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This report is published for educational purpose only LAGARDÈRE SCA by students competing in the CFA Research Challenge 2016
Euronext Paris 2011 2012 2013 2014 2015E 2016E 2017E 2018E Bloomberg Ticker MMB:FP NET SALES 7657 7370 7216 7170 7017 7429 7721 8015 Type of company: EBITDA 577 541 614 570 538 566 586 613 EBITDA 7.54% 7.34% 8.51% 7.95% 7.66% 7.62% 7.59% 7.65% Conglomerate MARGIN Sector: EBIT 320 302 309 324 324 343 356 370 EBIT MARGIN 4.18% 4.10% 4.28% 4.52% 4.61% 4.61% 4.61% 4.61% Publishing, Media, Travel Retail, NET INCOME -689 106 1319 49 98 121 132 143 Sports & Entertainment
Recommendation: HOLD SHARE PRICE: €25.16 Investment Summary TARGET PRICE: €26.97 UPSIDE: +7.19% Recommendation We initiate our coverage of Lagardere SCA with a BUY rating and a target price of € 26.97 which implies a 7.19% potential upside from its current stock price (€25.16). We reckon that, at present, the Market and Stock Data stock is undervalued given its fundamentals.
Market Cap 3,299.3 Four Distinct Division, Distinct growth potential The company was created as an SCA (Limited Partnership with Shares) with Jean-Luc Lagardère as Shares 131,133,286 Outstanding Managing Partner. Since 1992 the ecosystem of different companies within Lagardère group (then named Lagardère SCA) changed significantly. As of today, Arnaud Lagardère is the general and 52 weeks price 21.9 - 30.2 managing partner. The company is divided into 4 main divisions: Lagardère Publishing, Lagardère range Travel Retail (Lagardère Services before 2015), Lagardère Active, Lagardère Sports & Entertainment (formerly Lagardère Unlimited) Average 3M 204,783 volume Sales Growth Beta Levered 0.892 Sales from 2015 to 2018 have been projected as follows: Travel Retail (+6.14% CAGR 2015/16) which has a strong statistical correlation between sales of the business, sales of the airline industry and the Source: Bloomberg number of passengers travelling per year. Publishing has been projected with the average of a quantitative model and a conservative approach (+1.89% CAGR). Active has been projected to grow at (+4.29% CAGR). Sports & Entertainment is projected at (+4.54% CAGR) Sales growth for years 2019 to 2023 were constantly converged to the terminal growth rate.
Valuation Our DCF implies a target price of €26.97 per share, which was derived through a three-stage model: First we computed the economic performances and the relative cash flows of the period 2015E- 2018E, then we assumed the growth rate to show a steady decline from 2019 to 2023 to the real world GDP growth rate of 2.65%.
Considering these assumptions, the target price is given by Free Operating Cash flows for 24% and by the Terminal value for the remaining 76%. In order to verify the consistency of these findings, we performed a Monte Carlo simulation: we decided to run this exercise because the base case DCF model is mainly driven by organic factors, while the Monte Carlo simulation takes into consideration other external factors.
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Business Description
Lagardère SCA is a media (and formerly also industrial) empire that takes its name from the entrepreneur and founder Jean-Luc Lagardère. In 1992 Hachette, France's most famous publisher, acquired Matra, an aerospace and airplane engine developer and producer. Lagardère group was created to be the 'umbrella company' of this new group.
The company was created as an SCA (Limited Partnership with Shares) with Jean-Luc Lagardère as Managing Partner. Since 1992 the ecosystem of different companies within Lagardère group (then named Lagardère SCA) changed significantly. As of today, Arnaud Lagardère is the general and managing partner. The company is divided into 4 main divisions: 1. Lagardère Publishing 2. Lagardère Travel Retail (Lagardère Services before 2015) 3. Lagardère Active 4. Lagardère Sports & Entertainment (formerly Lagardère Unlimited) Figure: Geographical distribution of sales LAGARDÈRE PUBLISHING (28% of total sales), under the historic label of Hachette Livre, 2% 7% publishes educational books, general literature books, Illustrated books and partworks. This unit has a diversified geographical distribution of sales, which come mainly from France (30.7%), United 10% States (21.3%), United Kingdom (18.2%) and Spain (6.3%). 34% LAGARDÈRE TRAVEL RETAIL (53% of total sales) consists of retail operations and concessions in travel areas such as airports (Aéroports de Paris) and train stations. Main stores are classified 12% under Travel Essentials, Duty Free & Luxury, and Food Services.
