. Acquisition of RTL Radio France In December 2016, the M6 group announced the acquisition of RTL Radio France (RTL, RTL2 and Fun Radio) for EUR199.8m. RTL Group, the majority shareholder of both companies, owns 48% of the capital and 34% of the voting rights of the M6 group. It would like to merge the radio and TV activities in France to generate synergies. The transaction should be finalised in the third quarter, subject to approval by employee representative bodies and the CSA (French national audio-visual council).
We understand that the risk of the public regulators refusing the deal is very low, which is why we consolidated RTL Radio France into our forecasts from Q4 2017.
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2.2.1. Despite an attractive acquisition price and some synergies … Subject to agreement of the operation, the M6 Group should acquire RTL Radio France at EUR199.8m, equivalent to 1.2x 2016 sales and 5.3x 2020e management’s target EBITA (compared to 8.3x 2015 EBITA). This transaction between the group and its parent company, RTL Group, seems attractive when compared to recent transaction multiples in the below table.
Fig. 6: Recent transaction multiples related to radio/television acquisitions
Date Country Target Target main segment(s) Bidder Bidder Sector EV/Sales
Mar-17 Estonia Modern Times Group MTG AB Television and Radio Providence Equity Partners 1.1x
Jun-16 UK Wireless Group PLC Television and Radio News Corp Media 3.5x
Sep-15 France Radio Nova SARL Radio Private Investor 3.2x
Sep-15 Italy Monradio Srl Radio RTI SpA Media 7.4x
Jul-15 France NextRadioTV Television and Radio Altice Media 3.2x
Jun-15 UK Juice FM Radio Global Radio Holdings Limited 4.5x
Mar-15 Netherlands Talpa Holding NV Television ITV Plc Media 2.2x
Median 3.2x
France RTL Radio France Radio Groupe M6 Media 1.2x
Source: Mergermarket; Bryan, Garnier & Co ests.
We believe M6 Group could unlock synergies in both its commercial offers and costs:
Its marketing teams could provide advertisers with combined TV/radio deals to take full advantage of peak audience times and listener/viewer categories in both TV and radio. For example, for radio stations (especially general interest stations) prime time tends to be in the morning, which is a very quiet time for the group’s TV channels. In addition, the morning music programmes on W9 could be shared with RTL2 and Fun Radio, and some programmes filmed for TV could be broadcast simultaneously on the radio. M6 could also draw on its expertise and technological resources to make more of the digital services offered by RTL Radio France, e.g. by boosting the earnings generated by podcasts.
Given that RTL Radio France has underperformed the radio market in recent years (-2.0% on average over the last three years versus -1.1% for the market), these assumptions suggest a deceleration in the decline of the division’s sales, with revenues gradually coming into line with the market average (see Fig. 11).
The bulk of synergies will come from savings achieved by pooling content and administrative/support costs. This means sharing journalists/participants and support services, and merging the two companies’ premises.
2.2.2. … radio is losing steam as a media platform in France… According to Médiamétrie, French people listened to the radio for an average of 2 hours 55 minutes per day in November and December 2016, representing a decrease of three minutes of listening time since 2012. Although this figure has remained stable over the last three years, we believe in a downtrend going forward due to the increasing time spent on video and the acceleration in music streaming services.
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In France, cumulative weekly listener numbers fell by 1.4% to 79.4 million between November and December 2016. Today’s radio listeners favour two types of programme: 1/ general interest programmes, with 43.0% market share in November/December 2016, provided by RTL (12.6% audience share), France Inter (11.0%), RMC (6.8%), Europe 1 (6.6%) and France Bleu (6.0%) and 2/ music stations (31.4%) for which audience share is fragmented between 10 or so players, the main ones being NRJ (6.1%), Virgin Radio (4.8%), Fun Radio (4.2%), and Nostalgie (4.2%).
Among the private players, RTL Radio France has had a dominant position for over 10 years, with audience share of 19.3% in 2016, according to Médiamétrie. With the RTL channel, the group is the leading general interest provider, with 12.6% audience share, up 90bps in 2016. This rise was partly due to the poor performance of the Europe 1 station, which saw its audience share fall from 7.5% to 6.6%. The company is also very well placed in music programmes, with 6.7% audience share.
Fig. 7: Key radio groups’ weekly audience share in November and December
26% 23% 20% 17% 14% 11% 8% 5% 2012 2013 2014 2015 2016
RTL Group NRJ Group Lagardere RMC Indes Radio Radio France
Source: Company Data; Médiamétrie; Bryan, Garnier & Co ests.
