Endemol Equity Research Europe EML.AS

Home , Bigg Boss, Deal or No Deal, Endemol, Fear Factor (franchise), Grande Fratello

01 December 2006

Rating (from NEUTRAL) OUTPERFORM* Upgrading to Outperform Price (30 Nov 06) 15.28 (Eu) Target price (12 months) (from 14.50) 17.50 (Eu) Upgrading to Outperform and raising price target to € 17.50. Following Market cap. (Eu m) 1,910.00 recent strong incremental newsflow and our belief that underlying trading is Enterprise value (Eu m) 1,900.13 even stronger than currently anticipated by the market (or indicated by the Region/country Europe/Netherlands company’s guidance), we are upgrading Endemol to Outperform (from Neutral) Sector Entertainment Analyst's Coverage Universe Media and raising our price target to € 17.50 (from € 14.50). Changes to our forecasts Weighting (vs. broad market) OVERWEIGHT yield a 1% upgrade to 2006E EPS, 2% to 2007E EPS and 3% to 2008E EPS. Date 01 December 2006 Recent Telefonica Q3 results suggest underlying growth remains above * Stock ratings are relative to the coverage universe in market expectations. Endemol reported an extremely strong H1, delivering each analyst's or each team's respective sector. organic growth of 21%. Our analysis of Telefonica’s Q3 results suggests that Endemol continues to enjoy growth north of 20%. Management is currently Price / price relative guiding to full year growth of 15%. As a result, we have raised our organic 15 growth forecast to 20% (from 18.5% previously). Solid performance of core formats. Big Brother is slated to return to screens 13 across the major territories in 2007. Deal or No Deal continues to travel to new 11 territories and is commissioned well into 2007 across Endemol’s most important 9 territories. The company has also enjoyed a string of foreign syndication deals Nov-05 Mar-06 Jul-06 Nov-06 post MIPCOM. We also anticipate further positive newsflow on 3 US gameshow Price Price relative pilots, 2 of which could potentially become key global formats in 2007. The price relative chart measures performance against the Europe Dow Jones Stoxx index Big Brother remains a major format for broadcasters. In this note we argue On 30/11/06 the Europe Dow Jones Stoxx index closed at 379.98 On 30/11/06 the spot exchange rate was Eu 0.76 /US$1 and demonstrate quantitatively that Endemol’s most famous format remains popular globally. Overnight, it has been reported that the Channel 4 in the UK is Performance over 1mth 3mths 12mths to pay £180m over 3 years for the show from 2008. This suggests a significant Absolute (%) 0.6 8.1 54.8 50% rise in the cost of the rights by our estimates. To reflect this we are raising Relative (%) 0.3 2.0 28.9 our 2008 organic growth estimate to 6.8% (from 5.1% previously). We believe Year 12/04A 12/05A 12/06E 12/07E this deal is indicative of premium pricing economics (which very few formats are Revenue (Eu m) 850.9 900.1 1,102.7 1,194.9 capable of attaining). As a result of this deal we are upgrading our 2008 EBITDA (Eu m) 132.42 152.80 188.50 207.17 EBITDA margin to 17.8% (from 17.6% previously). Net income (Eu m) 65.0 84.2 103.5 115.9 Content king in the converging world. Given the convergence of media and CS adj. EPS (Eu) 0.00 0.66 0.80 0.89 telecom spaces we are observing, we see compelling content as the only ROIC (%) — — — — differentiating factor amongst bundled offerings. The likely beneficiaries of this P/E (x) 23.0 19.1 17.2 trend are the Hollywood Movie studios, top sports clubs and franchises, and P/E rel (%) — 147.3 137.7 135.3 EV/EBITDA (x) 14.9 13.0 10.1 9.0 those production companies capable of delivering audience generating branded shows. Endemol represents one of the best focused pure plays on this trend, in Dividend 2005 (Eu) Book value/share (12/05, Eu) our view. Endemol currently trades on 17.2x 2007E, at a premium to the 0.49 — European TV broadcasting sector. We believe a premium is warranted given Dividend yield (%) Free float (%) Endemol’s diversified revenue base, platform neutrality, correlation to global as 3.2 25.0 opposed to domestic advertising cycles and its position as a premium content IC (12/06E, Eu m) Number of shares (m) play likely, in our view, to be of takeover interest to telcos, ISPs and media —125.00 conglomerates looking to acquire premium content assets. Net debt (12/06E, Eu m) EV/IC (12/06E, x) Endemol is a global creator and producer of television formats -9.9 Net debt/equity (12/06E, %) Current WACC (12/06E, %) — 8.2 research team Source: FTI, Company data, Datastream, Credit Suisse Securities (EUROPE) LTD. Mike Cunningham Nick Bertolotti Neil Shelton Estimates Research Analyst Research Analyst Research Analyst 44 20 7883 8723 44 20 7888 4954 44 20 7888 1370 [email protected] [email protected] [email protected]

IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS ARE IN THE DISCLOSURE APPENDIX. .