Part of this business unit is also the Distribution business, which operates in both independent and integrated retail networks. This business is being slowly divested as Lagardère is continuously searching for buyers. The management believes that the Travel Retail business can be the major 35% source of organic growth. The most famous names under the Travel Retail business are Relay, Hubiz, Aelia, Discover, Other Countries Asia-Pacific Rustichelli Mangione, Bricco and Trib's. The company also operates - under franchise - brands as USA and Canada Eastern Europe Hermès, Lonely Planet, Fnac, iStore, Costa Coffee, Paul, Victoria's Secret and Marks & Spencer. France Western Europe 2015 has been an important year for Travel Retail, for Lagardère acquired a North American travel retailer (Paradies, for 485M € paid in cash with a bridge loan) to increase its presence in North America, and more recently obtained a contract to operate in various sections of the Duty Free retail space at the new Midfield Terminal Complex (MTC) of the Abu Dhabi International Airport (from Figure: Sales per business 2017). Lagardère Travel Retail is the 4th travel retailer in the world (according to Moodie Report 2015). Sales come from France (26.2%), Europe (excluding France, 59.8%), North America and Asia-Pacific. 394 LAGARDÈRE ACTIVE (13% of total sales) contains an ecosystem of media activities. Sales come 958 2.004 mainly from France (85.5% of Active's sales). The firm owns famous magazines (52% of Active's sales) such as Elle, Paris Match and Version Femina, radio stations (22% of Active's sales) such as Europe 1, Virgin Radio and RFM, Television channels (9% of Active's sales, Youth Channels such as Tiji, Canal J and Gulli, Music Channels such as Virgin Radio TV, MCM, RFM TV, MCM Top), and Websites (Doctissimo, BilletReduc.com, Boursier.com). Part of this unit's activities is also the Audio-Visual production & distribution, which consists in selling and distributing to other TV channels programs archives and own productions.
Sales of Active are highly dependent from the cyclical advertisement market. After the sale of 3.814 Canal+ to Vivendi in 2013, the focus of the management is to improve profit margin by performing an efficient cost optimization on this unit.
Publishing LAGARDÈRE SPORTS & ENTERTAINMENT (6% of total sales) main activities consist in Marketing Rights and TV rights management, talent representation and music shows/live shows Travel Retail production.The company is one of the major international market players, although it is not one of Active the top ones. Main clients for marketing rights management are football teams in the British, French and German football leagues. The most famous teams are Borussia Dortmund, Olympique Sports&Entertainment Lyonnais and FC Southampton.
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Main TV rights owned come from the African Football Confederation and from the Asian Football Confederation. Talent Represented are mainly tennis players such as Andy Murray, Caroline Wozniacki and Richard Gasquet. The portfolio of activities is very broad, the unit also sells TV rights in Asia for events such as the tennis US Open and Paris Roland Garros tournament.
The declared strategy of the management is to consolidate its market position by renewing the contracts and the rights that they already own. External growth is not probable unless very profitable and safe opportunities arise. Main sales come from Marketing Rights (47.9% of Sports & Entertainment sales) and TV rights (19.5%). Geographical distribution of sales is concentrated in France (56.9%), Asia-Pacific (20.1%), America (14.1%) and Africa (6.3%).