In contrast to TV which benefited from non-linear consumption (Fig. 16), we believe that radio station traffic will come under pressure as millennials come to represent a larger share of the population. Indeed, we think that young listeners are attracted by a pull-based content centric model, which allows them to choose the music and playlists they listen to, as opposed to the passive model offered by traditional radio stations. Even if radio should take some benefits from the digital trend with the increasing use of podcasts, we think that this technology (7% of listening time at Radio France in 2016 according to date from Le Monde) should not make up for the decline in the traditional radio format due to increasing in both video time and music streaming penetration (+55% in streaming revenues in 2016 according to the SNEP).
That said, general interest stations, whose listeners’ average age is 57 for RTL, should prove more resilience than music stations, which tend to draw younger listeners (aged around 31 on average for Fun Radio), making them more vulnerable to competition from music streaming services, which are gaining ground in France.
Radio advertising revenues have been falling more rapidly than cumulative listener numbers since 2014 (-1.1% per year on average versus -0.5%), underscoring radio providers’ increasing struggle
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M6 to monetise their audience share. Advertisers see radio as being less efficient than TV and the internet, where advertising revenues have risen by respectively 0.4% and 13.2% per year on average since 2014. These figures are reflected in the earnings of RTL Radio France, whose revenues have fallen by 2.3% on average over the last five years, while its operating margin fell from 16.7% in 2012 to 14.3% in 2015 (the earnings reported in 2016 by RTL Radio France are not comparable due to exceptional items relating to accounting errors made in previous years). We expect this decline in revenues to continue in 2017.
Fig. 8: Radio audience and advertising market (base: 100)
102.0
100.0
98.0
96.0
94.0
92.0 2011 2012 2013 2014 2015 2016
Cumulated audience* Radio Ad Market
Source: IREP; Médiamétrie; Bryan, Garnier & Co ests. * In million weekly individual listening, between November and December
Fig. 9: Breakdown of gross advertising investments by group
26% Radio France 23%
20% RTL Group
17% NRJ Group 14% Lagardère 11% Independant Radio
8% RMC
5% 2012 2013 2014 2015 2016
Source: IREP; Bryan, Garnier & Co ests.
Our market analysis rises caution regarding management’s EBITA target of EUR38m by 2020 (+58% compared to 2015), which looks overly optimistic. RTL Radio France’s revenues have fallen by 2.0% on average over the last three years. Thanks to the commercial synergies mentioned above, we expect a deceleration in the revenue fall-off between -1.8 and -1.4% on average between 2017e and
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2020e. With savings gradually increasing to 15% of the 2015 cost base (2016 earnings are not comparable), we expect EBITA of EUR32m (+33% compared to 2015) in a best-case scenario in 2020e, representing 20.8% operating margin versus 16.9% in 2015.
Based on our estimates, management expects an EBITDA margin between 27.0% and 28.5% in 2020e compared to Bryan Garnier mid-range of 22.8%. We have our doubts on these figures because they are close to those reported by the radio segment of NextRadioTV in 2015 (around 30% EBITDA margin), before it was acquired by Altice. Indeed, that company had three news channels, which would justify better synergies, hence a higher premium than that implied by M6 Group’s forecasts.
Fig. 10: EBITDA and EBITDA margin estimates for 2020e: sensibility analysis
Sales CAGR 2017-2020 3581.7% -2.0% -1.8% -1.6% -1.4% -1.2% 25.0% 46 47 48 50 51
20.0% 39 40 41 43 44 15.0% 32 33 35 36 37
2015 OPEX) 10.0% 25 26 28 29 30
Cost savings (as of % % of (as savings Cost 5.0% 18 20 21 22 23
Sales CAGR 2017-2020 23.4% -2.0% -1.8% -1.6% -1.4% -1.2% 25.0% 30.7% 31.3% 31.9% 32.4% 33.0%
20.0% 26.1% 26.7% 27.3% 27.9% 28.5% 15.0% 21.5% 22.1% 22.8% 23.4% 24.0%
2015 OPEX) 10.0% 16.9% 17.6% 18.2% 18.9% 19.5%
Cost savings (as of % % of (as savings Cost 5.0% 12.3% 13.0% 13.7% 14.4% 15.1%
Bryan Garnier Estimates Management Estimates Source: Company Data; Bryan, Garnier & Co ests.