Endemol 01 December 2006 Investment Summary

Upgrading to Outperform and raising price target to € 17.50. Following recent strong incremental newsflow and our belief that underlying trading is even stronger than currently anticipated by the market (or indicated by the company’s guidance), we are upgrading Endemol to Outperform and raising our price target to € 17.50.

Readover from Telefonica’s Q3 results Endemol’s parent company Telefonica recently reported its Q3 results. If one examines Telefonica’s divisional revenue breakdown, one can analyse the performance of its media and content businesses. Telefonica reported 9 month growth in its content businesses of 28%. By our estimates, the quoted Endemol (Endemol NV) represents approximately 71% of Telefonica's content revenues (the remainder is Endemol France, and ATCO). Endemol reported an extremely strong H1, delivering organic growth of 21%. Looking at the relevant Telefonica release for the same period, Telefonica reported growth of 28.8% in its content businesses. This suggests that Endemol continues to grow above market expectations in Q3. Moreover, the growth rates of Telefonica's content businesses have slipped only very marginally in Q3 (from 28.8% in H1 to 28% for 9 months), suggesting Endemol continues to enjoy growth north of 20%.

Moreover, we can estimate the likely Q3 and 9 month growth rates directly for the quoted Endemol NV. As part of its IPO filings Endemol reported one set of quarterly figures, for Q3 2005. Endemol's 9 month revenues in 2005 according to this release were € 615.82m. Assuming c70% of Telefonica's 9 month content revenue are derived from Endemol NV suggests growth of 27.9% for 9 months, and 26% in Q3.

Endemol raised their FY 06 organic growth guidance to 11-13% at the H1 stage, and raised it further recently in their Q3 trading statement, to 15%. In our opinion, Endemol has traditionally been overly conservative in their guidance (i.e. guiding to 5-6% for FY but delivering 21% in H1). As a result of this we are raising our full year organic revenue growth target to 20% for 2006. Given Telefonica's results, it is reasonable to suggest that the growth performance of Endemol may be even better than the market is currently forecasting. We believe the market to be anticipating growth of 15-18%

This analysis suggests that Endemol continues to enjoy buoyant trading conditions in Q3, well ahead of market expectations and company guidance.

Recent incremental newsflow is also indicative of strong H2 Endemol has enjoyed a string of programming commissions and foreign syndications globally post MIPCOM. Held in Cannes every October, MIPCOM is one of the key programming conferences for the TV format industry globally. Deal or No Deal has been commissioned in a number of new territories highlighting the ability of the format to travel globally – South Africa, Canada, Singapore, Malaysia, Australia and a first ever production in Japan (however the majority of these commissions will impact 2007 numbers in the main). The show is commissioned well into 2007 in Endemol’s core territories of the US and Europe.

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Endemol has also successfully sold foreign syndications of some of their flagship US formats. Extreme Makeover: Home Edition has been licensed to MNET in South Africa, Sky Italia and UKTV. Fear Factor has been syndicated to Challenge in the UK, Sky Italia and Channel 4 Finland. The company has also enjoyed significant sales of its less well known shows globally. These deals represent the syndication of previously produced and broadcast shows to foreign networks. Such programming involves minimal cost to Endemol given that the original production has been cashflowed by the commissioning US broadcaster. As such these deals are likely to enjoy a very high EBITDA margin, well in excess of the group's average. This further supports our belief that Endemol is likely to report margins towards the top end of its typical 15-17% range. At its H1 results Endemol announced that it had successfully sold 3 new gameshows to separate US networks (ABC, NBC and Fox) in the space of one week. For The Rest of Your Life on ABC, and Show Me the Money for Fox were created by Dick de Rijk who invented the Deal or No Deal format concept. 1 versus 100 for NBC, is a format from Endemol’s library of 1200+ TV formats. A key factor in the sales was Endemol’s consistent track record of producing audience capturing content. These productions were slated to take place in the second half of 2006 and thus be reflected in Endemol’s full year numbers. All 3 were sold as pilots, with further commissioning dependent on the success of the pilot shows. The first show to be broadcast was 1 vs. 100 on NBC. The pilot was very successful, generating the highest non-Olympic 18-49 rating in its time slot since December 2002. As a result NBC promptly reordered a further 10 new shows. We await further newsflow on the successful launch of the other two shows. Show Me The Money debuted on Fox last week, hosted by William Shatner. If the two formats are successful, they could be exploited through Endemol’s global network in 2007 and beyond, in the manner that Deal or No Deal is currently.