MANAGEMENT STRATEGY
The Management's main objective is to obtain a 3% organic growth before 2018 by increasing Lagardère's presence in the fast growing Travel Retail market. Better profit margin is pursued by increasing Publishing's exposure to the e-books market (which leads to higher margins as the production costs are lower), performing a cost optimization on the Active unit, divesting well functioning but non-profitable businesses (such as the Distribution business, divested in Spain and Switzerland in 2015) and bring Sport & Management to stable profitability. CORPORATE GOVERNANCE The company's legal structure deserves to be mentioned. It is indeed an SCA (société en commandite par actions), non-other that a Partnership Limited by Shares. There are two categories of partners: • General Partners • Limited Partners
General Parners are indefinitely personally liable for the companies' liabilities, while Limited Partners are liable only to the extent of their contribution in the partnership. Their situation is the same as that of shareholders in a joint stock corporation.
The company is managed by the Managing Partners. They are appointed by the General Partner even though the final decision is taken by shareholders in an ordinary general meeting. There is a Supervisory Board whose members are elected by the limited partners in order to represent their interest and eventually oppose to the choices of the General Partners and Managing Partners. General Partners are Arnaud Lagardère and Arjil Commanditée-Arco, a joint stock company represented by Arnaud Lagardère, Pierre Leroy, Dominique D'Hinnin and Thierry Funck- Brentano. These members are also Managing Partners of Lagardère SCA.
This structure has some limitations and some benefits:
It gives a stronger control power to the General Partners. Indeed, even if a new entity buys a relevant stake of Lagardère SCA shares, control will still be in hand of the general partners.
Figure: PUBLISHING Porter's 5 Forces. On the other hand, General Partners' first interest is that the company survives and grows, The value is higher the closer the line as they have unlimited liabilities in case things go wrong. is to the border Industry Overview and Competitive Positioning
For a consistent and relevant Industry analysis, we must analyze every industry in which Lagardère SCA operates individually. compe Publishing Industry titors new The publishing industry is driven by the search of the next bestseller. There is not an exact recipe substit entran for the bestselling book, therefore bigger dimension and higher number of books realized is the way utes ts … to have more chances to achieve the next bestseller. The market is highly concentrated into a small suppli number of major publishers. It can be considered an Oligopoly even if the internet revolution broke buyers er several barriers to entry. power power Recently the industry had to face several challenges, thereof the most important is the advent of e- publishing and e-books. Major players in this market are adapting to change without suffering from the entry of new competitors. On the other hand, it is of vital importance that companies in this industry build a good relationship with the major e-publishers such as Amazon to maintain their market share.
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Figure: TRAVEL RETAIL Porter's 5 Tensions between Amazon and major publishers rose in 2014 regarding the marketing of e-books Forces. The value is higher the closer by Amazon. Tensions between Amazon and Hachette came to a temporary end at the end of 2014, the line is to the border when Amazon let to Hachette full independence regarding the pricing of its books, but with incentives to offer discounts to consumers. Travel Retail Industry competi tors The Market is an Oligopoly, with the first 5 companies holding 49.6% of the market share (source: elaboration from Moodie Report, 2014). Main competitors are Dufry, DFS group (owned by LVMH), new substitu Lotte Duty Free and World Duty Free. In terms of sales, Lagardère was in 2014 the 4th travel retailer, entrant tes with the Swiss Dufry first in the ranking. s threat Firms obtain the concession from airports and other travel areas (train stations and so on) to operate supplier buyers their portfolio of stores. Concessions are long-term, therefore it's difficult to gain market share by power power 'stealing' concessions from other competitors. The major way of gaining market share is by external growth, i.e. by acquiring other competitors (as Lagardère did in 2015 with Paradies, a family owned travel retailer in North America). This market has some peculiarities in terms of potential consumers: indeed, consumers do not choose to buy from Dufry or from Lagardère, they buy according to where they are travelling. If they are travelling to the Paris Charles De Gaulle airport, by buying a Hermes perfume at the duty free, they will unknowingly pay Lagardère, if they travel to another airport where Lagardère does Figure: MEDIA INDUSTRY Porter's 5 Forces. The value is higher the closer not have any concession, they might pay another company. the line is to the border Market depends on the costumers of the airline industry. The more people travel, the more potential revenues for a travel retailer. The worldwide number of airline passengers indeed grew competi yearly by 6.26% CAGR (2010-14) while in the same period, traffic in Asia-Pacific rose by 7.70% CAGR tors and traffic in Middle East rose by an outstanding 13.17% CAGR. Passenger traffic is expected to grow at the same rates also in the next few years (source: IATA statistics). new substitu entrants MEDIA INDUSTRY tes threat For this analysis there is a focus on magazine industry, as it accounts for 52% of the Lagardère Active business unit. This market as a whole (Magazines, TV, Radio) is highly dependent on the cyclical supplier buyers power power advertisement market. The objective of a firm is not to have high margins from sales of the magazine, but to sell as many copies as possible in order to increase advertisement revenues. Competition is therefore based on the costumers' base. Costumer base can be increased either by price reduction or by brand construction. The first way is easier but more dangerous. Brand takes several years and investments to build but then gives greater benefits in terms of costumer retention.