Fig. 11: Contribution of RTL Radio France’s activities
RTL RADIO FRANCE 2014 2015 2016 2017e 2018e 2019e
Revenue 163.0 166.0 162.0 158.8 156.5 154.7
% of growth -5.2% 1.8% -2.4% -2.0% -1.4% -1.2%
% of group revenue 6.0% 10.8% 10.6%
EBITA 21.0 24.0 5.0 19.5 24.2 26.5
EBITA margin 12.9% 14.5% 3.1% 12.3% 15.5% 17.1%
% of group revenue 4.6% 10.2% 11.2%
EBITDA 25.0 28.0 11.0 23.5 28.2 30.5
EBITDA margin 15.3% 16.9% 6.8% 14.8% 18.0% 19.7%
% of group revenue 6.7% 7.4% 8.1% Source: Company Data; Bryan, Garnier & Co ests. * Contribution in Q4 only for 2017
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2.2.3. … which emphasizes the group’s exposition to the ad market volatility. We are indeed questioning the rationale behind this acquisition, which is set to make the group even more dependent on advertising:
We are concerned about the increased exposure to the advertising market resulting from the acquisition of RTL Radio France, which poses a meaningful risk. M6 Group is increasing its dependence on a market that proved volatility in the past (Fig. 12). Its advertising revenue is expected go from 68.7% to 72.4% of total revenues in 2018e (Fig. 13), when RTL Radio France will make its first full-year contribution.
Fig. 12: Advertising Investment Growth rates in historical medias
2.0%
Television 0.0% Radio
-2.0% Historical Media (excl. Digital)
-4.0%
-6.0% 2011 2012 2013 2014 2015 2016
Source: IREP; Bryan, Garnier & Co ests.
Fig. 13: M6 Group revenues: exposure to the advertising market
M6 GROUP SEGMENTS 2013 2014 2015 2016 2017e 2018e 2019e
M6 Group Total Sales 1,268.1 1,270.8 1,261.1 1,355.8 1,332.9 1,456.1 1,460.3 % of growth 0.2% -0.8% 7.5% -1.7% 9.2% 0.3%
Group Ad Revenue 808.8 796.9 813.9 853.3 916.0 1,054.1 1,074.3 % of growth -1.5% 2.1% 4.8% 7.4% 15.1% 1.9% % total sales 62.7% 64.5% 62.9% 68.7% 72.4% 73.6%
TV Ad Revenue 808.8 796.9 813.9 853.3 876.3 897.5 919.6 % of growth -1.5% 2.1% 4.8% 2.7% 2.4% 2.5% % total sales 62.7% 64.5% 62.9% 65.7% 61.6% 63.0% ow Free to air 762.8 750.1 762.0 792.9 810.4 825.0 839.8 % of growth -1.7% 1.6% 4.1% 2.2% 1.8% 1.8% % total sales 59.0% 60.4% 58.5% 60.8% 56.7% 57.5% RTL Radio France - - - 39.7 156.5 154.7 % of growth - 294.4% -1.2% % total sales 0.0% 0.0% 0.0% 3.0% 10.8% 10.6%
Source: Company Data; Bryan, Garnier & Co ests.
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We estimate that a third of the growth in advertising revenues from the M6 group’s free channels over the 2013-2016 period relates to growth in the TV market as a whole, with just 0.2% stemming from its own audience performances.
Fig. 14: Advertising revenues for the M6 Group’s free channels (in million euros)
+0.7%*
+0.2%* +0.4%*
+1.3%*
Source: Company Data; IREP; CSA; Bryan, Garnier & Co ests. * CAGR 2013-2016
Finally, we believe that the group could have used its cash and debt capacity to take positions in more promising markets than radio advertising. The increase in its exposure to advertising revenue contrasts with the situation at TF1 Group, whose strategy is geared more towards diversification (see our report initiating coverage of TF1). In the medium term, when digital platforms and the shift to non-linear viewing will take their toll on TV revenues, we believe that investment and technological expertise should focus on:
• Improving Big Data technologies to ensure better targeting both online and on TV, in particular with the likely arrival of targeted advertising on the small screen (see sector note).
• Investments in content and production to support digital uses.
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3. Digital needs to further strengthen The development of new video consumption methods towards increased non-linear viewing is prompting TV channels to invest more in their online activities, as explained in detail in our sector report. According to the CNC, the penetration rate of catch-up TV among viewers aged 15 and over is 80%, versus 67% in 2012. Some 17% of 15-24 year-old say they watch catch-up TV every day, versus 13% in the 25-34 age group and just 7% in the 50 plus age group.
Fig. 15: Growth in catch-up TV viewing in France
6,462
1,812
2011 2012 2013 2014 2015 2016
Catch-Up TV (million of views)
Source: CNC; Bryan, Garnier & Co ests.
These assessments are backed by a new audience measurement initiates by Médiamétrie in 2016, which measures the TV consumption on the “4 screens”, meaning not only on the TV set but also on digital devices (computer, tablet, and smartphone). This report highlights an increase in total TV consumption by 2.7% and 0.4% respectively in 2015 and 2016, mainly thanks to the digital viewing time which more than doubled in 2 years from 8 minutes to 18 minutes in 2016.