Big Brother remains in demand globally Overnight, it has been reported that Channel 4 in the UK is to pay £180m over 3 years for the show from 2008. This news confirms the continued popularity of Endemol's flagship franchise. Though less dependent on Big Brother than historically, we believe the format will contribute 18% of FY 2006E group revenues (compared to 22% in 2004). Channel 4's current contract was due to end in 2007 and speculation amongst the media press suggested ITV would bid aggressively for the rights to the show. The importance of the Big Brother franchise to Channel 4 is demonstrated by ratings from this summer. Indeed, Channel 4, is now heavily reliant on the franchise for its ability to deliver the key demographic for advertisers – 16-34 year olds. During 2006, the franchise and related shows (Little Brother, Big Brain, Big Mouth and Celebrity Big Brother) have accounted for almost a fifth of (18.8%) of Channel 4’s rating in this demographic (Source: Broadcast). Moreover, Channel 4’s stable of channels overtook ITV’s in the 16-34 demographic during Big Brother’s summer run, for the first time ever. ITV's widely speculated plan to bid for Big Brother was likely based around trying to claw back its share of the 16-34 demographic. Channel 4 is now highly reliant on Endemol programming when one considers that Deal or No Deal has become a key show for the broadcaster.

Whilst Endemol does not give out any details on individual contracts, widespread press reports suggested that the current Big Brother deal was worth c£40m per annum. If the reported figure of £180m is correct, this suggests that Endemol has secured a

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significant 50% increase in its fees for the show. This is a very significant feat in the TV production industry given that the leverage of producers relative to broadcasters is generally very limited. However, it is lower than the £70-80m figures recently speculated in the trade press.

Changes to forecast estimates As a result of our belief that Endemol’s organic growth is currently ahead of market expectations and company guidance we are raising our 2006 organic revenue growth forecast to 20% from 18.5%. As a result of the Channel 4 Big Brother deal discussed above we are also raising our 2008 organic growth forecast to 6.8% from 5.1% previously.

We have consistently argued that Endemol now has the potential to break through the historic 17% EBITDA margin ceiling implied by its cost plus business model. Historically, Endemol’s margins have been effectively capped around 17% due to the cost plus business model of the television format production business which is essentially fixed around the world for typical productions. However, some of the most successful formats are able to earn a premium due to their ability to generate large audiences. Such formats include the likes of Endemol’s Big Brother and Celador’s Who Wants to be a Millionaire? Endemol has used the continued global success of Big Brother to charge a premium for the rights to its production and also as a vehicle to force broadcasters to trial some of its lesser known formats. We believe that the global success of Deal or No Deal will allow it to break into the premium pricing category given that it is likely to be in high demand for recommissions by broadcasters globally (for example, we note that following its initial success in the UK and the US, both Channel 4 and NBC were quick to recommission the show, with Channel 4 taking some 230 episodes). We estimate that 33% of Endemol’s revenue base can generate margins north of their historic 17% ceiling due to premium pricing. Aside from the improvement in pricing we anticipate for the major formats, we would also highlight the high margins the group has produced on a normalised basis (once exceptional factors have been removed) to give further comfort on potential margin expansion. For the FY 2005 normalised margins reached 17.5% and 17.3% in FY 2004. In H1 06, management believes that normalised margins were 19.2%. However, we would caution that some incidental factors are not non- recurring in nature (e.g. the LTIP which is removed for comparability with the pre-IPO H1 05 period) and that the true normalised margin is approximately 17.5%.

We believe the Channel 4 deal is an example of such premium pricing economics. The show is of critical importance to Channel 4’s summer schedule and ability to deliver the key 16-34 demographic to advertisers. As a result we are raising our 2008E EBITDA margin estimate to 17.8% (from 17.6% previously).