The market is characterized by monopolistic competition, with a large pool of firms in the market that realize a product that can be partially differentiated by content (Fashion magazines, Cars, Pets, Men/Women magazines and so on) or by brand differentiation. Lagardère Active is an important player in Europe, owning highly branded magazines such as Elle Figure: SPORT & ENTERTAINMENT and Paris Match, and Radio and TV channels. Magazines have a strong name recognition which is Porter's 5 Forces. The value is higher an advantage against competitors. The digitalization of magazines is an important lever nowadays: the closer the line is to the border competition will be based on the capacity of firms to offer their products also as e-magazines. European competitors are Mondadori Editore, Gruppo Editoriale l'Espresso, Condé Nast and Daily Mail General Trust. SPORTS & ENTERTAINMENT INDUSTRY
competit The industry can be divided into Marketing rights management and Broadcasting rights. Within ors the analysis more weight is given to Marketing rights management as it represents the major source of sales for this unit. Marketing rights consist in managing the image of the client (either club or new individual athlete) and find him the best sponsors. Broadcasting rights management consist in substitut entrants buying TV rights for big sports events (FIFA world cup, Olympic Games, The Super Bowl and so es threat on) and selling it to TV channels.
Marketing rights depend on the prestige of the sponsors found for its clients and the monetary supplier buyers amount of the sponsorship. Companies get a fee out of that transaction. TV rights depend on how power power much can the firm gain in the buy-sell of these rights.
The market is in constant rise but still remains partially unregulated. Research from ATkearney estimates the total amount of revenue of this industry to be worth 76.1BN $ in 2013, with a projected CAGR of +5% until 2017. Lagardère Sports & Entertainment sales represent only a little share of this enormous market (only 394M€ in 2014). 4 | Page
A part of this 'big pie' is non accessible due to a lack of regulations, especially in Europe where the major sports associations (FIFA, UEFA) own and market their Broadcasting rights even though they should be non-profit associations. Figure: Consolidated Sales (Factset) The main source of sales of the market come from USA and Europe, but African and Asian markets are developing. Broadcasting rights changed dramatically since 15 years ago: TV rights for the 10000 French Ligue 1 football championship were worth 275M € per year in 2001, while in 2016 are worth 8000 748M. English Premier League TV rights reached 1BN€ value in 2013 (source: ATKearney). Main 6000 market players are Chime Communication (owned by WPP), RTR Sports Marketing, Sportquake, 4000 Pitch, Octagon and WWP (whose clients are Real Madrid, Barcelona, Milan and Rome). 2000 0 Financial Analysis
Consolidated Sales are in a negative trend, -1.9% CAGR between 2009 and 2014 driven by a -2.49% PUBLISHING TRAVEL in Publishing, -11.1% from Active and -4.9% in Sports and Entertainment. Travel retail partially compensated with a +2.4% CAGR in the same period. The figures regarding Active are biased ACTIVE SPORTS because of the process of newspapers and magazines divestiture that toke place in these recent years and are therefore the result of the deconsolidation of subsidiaries. Lagardère sold its International Figure: Historical quarterly sales Press and Magazines operations to Hearst Business Communications Inc. in 2011 for 864.7M € (Factset) (Factset).