Fig. 16: TV daily individual listening time by device
2014 2015 2016
TV on all screens 03:44 03:50 03:51
Live on TV set 03:36 03:36 03:33
Digital TV (Delayed + Catch-up + Live) 00:08 00:14 00:18 ow. Replay 00:08 00:08 Non-linear on TV set 00:05 00:08 00:10
ow. Replay 00:05
Non-linear on other screens 00:03 00:06 00:08
Source: Médiamétrie; Bryan, Garnier & Co ests.
However, digital viewing still makes up only a fraction of total media use (see Fig. 17) and we do not expect it to have a significant impact on the group’s margins and share price in the short term.
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Fig. 17: Summary of media usage in France
Source: eMarketer; Médiamétrie; Bryan, Garnier & Co ests.
Beyond the fact that the group’s internet activities still contribute little to total recurring revenues (5.9% in 2017e for M6 web excluding M6 mobile), we have limited visibility on the contributions of the free channels’ digital activity via the 6Play website, where the number of videos viewed reached 1.5 billion in 2016 (+25% yoy) and the group’s other internet services. These include thematic e-commerce websites, which are well placed in their respective fields, such as clubic.com for high-tech info, radins.com for good deals, cuisineaz.com for cookery, and deco.fr for interior decoration ideas.
We see attractive opportunities to create synergies among the various digital channels, which reinforce the group’s focus strategy on women under 50 purchasing decision-makers, as well as helping to boost group margins in the medium term. The cookery and interior decoration portals in particular are promoted by TV programmes such as Top Chef, Chasseur d’appart and Maison à vendre, which reach the group’s target audience. It is worth noting that people who use the 6Play website are identified, as they have to log in to access the site’s services. This enables the company to gather information and make the most of its various advertising spaces by effectively matching users with the most appropriate commercial partners.
Most revenues come from video ads and display ads. Excluding M6 Mobile, M6 Web reported strong growth in its revenues and operating profit (+9.6% and +17.1% respectively) in 2016. Adjusted for revenues from the websites newly acquired in 2016 (Golden Moustache and Rose Carpet, etc.), web sales rose by 3.4% and related EBIT by 10.4%, with an EBIT margin of 19.5%. Thanks to growth in the digital advertising market (+6.5% in 2017e), the momentum of digital platforms, and the gradually improving contributions from recent acquisitions such as iGraal, we expect growth of 6.7% and 9.0% for M6 Web in 2017e and 2018e, respectively.
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4. Limited visibility for the other activities The Diversification segment as a whole (24.0% of group revenues) comprises four sub-segments: the digital and mobile phone activity discussed above (5.4% of group revenues), distance selling via the subsidiary Ventadis (11.7% of group revenues), the Interactions division (0.8% of group revenues) including the group’s events operations, and the Bordeaux football club Football Club des Girondins de Bordeaux (F.C.G.B.), which is wholly-owned (4.3% of group revenues).
In May 2016, Orange and M6 Group announced an initiative involving the gradual transfer of M6 mobile clients to an equivalent deal offered by Orange, with the aim of completely deconsolidating the activity by 2019. As a result, revenues fell from EUR37.3m to EUR23.5m in 2016. Orange’s decision to terminate this licensing agreement has a significant impact on M6, given the profitability of this activity (66% EBIT margin in 2015), which represented 57.5% of the Diversification segment’s operating margin in 2015 for 11.2% of revenues.
Given their overly volatile performances and limited potential at this stage, the other Diversification activities (excluding M6 Web and M6 mobile) seem to be dilutive (revenues generated by these activities fell by 0.6% in 2016 and 4.9% in 2015):
Ventadis (48.8% of Diversification segment revenues) reported 0.6% growth in 2016, while its operating margin contracted sharply by 170 bps to 9.0%. The fact that revenues remained stable in 2016 reflects robust sales of MonAlbumPhoto products at the end of the year. Teleshopping, scheduled in the morning when the advertising market is very weak, is struggling to renew its product catalogue and is likely to decline significantly in the coming years. The company has started to reduce the time spent filming these programmes. We therefore expect the fall in revenues to reach double digits in coming years, in line with the 14% downturn reported for the first quarter of 2017.
The Interactions division (+57.5% in 2016) was driven by the success of Kids United, a band which it promotes, but is set to suffer from unfavourable comps as the band’s popularity inevitably wanes, resulting in a drop of around 17% in 2017e.