4 Endemol 01 December 2006 Longevity of formats

A critical element of risk associated with investing in Endemol is its dependency on a few key formats. Endemol often suffers from the perception that it is a ‘hit-driven’ business, tied to the fortunes of its most famous franchise, Big Brother. We would argue this perception is somewhat, but not totally, misplaced. We believe these perceptions warrant closer inspection. Fundamentally, Endemol is a hit driven creative business. However, its revenue base is somewhat more diversified than it is perceived. Figure 1 below shows Endemol’s diversified geographical revenue base, indicating that the company remains relatively insulated from potential adverse advertising conditions that may occur within a particular territory. For example, the German market for TV productions remains tough as consequence of the slow recovery of the advertising market in Germany. Broadcasters in Germany remain cautious on experimenting with new formats and as a result the territory remains a laggard for Endemol. However, given the company’s stellar growth performance overall it is clear that the diversified revenue base provides protection from adverse conditions in one local market. However, as Figure 2 demonstrates the company does remain highly dependent on the success of, and broadcasters’ appetite for, non-scripted television formats. Non-scripted television formats are essentially those formats which do not require actors and scripts – gameshows and reality TV shows.

Figure 1: Endemol FY 2005A revenue by geography

Rest of the UK World 19% 14% Germany 9%

Netherlands Italy 17% 12% USA Spain 15% 14%

Source: Company data

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Figure 2: Endemol FY 2005A revenues by discipline

Digital Media 9% Scripted 14%

Non-scripted 77%

Source: Company data

Examining Endemol’s revenue base by format, we find that its supposed dependency on Big Brother is diminishing over time. This is illustrated in Figure 3Big Brother represented 22% of Endemol’s revenues in 2004 and we anticipate that the format will represent 18% of FY 2006 revenues. Whilst, the success of Big Brother remains very important for the performance of the company, the emergence of Deal or No Deal and other formats has tempered this dependency.

Figure 3: Percentage of revenues generated by Big Brother

0 2004 2005 2006E

Source: Credit Suisse estimates

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Figure 4: Endemol’s top ten formats (H1 2006) Format Country of origin Genre Netherlands Reality

Global Creative Team Game Show

USA Reality/ Lifestyle Show

Particitpation Netherlands TV

USA/Netherlands Reality/ Game Show

3rd Party Game Show

3rd Party Reality

Source: Endemol

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Figure 5: Endemol’s top ten formats (H1 2006, continued) Format Country of origin Genre Australia Talent Show

UK Sports reality

Source: Endemol

If we examine the revenue generation of Endemol’s formats more widely, we note that the company remains highly dependent on its top 10 formats. For example in H1 2006, the company generated some 61% of its revenues from its top 10 franchises. These formats are illustrated above. Whilst this ratio appears high, we would argue that Endemol represents a significantly more diversified production company than many UK AIM listed companies, which are typically dependent on one or two major franchises.

Is anybody still watching Big Brother? We estimate that Endemol’s two top franchises, Big Brother and Deal or No Deal, will likely account for around 33% of FY 2006 revenues (Big Brother 18%, Deal or No Deal 15%). Clearly, the longevity of Endemol’s major formats remains a key issue for the stock. Big Brother remains one of the most famous TV formats, especially of those created in the last 10 years. Understandably, there is a concern that its popularity may have run its course. To this end, it is useful to examine the popularity of Endemol’s core show over time and across different territories, to try to give a more quantitative response to such concerns.

In the UK, data for the most recent series suggests the show remains as popular as ever, and is certainly not showing any sign of diminishing. This is illustrated in Figure 6, which shows that the viewership of the most recent series (Series 7) is in line with its long run average, and more popular than the previous year.

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Figure 6: Big Brother, average viewers by series (Millions)

0 Series 1 Series 2 Series 3 Series 4 Series 5 Series 6 Series 7 (2000) (2001) (2002) (2003) (2004) (2005) (2006)

Source: Media Guardian

Moreover, Big Brother maintains the ability to attract large audiences, especially among the younger demographic which advertisers seek to target. Figure 7 shows the audience shares achieved by the show at critical moments through the series. Clearly, with audience shares frequently in the region of 30%, the show retains its ability to capture viewers attention and hence remain attractive to the broadcaster and its advertisers.