2500 During the year, there is historical seasonality mainly due to Publishing and Travel Retail: sales are low every Q1 and Q2, and then sharply increase in Q3 and Q4. Educational books are bought before school starts (August/September, Q3/Q4) while Christmas holidays contribute to the seasonal 2000 increase in Q4: people travels more and books are sold as a Christmas present. 53% of sales, as of 2014, come from Travel Retail, while the other half of sales is distributed between 1500 Publishing (28%), Active (13%), and Sports & Entertainment (6%). Geographical distribution is spread around Germany (9.5%), United States (9.5%), United Kingdom (7.2%) and Italy (5.3%), but it's mainly concentrated in France (34.7%, source. Factset). 1000 OPERATING NET WORKING CAPITAL AND CAPEX 500 Net working Capital (Working Capital - Cash) is always negative. Payables and other liabilities are higher than inventories and receivables. Operating current liabilities in total are partially financing Lagardère's operations. Delaying payments to suppliers in order to finance operations, as the
0 historical Days of Payables Oustanding shows (figure 36) has however a limit (reached in 2010), even if suppliers bargaining power is low.
2008 2009 2010 2011 2012 2013 2014 2015
Tot Pub Travel 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 0 100% Active Sports -200 50% 2015 2014 2014 2013
Half Year Half Year Millions € Year End Year End -400 0% Inventories 631 578 658 559
Receivables 1,231 1,280 1,128 1,239 -600 -50% O.C.A. 1,032 976 1,011 1,019 NET WORKING CAPITAL % Change Payables 1,500 1,702 1,613 1,645 Other Liabilities 1,202 1,214 1,151 1,367 Business is highly seasonal, further analysis is needed to control if the level of working capital given DIFFERENCE 274 228 on 31 December by the company reflects what is the real working capital requirement during the year. Lagardère closes its accounts on 31 December, after the seasonal peaks of Q3 and Q4.
100 Inventories at year end are lower than during the year (educational books inventories are built in Q2 to be sold in Q3) while payables are higher than during the year. It is estimated that Working 0 Capital is higher by 200/300M € during the year compared to year end. 2011 2012 2013 2014
-100 This can have implications on the financial analysis. Underestimated Working Capital means Capital employed is underestimated (by 7.82% in 2014) and thus Return on Capital Employed is - 200 overestimated. Ned Debt is underestimated by 7.82% and therefore financial leverage is underestimated. Investors should take this into account when reading the analyses and ratios DSO (days) DPO (days) proposed later on. DIO (days) Cash Conv Cycle (Days)
Figure: Cash Conversion cycle 5 | Page
Capital expenditures are mainly driven by the need to maintain and renovate the fixed assets of the 350 20,00% firm. Deteriorated fixed assets can be spotted by looking at the Net Book Value (gross value - accumulated depreciation) of fixed assets as a percentage of the gross value. A ratio lower than 30% 300 10,00% 250 might indicate that the company's Property, Plant and Equipment are probably worn out: 200 0,00% 150 -10,00% Millions € 2010 2011 2012 2013 2014 100 50 -20,00% Net CAPEX 218 227 244 288 233
0 -30,00% PPE, Gross 1,615 1,671 1,719 1,795 1,864
Accumulated (990) (959) (980) (1,033) (1,024) Depreciation
CAPEX PPE, Net 625 712 739 762 840
% Change from year before NET/GROSS 38.7% 42.6% 43.0% 42.5% 45.1% High capex in 2012 and 2013 contributed to a better state of fixed assets (45.1% in 2014). Unsufficient capex in 2014 and 2015 will lead to a fixed asset deterioration that need to be addressed with projected increasing capex in 2016-18 (Figure 36).