Finally, the Bordeaux football club (17.8% of Diversification revenues) lost 10.1% of its revenues in 2016 due to a poor second half in the 2015-2016 season (January-May), which left it in 11th place in the Ligue 1 table (versus 5th for the 2014-2015 season). This activity has been loss- making for the last five years and lost EUR9m in 2016. In 2017, we expect the club to see strong revenue growth thanks to 1/ favourable comparables, 2/ a revaluation of TV rights for Ligue 1, and 3/ a great come-back in the second half of the 2017 season (January to May), with the team reaching 6th place in the league table.
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Fig. 18: Forecast contributions from the Diversification segment
DIVERSIFICATION SEGMENT SPLIT 2014 2015 2016 2017e 2018e 2019e REVENUE Total Group Revenue 1,270.8 1,261.1 1,355.8 1,332.9 1,456.1 1,460.3 % of growth 0.2% -0.8% 7.5% -1.7% 9.2% 0.3% Diversification 333.0 333.7 325.0 291.4 283.9 285.1 % of growth 5.4% 0.2% -2.6% -10.3% -2.6% 0.4% ow Interactions 10.8 7.3 11.5 9.5 8.9 8.9 % of growth -18.8% -32.4% 57.5% -17.2% -6.9% 0.0% ow Ventadis 175.4 157.7 158.7 138.7 124.8 117.0 % of growth 25.9% -10.1% 0.6% -12.6% -10.0% -6.2% ow M6 Web 91.7 104.3 96.9 78.3 85.4 94.4 % of growth -5.1% 13.7% -7.1% -19.2% 9.0% 10.5% ow F.C.G.B. 55.1 64.4 57.9 64.8 64.8 64.8 % of growth -17.4% 16.9% -10.1% 12.0% 0.0% 0.0%
VERTICAL ANALYSIS 2014 2015 2016 2017 2018e 2019e % of Diversification revenue Interactions 3.2% 2.2% 3.5% 3.3% 3.1% 3.1% Ventadis 52.7% 47.3% 48.8% 47.6% 44.0% 41.1% M6 Web 27.5% 31.3% 29.8% 26.9% 30.1% 33.1%
F.C.G.B. 16.5% 19.3% 17.8% 22.3% 22.8% 22.7% % of Group revenue Diversifications 26.2% 26.5% 24.0% 21.9% 19.5% 19.5% Interactions 0.8% 0.6% 0.8% 0.7% 0.6% 0.6% Ventadis 13.8% 12.5% 11.7% 10.4% 8.6% 8.0% M6 Web 7.2% 8.3% 7.1% 5.9% 5.9% 6.5% F.C.G.B. 4.3% 5.1% 4.3% 4.9% 4.5% 4.4%
Source: Company Data; Bryan, Garnier & Co ests.
The Production and Audio-visual Rights segment is M6’s last activity, representing 7.2% of revenues in 2016. It provides exposure to the cinema market and the market for video sales (physical and digital). SND, the group’s main subsidiary in this activity, ranks 7th in the film distribution activity with 5.1% market share, 5th with 5.1% in physical distribution and 2nd with 9.9% in digital distribution. The division’s rights on films released in cinemas continue to contribute to revenues for several years as films are subsequently released on DVD, VoD, television and in SVoD format.
The volatility of the division’s revenues is directly linked to the timing and success of the films to which it has rights. In 2016, thanks to an increase in cinema-going in France (up 3.6%) and the release of several blockbusters for which SND had rights (The Divergent Series: Allegiant, Now You See Me 2, and The Hateful Eight by Quentin Tarantino), the production and audio-visual rights division reported revenues of EUR98m (+4.7 versus 2015) and an operating margin up 7.5% to 8.6%.
Unlike its rival TF1, M6 does not produce films for third parties, which seriously limits the opportunities for this kind of business, in our view.
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5. Margin upside constrained by the declining Diversification division The M6 group’s television activity incurs three types of operating expense: TV programming costs (53% of TV revenues), broadcasting costs (~3% of TV revenues) and overheads/administrative costs (~28% of TV revenues). Programming costs (EUR452m in 2016) represented 52.8% of the TV segment’s revenues, versus 50.9% in 2015, up 8.0%. This mainly reflects the EUR30m investment in coverage of the Euro 2016 football championship, which the group intends to reinvest in its programmes in 2017 to sustain growth in its audience share.
2016 saw a change in standards for signal compression, which reduced broadcasting costs by an estimated EUR5m in 2017e for the M6 group. Assuming revenue growth of 2.1%, we obtain a margin of 19.9% for the TV activity in 2017e. Margins should stabilize after that, as we expect potential audience share gains to be accompanied by higher marginal costs.