Figure 7: UK: Big Brother (Series 7) Record audiences by event Day Date Day Start End Duration Viewers (m) Audience share (%) Event 1 18/05/2006 Thursday 21:00 22:15 75 7.141 31 Launch 30 16/06/2006 Friday 22:01 22:28 27 6.346 30 Grace evicted 44 30/06/2006 Friday 22:03 22:48 45 6.24 31 Aisleyne moves to second house 59 14/07/2006 Friday 22:01 22:29 28 6.158 31 Nikki evicted 51 07/07/2006 Friday 22:01 22:29 29 5.819 28 Lea evicted 37 23/06/2006 Friday 22:00 22:30 30 5.768 27 Lisa evicted 2 19/05/2006 Friday 21:00 21:58 58 5.753 25 Day 2 80* 04/08/2006 Friday 22:00 22:30 30 5.706* 30 Ex-housemates back in/Susie evicted 7 24/05/2006 Wednesday 21:01 22:03 61 5.671 24 Shahbaz exit 87* 11/08/2006 Friday 22:00 22:30 30 5.608* 29 Imogen out/Nikki back in Average 6.112 28.6

Source: Media Guardian, *Overnight figures - excludes 'time-shifted viewing' such as videos, PVRs/Sky+

Indeed, Channel 4, the UK broadcaster of Big Brother, is now heavily reliant on the franchise for its ability to deliver the key demographic for advertisers – 16-34 year olds. During 2006, the franchise and related shows (Little Brother, Big Brain, Big Mouth and Celebrity Big Brother) have accounted for almost a fifth of (18.8%) of Channel 4’s rating in this demographic (Source: Broadcast). Moreover, Channel 4’s stable of channels overtook ITV’s in the 16-34 demographic during Big Brother’s summer run, for the first time ever.

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The attractiveness of the Big Brother franchise, and its importance to the Channel 4 summer schedule underlines why the broadcaster was prepared to pay such a high amount to secure the rights until 2010.

The attractiveness of the franchise is not limited to the UK. In Italy, the franchise’s core audience remains robust. This is highlighted in Figure 8 below. Though prime time audience share has declined significantly from that of the first series, recent audience shares remain healthy, with the most recent series enjoying a higher share than the previous series.

Figure 8: Big Brother Italy (Audience Share, %, Prime Time for Grande Fratello)

0 Ediz. Aut '00 Ediz. Aut '01 Ediz. Pri '03 Ediz. Pri '04 Ediz. Aut '04 Ediz. Pri '06

Source: Canale 5, Mediaset

Moreover, the show remains important to the broadcaster. Commenting at the recent Mediaset Q3 earnings conference call, Fedele Confalonieri, Chairman of Mediaset, looked forward to the return of Big Brother on his network in January 2007, stating that ‘these types of programmes are probably not at the end of their age’.

Figure 9 highlights the performance of Big Brother in the US. In the US, Big Brother has not been the phenomenon that it has been in Europe and other regions of the globe and we can see the average audience has trended steadily down. However, the core viewing audience remains solid. CBS has an option on the show for 2007 and 2008 and management has said that they believe that CBS is happy with the performance of the show and expect them to exercise their option.

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Figure 9: Big Brother US, CBS, Average Audience share (Live, % of US Households)

0 2000 2001 2002 2003 2004 2005 2006

Source: Nielsen, Credit Suisse

We estimate that Endemol’s two top franchises, Big Brother and Deal or No Deal, will likely account for around 33% of FY 2006 revenues. As we highlighted in the newsflow section, demand for both shows remains strong. In 2007, the show is already commissioned for 10 countries; Argentina, Australia, Belgium, Brazil, Germany (returning from a break in 2006 following the year long Big Brother: Das Dorf in 2005), Italy, Netherlands, Philippines, Portugal, United Kingdom. CBS retains an option for the show in 2007 and 2008 for the US. It is anticipated that the show will be produced in 20 countries in 2006, including a production for the first time in India (Bigg Boss).

The life cycle of the format Investing in Endemol clearly requires an investor to be comfortable with the shelf-life of core formats, as well as the future creative output of the company. Whilst the core franchises (such Big Brother, Deal or No Deal, Fear Factor, Extreme Makeover: Home Edition) generate the majority of current revenues, in order to generate growth for shareholders the company must focus on three areas.

1. Travelling formats – exporting existing formats into new territories

2. New formats – creating new format ideas 3. M&A

We would argue that all current formats of a TV production company are essentially diminishing assets over time. Thus in order for a TV production company to enjoy growth, its creative output and ability to travel its formats must exceed this natural decay of the attractiveness of its formats.