600 LIQUIDITY AND FINANCIAL POSITION 500 Operating Cash Flow has been positive but in decline until 2014. It is expected to increase thanks to 400 the continuous disposal of the Distribution business subsidiaries in favor to an expansion in Travel Retail, where costumers pay in cash. From 2011 to 2013 Operating cash flow was just enough to cover 300 capital expenditures and changes in working capital (figure x), while in 2014 part of these two 200 elements had to be financed by external sources. 100 Even though, Lagardère has a good liquidity condition which is demonstrated by solid liquidity 0 ratios. This solid cash condition comes from a good cash management but also from external factors: the sale of Canal+ in 2013 brought to Lagardère 3,354 M€ of cash, which was used to pay back debt
2010 2011 2012 2013 2014 (1004 M€) and to pay exceptional dividends in 2013 (1.323 M€) and in 2014 (945 M€). The excess cash 2015E 2016E 2017E 2018E remained on balance at the end of 2013 is the main reason of the high cash ratio of 0.53. OPERATING CASH FLOW
2009 2010 2011 2012 2013 2014 CAPEX Current Ratio 1.08 1.20 1.06 1.21 1.37 1.06
Acid Test (Quick Ratio) 0.92 1.06 0.89 1.03 1.21 0.88 1,50 Cash Ratio 0.24 0.19 0.22 0.21 0.53 0.18 1,00 0,50 The Group’s main debt component as at 31 December 2014 is comprised of non-current bonds amounting to €989 million with annual coupon of 2%. It also includes a commercial paper 0,00 programme capped at €500 million. The Group successfully settles its debt obligations in the face of new borrowings. As at 31 December 2014, we find a decrease in borrowings amounting to €640 2009 2010 2011 2012 2013 2014 million and an increase in proceeds from new borrowings amounting to €816 million. Significant Current Ratio near future settlements are mainly comprised of €492 million in 2017.
Acid Test
Cash Ratio A portion of the Group’s bank loans are tied within financial ratio covenants. Failure to meet these ratio requirements entitles the lenders to require early repayment of their loans. As at 31 December 2014, none of the applicable covenants have been breached.
0,002,00 Financial position improved in 2013 due to a reduction in financial debt, but deteriorated in 2014 2 2 2 2 2 2 6 Current Ratio due to an increase in the financial gearing and a reduction of equity due to exceptional dividend payment. Overall the company is more leveraged compared to other peers (Financial Debt to Equity 4 Acid Test of 73% in 2014, Total Liabilities to Equity of 2.79), and needs a stable and positive EBITDA to repay 2 its lenders. Financial position might be worse during the year, as the Working Capital Requirement 0 is higher during the year (refer to the Operating Net Working Capital analysis mentioned before). Lenders and investors should look at the EBITDA in order to assess Lagardère Capacity to repay 2011 2012 2013 2014 2015E 2016E 2017E 2018E back loans, but here Goodwill is also to be mentioned. Figure: Financial Debt to EBITDA Indeed, Goodwill is very high (83.6% of Equity in 2014) due to a high number of acquisitions. Concerns may rise if there will ever be the need for an impairment and if yes, what could be the consequences.
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2011 2012 2013 2014
4000 8,0% Equity 3,024 2,991 2,927 2,081 R.O.O.A. Goodwill 1837 1799 1619 1740 3000 6,0% Goodwill/Equity 60.74% 60.15% 55.31% 83.61% 2000 4,0% Tangible Equity 1,187 1,192 1,308 341 Financial Debt/Tangible Equity 1.69 2.02 1.09 4.46 1000 2,0% PROFITABILITY 0 0,0% Operating assets are reclassified from the accounting balance sheet in order to consider only the 2011 2012 2013 2014 assets needed by Lagardère to run its operations. Return on operating assets excludes goodwill, excess cash and other non-operating items. ROOA was 7.24% in 2014 (figure) and increased from OPERATING ASSETS NOPAT 5.05% in 2013. Goodwill in 2014 was 23.2% of total assets, and this is why ROOA differs significantly from ROA which in 2014 was only 2.30%.