Fig. 19: Operating profit for the M6 group’s TV activity
M6 GROUP TELEVISION ACTIVITY 2014 2015 2016 2017e 2018e 2019e Television sales 813.2 822.1 855.8 871.5 886.0 900.8 % of growth -2.0% 1.1% 4.1% 1.8% 1.7% 1.7% Cost of programming (415.7) (418.5) (451.9) (456.4) (464.0) (471.8) % of growth -3.7% 0.7% 8.0% 1.0% 1.7% 1.7% % of sales -51.1% -50.9% -52.8% -52.4% -52.4% -52.4% Other costs (253.5) (247.9) (244.6) (243.3) (246.9) (250.6) % of growth 1.8% -2.2% -1.3% -0.5% 1.5% 1.5% % of sales -31.2% -30.2% -28.6% -27.9% -27.9% -27.8% EBIT from television 144.0 155.7 159.3 171.8 175.1 178.4 % of growth -3.4% 8.1% 2.3% 7.8% 1.9% 1.9% EBIT margin 17.7% 18.9% 18.6% 19.7% 19.8% 19.8%
Source: Company Data; Bryan, Garnier & Co ests.
Given the group’s track-record of efficient operating cost control, we believe that the radio division’s profitability will improve, although we are treating management’s figures (2020e EBITA of EUR38m) with caution (see section 2.2 for details of our estimates).
We therefore expect EBITDA margin to reach 17.1% in 2019e. This assumption is based on cost savings of around EUR14m, i.e. 10% of the comparable cost base in 2015.
While operating profit increased in the TV and radio segments, growth at group level is likely to be held back by the Diversification segment, which is in decline. In 2016, it represented 24% of revenues and 20% of EBIT, excluding the EUR50m received from Orange. The Diversification segment is being negatively affected by 1/ the end of M6 mobile deals, whose margins reached 66% in 2015 and 2/ a fall-off at Ventadis, which we expect to last, coupled with the structural waning popularity of the Kids United band in the Interactions division.
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Fig. 20: Contribution of the various activities to the M6 group’s margins
M6 GROUP SEGMENTS SPLIT 2014 2015 2016 2017e 2018e 2019e EBIT M6 Group 207.1 200.2 195.5* 214.4 237.9 236.4 Group margin 16.3% 15.9% 15.0%* 16.1% 16.3% 16.2% Television 144.0 155.7 159.3 173.9 177.2 180.6 EBIT margin 17.7% 18.9% 18.6% 19.9% 20.0% 20.0% Production and Audiovisual Rights 10.3 7.0 8.4 7.5 7.5 7.5 EBIT margin 9.2% 7.5% 8.6% 8.0% 8.0% 8.0% Diversification 55.6 42.8 39.3* 30.1 31.0 23.9 EBIT margin 16.7% 12.8% 12.1%* 10.3% 10.9% 8.4% RTL Radio France - - - 4.9 24.2 26.5 Others (2.8) (5.3) (11.5) (2.0) (2.0) (2.0)
VERTICAL ANALYSIS 2014 2015 2016 2017e 2018e 2019e EBIT Television 69.5% 77.8% 81.5%* 81.1% 74.5% 76.4% Production and Audiovisual Rights 5.0% 3.5% 4.3%* 3.5% 3.1% 3.2% Diversification 26.8% 21.4% 20.1%* 14.0% 13.0% 10.1% RTL Radio France - - - 2.3% 10.2% 11.2% Others -1.4% -2.6% -5.9%* -0.9% -0.8% -0.8%
Source: Company Data; Bryan, Garnier & Co ests. * Excluding the exceptional amount of EUR50m relating to M6 mobile in 2016
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6. Valuation 6.1. Share price performance
Fig. 21: M6 stock price (base 100)
127.0
122.0
117.0
112.0
107.0
102.0
97.0
92.0 02/01/2017 02/02/2017 02/03/2017 02/04/2017 02/05/2017 02/06/2017 02/07/2017
M6-METROPOLE TV CAC 40 SXX EUROPE MEDIA
Source: Thomson Reuters.
Driven by excellent audience figures (13.8% average audience share, versus 13.6% over the same period in 2016), the M6 stock share increased sharply until mid-May 2017, outperforming the indices. However, we saw a correction across the sector halfway of the second quarter, reflecting fears on growth in the TV advertising market in France. Despite this, M6’s current share price shows a strong performance: +12.9%, i.e. 595bps above the CAC40 and 1,322bps above the Stoxx Europe Media index.
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6.2. DCF Our DCF model values the group’s equity at EUR2.48bn with total enterprise value of EUR2.54bn. We therefore value M6 at 12.0x our EBIT estimate for 2017e, with a 2016-2019e CAGR of 4.9% (excluding any compensation for M6 mobile), while the average for peers on the European market is 11.3x 2017e EBIT with a 2016-2019e CAGR of 10.0%. Our valuation shows an EV/EBIT to growth ratio of 2.4, versus the 1.1 average for M6’s peers.