In this regard, it is useful to examine data on the current level of global exploitation of Endemol’s core formats and, with more difficulty, their potential life cycle.

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Figure 10: International exploitation of Endemol formats

15 Number of countries of Number

0 1999 2000 2001 2002 2003 2004 2005 2006*

Big Brother Deal or No Deal Call TV Fear Factor Extreme Makeover: Home Edition

Source: Endemol, *denotes estimate for end 2006 made July 2006. No data yet provided for Fear Factor 2006

As a format, Big Brother would appear to have matured, but is not yet in decline. As we demonstrated above its core audiences remain robust globally, causing it to remain in high demand from broadcasters. As Figure 10 highlights, it will be produced in some 20 countries in 2006, marginally below its peak of 22 countries in 2005. Moreover, the show will be retained across Endemol’s core territories in 2007.

To get a sense of Big Brother’s potential lifecycle, it is worth examining the data on other major global formats.

Figure 11: Selected major global TV formats Format Producer No. of countries produced in/licensed to Who Wants to be a Millionaire? Celador 105 Big Brother Endemol 70 X-Factor Syco TV 35 Pop Idol 19 Entertainment 30

Source: Company data, Wikipedia.

Big Brother has seen widescale international exploitation, but not quite to the extent of Who Wants to be a Millionaire? This largely represents Celador’s decision to allow licensing of the show to local production companies and broadcasters around the globe. Endemol prefers to retain their intellectual property rights (the license) as well as produce their shows. Thus, in general, if a broadcaster wishes to show an Endemol format, Endemol’s local production houses will be responsible for producing it. This

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allows Endemol to control more areas of the value chain and to protect the brands of their shows.

Figure 12: International exploitation of Big Brother

Source: Wikipedia. Grey territories are those where Big Brother has yet to be produced.

As Figure 12 highlights, whilst the format has seen significant international exploitation, Asia remains an area of potential new productions. As we highlighted above, the show only made its debut on Indian TV in 2006, despite being created in 1999.

To estimate the lifespan of the show is extremely difficult. As we have shown, the format continues to enjoy robust demand from broadcasters, and could also potentially be further exploited in new territories. We would argue that reality TV is a programming genre which is here to stay, like soaps or sitcoms, and will evolve and be adapted for changing tastes in the future. By way of comparison, and though from an entirely different programming genre, some formats have managed to survive for considerable lengths of time; for example Price is Right (50 years), Jeopardy (32 years), Wheel of Fortune (31 years). It is unlikely that Big Brother will enjoy a similar life span but we highlight these shows to indicate the upper bounds of format lives.

Deal or No Deal is an excellent example of Endemol’s ability to invent formats and adapt them to new markets. Originally created in the Netherlands in 2002 by Dick de Rijk, the format has enjoyed strong international growth and is expected to be produced in 35 countries this year. The international expansion of the format has been a key driver of the company’s 2006 growth.

As regards future creativity, and the future growth of the company, we would highlight the potential international exploitation of the 2 new US gameshows (1 vs. 100 has already been widely produced in Europe). Show Me the Money is already in production

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in Italy and we look for further positive newsflow on the success of these shows going forward.

14 Endemol 01 December 2006 Pure content play with potential takeover upside

Strong demand for audience generating content We have recently observed a structural shift in the US networks programming strategies. The networks are ditching expensive drama, movies and sports in favour of entertainment formats - Endemol is the largest producer of these formats globally. We believe this shift will provide a structural tailwind for Endemol going forward. It is clear that the US networks are increasingly focusing on Entertainment, which provides regular, cheap repeat programming, which is less expensive than rights such as sports or movies and also more advertiser friendly. NBC has opted to bring gameshows and reality TV shows to its 8PM primetime slot, eschewing the traditional broadcasting of flagship drama in the key timeslot. Endemol is largely credited with bringing the gameshow back to US primetime due to the success of Deal or No Deal. The popularity of that franchise was a key factor in Endemol being able to successfully pitch the 3 gameshows sold to US networks highlighted above.

We also continue to see strong demand globally for branded shows capable of delivering guaranteed strong audiences. In the UK we note the inflation of the cost of flagship drama series – Channel 4 reportedly paid £900,000 an episode to retain Desperate Housewives, totalling over £40m over the course of the next two years. BSkyB announced it recently paid an estimated £27m to secure the rights to seasons 3 and 4 of Lost. With inflation of top drama programming globally, we anticipate increased demand for cheaper reality TV and gameshow programming which will naturally benefit Endemol.