Our model is based on the following assumptions:
Revenues: average organic growth in recurring revenues (excluding other operating revenues) should be -1.2% and +2.5% including RTL Radio France between 2016 and 2019e. These assumptions factor in around 1.1% growth in the traditional and internet advertising market on average over the same period and an increase in the M6 group’s audience share.
EBIT: the group’s operating profit is likely to fall by around 1.4% on average to 2019e reflecting the loss of the Orange mobile agreement and the fall in earnings from the Diversification segment, offset by the integration of RTL Radio France. Margins should remain more or less stable versus the 2015 level (the 2016 margin was inflated by the compensation paid by Orange) at around 16.1% on average.
At the end of 2016, the group showed a net cash position with total debt of EUR34.6m and cash and cash equivalents of EUR174m. With the acquisition of RTL Radio France for EUR199.8m, we have increased bank debt by EUR220m in our model, corresponding to the mid-range guidance. We expect investments to total EUR437m in the next three years, focusing on programmes acquisitions and investments/acquisitions in the digital arena.
The company is very slightly leveraged if we project the acquisition of RTL Radio France at EUR67m at end 2017e, based on our estimates. We assume the cost of debt before tax to be 1.6% and assume a tax rate of 38.4%. We use a discount rate of 6.6%, with a beta of 0.7, corresponding to the group’s historical two-year beta versus the CAC40 (this compares with our beta of 0.8 for TF1). We apply a 7.0% risk premium and a risk-free rate of 1.6%.
We assume growth to infinity of 1%.
Fig. 22: Calculation of the discount rate
Inputs
Risk Free rate 1.6%
Market risk premium 7.0%
Βeta 0.7
Cost of Equity 6.7%
Cost of debt after taxes 1.0%
Gearing 2.7%
WACC 6.6%
Source: Bryan, Garnier & Co ests.
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Fig. 23: DCF model
M6 GROUP DCF VALUATION 2014 2015 2016 2017e 2018e 2019e
Current Revenue 1253.2 1257.9 1249.8 1278.7 1298.7 1421.9
% of growth -10.1% 0.4% -0.6% 2.3% 1.6% 9.5%
Other operating revenue 14.9 12.9 11.3 77.1 34.2 34.2
% of growth 91.0% -13.4% -12.4% 582.3% -55.6% 0.0%
Group Revenue 1270.8 1261.1 1355.8 1332.9 1456.1 1460.3
% of growth 0.2% -0.8% 7.5% -1.7% 9.2% 0.3%
EBIT 207.1 199.1 244.3 212.4 235.9 234.4
EBIT margin 16.3% 15.8% 18.0% 15.9% 16.2% 16.1%
Tax Rate -41.5% -43.3% -38.4% -38.4% -38.4% -38.4%
NOPAT 121.2 112.9 150.6 130.8 145.3 144.4
% of growth -6.9% 33.4% -13.1% 11.1% -0.6%
D&A (120.6) (123.8) (141.8) (139.6) (139.6) (139.6)
CAPEX (114.8) (126.8) (144.2) (144.7) (146.2) (146.2)
Change in NWC (43.8) (65.2) (21.0) (14.9) (15.1) 1.3
FCF 83.2 44.7 127.2 110.8 123.6 139.1
Discounted FCF 107.3 112.3 118.6
Sum of disc. FCF 1,030.8
+ disc. Terminal Value 1,508.7
EV 2,539.5
- Net Debt (52.2)
- Provisions (13.4)
Equity 2,473.9
Number of shares 126.4
Target Price (EUR) 19.6
Source: Company Data; Bryan, Garnier & Co ests.
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6.3. Multiples The current share price values the M6 group at 12.2x 2017e EBIT, i.e. 33% above the average valuation for the last three years (9.0x EBIT, with 7.9x EBIT over the last five years, as shown in Fig. 25). This valuation seems high given the limited upside in terms of EBIT for the next three years.
Note also that over the past five years, the M6 group was trading at an EBIT multiple around 30% lower than that of its rival TF1 (7.9x vs 10.9x), but the spread has now narrowed to 10%. Although this narrowing could be put down to convergence between the two groups’ advertising performances in recent years, the adjustment still seems excessive in our view.
We value the M6 group at 12.0x 2017e EBIT and 10.8x 2019e EBIT.
Fig. 24: Comparables EBIT multiples
EV/Current EBIT 2017e 2018e 2019e TF1 Group (consensus) 11.8x 11.7x 9.1x TF1 Group (BG) 13.2x 14.4x 10.9x M6 Group (consensus) 10.9x 10.7x 9.6x M6 Group (BG) 12.0x 10.8x 10.8x ITV 10.1x 8.1x 5.3x Prosieben 10.9x 10.8x 9.3x Mediaset 12.2x 11.8x 7.3x Average (consensus) 11.3x 10.6x 7.7x M6 Group vs average -3.5% 0.8% 23.9% M6 Group vs TF1 (consensus) -8.3% -9.0% 5.2%
Source: Thomson Reuters; Bryan, Garnier & Co ests.
Fig. 25: M6 Group historical EBIT multiples
12
10
8
6
4
2
0 Feb-16 Feb-15 Feb-14 Feb-13 Feb-12 Aug-16 Aug-15 Aug-14 Aug-13 Aug-12 Nov-16 Nov-15 Nov-14 Nov-13 Nov-12 May-16 May-15 May-14 May-13 May-12 EV/EBIT (FWD) Avg 5y
Source: Thomson Reuters; Bryan, Garnier & Co ests.
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7. Appendices
Fig. 26: Simplified Income Statement
M6 GROUP SIMPLIFIED P&L 2014 2015 2016 2017e 2018e 2019e
Group Revenue 1,270.8 1,261.1 1,355.8 1,332.9 1,456.1 1,460.3
% of growth 0.2% -0.8% 7.5% -1.7% 9.2% 0.3%
Operating expenditures (1,063.7) (1,062.0) (1,111.5) (1,120.5) (1,220.2) (1,225.8)
% of sales -83.7% -84.2% -82.0% -84.1% -83.8% -83.9%
EBIT 207.1 199.1 244.3 212.4 235.9 234.4
EBIT margin 16.3% 15.8% 18.0% 15.9% 16.2% 16.1%
D&A 120.8 113.9 138.6 140.6 143.6 143.6
% of sales 9.5% 9.0% 10.2% 10.5% 9.9% 9.8%
EBITDA 327.9 313.0 382.9 353.0 379.5 378.0
EBITDA margin 25.8% 24.8% 28.2% 26.5% 26.1% 25.9%
Net interest 3.7 2.0 0.8 2.0 2.0 2.0
Taxes (87.4) (87.1) (94.0) (82.3) (91.4) (90.8)
Tax rate -41.5% -43.3% -38.4% -38.4% -38.4% -38.4%
Joint ventures and associates (0.2) 0.9 1.7 2.0 2.0 2.0
Net profit 123.2 114.9 152.8 134.0 148.5 147.6
Profit margin 9.7% 9.1% 11.3% 10.1% 10.2% 10.1%
EPS 0.98 0.91 1.20 1.06 1.18 1.17
% of growth 9.8% -7.1% 32.8% -11.9% 10.8% -0.6%
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 27: Simplified Cash Flow Statement
M6 GROUP SIMPLIFIED CASH FLOW STATEMENT 2014 2015 2016 2017e 2018e 2019e
Operating profit 207.1 199.1 244.3 212.4 235.9 234.4
D&A 120.8 113.9 138.6 140.6 143.6 143.6
Change in working capital (43.8) (65.2) (21.0) (14.9) (15.1) 1.3
Others (82.3) (91.0) (93.4) (78.3) (87.4) (86.8)
Cash flow from operating activities 201.8 156.8 268.5 259.7 277.0 292.5
Capital expenditures (107.1) (116.8) (134.0) (144.7) (146.2) (146.2)
Acquisition expenditures (7.6) (31.3) (12.8) (199.8) 0.0 0.0
Others (2.9) (1.1) 1.0 0.0 0.0 0.0
Cash flow from investing activities (117.6) (149.2) (145.8) (344.5) (146.2) (146.2)
Dividends (107.1) (108.0) (107.7) (107.3) (107.3) (107.3)
Others (1.7) 15.1 (16.4) 220.0 0.0 0.0
Cash flow from financing activities (108.8) (92.9) (124.1) 112.7 (107.3) (107.3)
Exchange rate effects 0.1 0.2 0.1 0.0 0.0 0.0
Change in cash and cash equivalents (24.5) (85.1) (1.3) 28.0 23.6 39.1
Cash and cash equivalents, beginning period 285.4 260.9 175.8 174.4 202.4 226.0
Cash and cash equivalents, end period 260.9 175.8 174.4 202.4 226.0 265.0
Source: Company Data; Bryan, Garnier & Co ests.
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Fig. 28: Shareholding structure
Flottant 43.4% RTL Group 48.3%
FCP Salariés Compagnie Nationale à Groupe M6 Autodétention Portefeuille 0.2% 0.3% 7.2%
Source: Company Data
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