Due to the proliferation of media, audiences are becoming increasingly fragmented. As a result, broadcasters require flagship branded shows to generate audiences. We are seeing a segmentation of the market into cheap filler programming and expensive branded shows. This is leading to an inflation of premium, watercooler content.

Given the convergence of media and telecom spaces we are observing, we see compelling content as the only differentiating factor amongst bundled offerings. We recently highlighted in our note on UK Broadband (Too Many Pipes, 31 October 2006), that distribution is becoming commoditised. In order to differentiate triple play bundled offerings, compelling content is key. In such a scenario we see the likely winners as being the premium content providers – Hollywood Movie studios, top sports clubs and franchises, and those production companies capable of delivering audience generating branded shows. Endemol represents one of the best focused pure plays on this trend, in our view.

Endemol remains a potential takeover candidate, in our view Since its November 2005 IPO, Endemol has been subject to persistent takeover speculation regarding Telefonica’s 75% controlling stake. Mediaset has often been widely speculated to be interested in buying the stake and the company management confirmed to us on an investor roadshow that they are interested in as much as they would seek to protect their access to key content, but only as a relatively small part of a consortium with a potential stake commensurate with their operations in just Italy and

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Spain. Endemol’s co-founder John de Mol has also been widely speculated as considering a potential bid through his Talpa investment vehicle. Reuters (28 June 2006) recently quoted Telefonica Chairman Cesar Alierta saying that private equity groups were interested in the stake and that Telefonica wished to close a deal before the end of the year. This stance appears to have softened in recent months following Endemol’s very strong H1 results. Telefonica has reiterated their belief that the division remains non-core but are now in less of a hurry to find a potential buyer. It has recently been suggested that a sale would take place in Q1 of 2007 (Broadcast, 10 November 2006). We suspect this has credence as it would allow Telefonica to lock in the anticipated strong FY2006 numbers and demonstrate solid full year earnings track record as a listed company to a potential buyer.

In our recent meetings with key private equity companies in London, many of them stressed their belief in the importance of content and saw it as an attractive industry from private equity investment.

We would highlight the underleveraged balance sheet as a probable focus for private equity groups. Whilst Endemol's cash flow generation is very solid, we would question whether private equity firms would a) buy into what is essentially a highly creative business where the main assets are its key creative staff, and b) they are unlikely to have solid visibility on the life-cycle of key formats and the potential of the creative pipeline. Further, though Endemol is now publicly quoted, it is questionable whether key creative staff would wish to work under aggressive private equity management as opposed to their current management. Perhaps the most credible private equity bidder is John De Mol's Talpa investment vehicle. The vast majority of Endemol’s 1200+ television formats (a key intangible asset, held off balance sheet) were created under John De Mol's leadership of the company and he is likely to have a much fuller understanding of their true value and potential life than any other private equity investor. We do however believe that Endemol is of most interest to telcos, ISPs and media conglomerates who wish to capture and leverage Endemol's market leading content. We believe such a strategic trade buyer may be able to justify paying a higher price for the stock.

Resolution of Endemol France liability raises likelihood of takeover, in our view Telefonica recently resolved its outstanding dispute with Endemol France. Endemol France was carved out of the Endemol NV IPO vehicle due to a disagreement regarding the value of an earnout payable to the management of Endemol France. The liability for the resolution of this earnout subsequently resided with Telefonica. We have no information as to the size of this earnout liability but believe it to be very significant. Post IPO, Telefonica retained a 75% stake in Endemol NV and 100% ownership of Endemol France. Telefonica has expressed its intention to sell its interest in the business and several industry players and private equity firms have been linked with its stake. In our opinion, the outstanding issue regarding Endemol France has provided a slight impediment to any sale. From Telefonica's point of view, we think it makes little sense to retain ownership of a regional TV production arm in France if it successfully sells its stake in Endemol NV. Whilst there is little financial data available regarding Endemol France, we believe it represents one of the largest and most profitable units of the original Endemol group

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(i.e. prior to the Endemol NV IPO). Using 2004 filed Dutch GAAP figures we know that on a revenue basis, Endemol France was the largest unit of the group, with EUR186m in revenues representing 18% of 2004 group revenues. This implies that Endemol France was somewhat larger than the Netherlands (146.3m) and the UK (146.1m). We estimate the EBITDA as being EUR41.8m. This implies an EBITDA margin of some 22% - well in excess of the typical 15-17% range of most Endemol units.

We believe Endemol France is an attractive business unit, and, the earnout liability issue notwithstanding, would potentially be of interest to a potential acquirer looking to acquire Telefonica's interest in Endemol NV. From a potential owner’s point of view, it makes no sense to operate a local Endemol France unit, and a global Endemol business (Endemol NV - the currently listed Endemol vehicle). Thus resolution of the earnout liability issue will allow Telefonica to potentially exit its interest in both business more satisfactorily, and allow an industry buyer to amalgamate the business. In this respect a potential takeover of Endemol NV becomes more likely.

However, from Endemol NV shareholders point of view we would highlight the following risks. Whilst we think the removal of the Endemol France issue potentially makes an acquisition of Endemol NV more likely, we see a risk regarding how these businesses are potentially amalgamated. Telefonica may potentially use Endemol NV as a vehicle to bid for Endemol France. Whilst the earnout liability will have been resolved by Telefonica, we would caution that the potential acquisition of Endemol France entails certain risks for Endemol NV shareholders. The key assets of a television production business are its creative staff and their associated industry contacts and relationships with key broadcasters. The key staff at Endemol France are likely to have enjoyed lucrative earnings over recent years. In order to motivate these key staff it may be necessary to offer very attractive remuneration packages to them and it is also questionable how motivated they would be to join the publicly quoted Endemol vehicle. Whilst we think the potential re-amalgamation of the two Endemol businesses, the global Endemol NV and Endemol France, would make strategic sense, any acquisition of Endemol France may entail a risk of a transfer of value for Endemol NV shareholders.

Valuation Endemol currently trades on 17.2x 2007E on our revised forecasts. This is a slight premium to the European broadcast sector (trading at 16.5x 2007E) – indeed we think it should trade at a 20% premium to the European broadcast sector which supports our € 17.50 target price. We think a premium is warranted given Endemol’s diversified revenue base, platform neutrality, correlation to global as opposed to domestic advertising cycles and its position as a premium content play likely in our view to be of takeover interest to telcos, ISPs and media conglomerates looking to accumulate content assets. We also look at valuation via a DCF as a sense check. Our DCF, using a terminal growth rate of 3%, and a discount rate of 8.2%, yields an implied per share valuation of € 18.50. We note that historically media companies trade at a discount to implied DCF valuations and thus see our DCF valuation as an upper bound. However, given the solid operating performance we anticipate, the potential takeover interest highlighted above and our belief that Endemol should trade at a premium to the broadcasters, we believe a target price of € 17.50 is justified.

17 Endemol 01 December 2006

Companies Mentioned (Price as of 30 Nov 06) Endemol (EML.AS, Eu15.28, OUTPERFORM, TP Eu17.50, OVERWEIGHT) Mediaset (MS.MI, Eu8.95, NEUTRAL, TP Eu9.00, OVERWEIGHT) Telefonica (TEF.MC, Eu15.29, RESTRICTED)

Disclosure Appendix Important Global Disclosures The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names.

3-Year Price, Target Price and Rating Change History Chart for EML.AS

15 14.5 14 14

12 11.25 11 N 10 13-Jan-06 EUR 9

03 4 04 04 5 5 05 05 6 6 06 c- -0 t- c- -0 -05 t- c- -0 -06 t- e un-04 c e un-0 g c e un-0 g c Feb Feb -J Feb -J 2-D 2- 2-Apr-04 2-J 2-Aug-04 2-O 2-D 2- 2-Apr-05 2 2-Au 2-O 2-D 2- 2-Apr-06 2 2-Au 2-O Closing Price Target Price Initiation/Assumption Rating O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

EML.AS Closing Price Target Price Initiation/ Date Price (EUR) Price (EUR) Rating Assumption 13-Jan-06 10.85 11.25 NEUTRAL X 22-Mar-06 14.3 14 27-Jul-06 13.13 14.5

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18 Endemol 01 December 2006

***For Australian and New Zealand stocks a 7.5% threshold replaces the 10% level in all three rating definitions. Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. All Credit Suisse Small and Mid-Cap Advisor stocks are automatically rated volatile. All IPO stocks are automatically rated volatile within the first 12 months of trading.

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19 Endemol 01 December 2006

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Endemol - The End Game.doc