1500 Millions € 2011 2012 2013 2014
1000 ADJ EBIT 279 262 187 258
500 NOPAT 187 175 125 173 0 ROOA 5.33% 4.86% 5.05% 7.24% -500 2008 2010 2012 2014 ROA 2.09% 1.88% 1.50% 2.30% 2016E 2018E -1000 Return on Asset in the table above is calculated from NOPAT. ROA calculated in 2014 from Net EBIT ADJUSTED Profit is 0.65%. With a very low ROA, firms usually tend to boost (up to a given limit) their financial leverage. If Lagardère's ROCE is higher than its cost of debt, financial leverage will increase ROE NET PROFIT for shareholders:
2011 2012 2013 2014 2015E 2016E 2017E 2018E ROCE 3.72% 3.25% 2.88% 4.80% 4.78% 5.16% 5.45% 5.76% Cost of Debt (After 2.87% 2.45% 3.18% 3.18% 2.52% 2.52% 2.52% Tax)
Even if ROCE is low and projected to grow - in a scenario where the excess cash is used to repay debt -, ROCE is higher than the cost of debt and thus have a positive effect on the wealth generation to shareholders:
2011 2012 2013 2014 2015E 2016E 2017E 2018E Net Profit Margin -9.00% 1.44% 18.28% 0.68% 1.52% 1.76% 1.85% 1.93% x Asset Turnover 0.86 0.79 0.87 0.95 1.00 1.08 1.14 1.20 Figure: ROE, industry comparison = ROA -7.72% 1.13% 15.83% 0.65% 1.52% 1.90% 2.10% 2.32%
x Financial Leverage 2.95 3.13 2.85 3.61 3.20 2.97 2.76 2.55 % 2011 2012 2013 2014
Lagardère -22.8 3.54 45.06 2.35 = ROE -22.8% 3.54% 45.06% 2.35% 4.87% 5.63% 5.80% 5.92% Dufry 13.96 11.61 7.83 3.26 ROE in 2011 and 2013 is highly biased and cannot be considered when making assumptions for Publishing 11.81 13.31 16.65 11.35 Industry future expectations (due to the exceptional items already mentioned earlier). Recurring ROE is low compared to both the publishing industry average and other Travel Retail peers (we considered Dufry for comparison, Figure x).
Restructuring charge is a 'one-time' cash expense that occurs when the company is reorganized, employees laid-off, or when new systems are implemented. It could be a 'one-time' charge in the case of a single company, but in the case of Lagardère, which is a group of 431 companies, restructuring charge can therefore be considered as a recurring item. Because of the given amount of subsidiaries and changes in the structure, this charge might occur every year. Adjusted EBIT (EBIT - restructuring charge) was in slow downtrend until 2013 before increasing back in 2014. Operating performances are however very stable compared to net profit which has been impacted by exceptional items as the sale of Canal+ to Vivendi in 2013 (Gain on disposal of 1671M €) and a severe impairment loss in 2011 (585M €). Adjusted EBIT Margin of Lagardère in 2014
was 3.60%. 7 | Page
It decreased at a CAGR of -0.42% between 2011 and 2014 and it is projected to remain stable until 2018. The main drag was Sports & Entertainment, with a -3.52% margin in 2011 which increased to - 1.78% in 2014.
2011 2012 2013 2014 2015E 2016E 2017E 2018E
EBITDA margin 7.63% 6.89% 5.56% 6.71% 6.89% 6.89% 6.89% 6.89%
EBIT margin 4.18% 4.10% 4.28% 4.52% 4.61% 4.61% 4.61% 4.61% Figure: Lagardère ADJ EBIT margin, per ADJ EBIT margin 3.64% 3.55% 2.59% 3.60% 3.61% 3.61% 3.61% 3.61% business World MEDIA 19.46% 21.04% 22.03% 22.74% 23.71% 25.50% 27.35% 29.25% % 2011 2012 2013 2014 PUBL. 10.8 10.6 10.6 8.9 World PUBLISHING 10.40% 8.92% 9.53% 10.00% 9.84% 10.31% 10.73% 10.56% TRAV. 2.7 2.7 2.5 2.5 Lagardère Publishing's EBIT margin is in line with the industry, even though there was a decrease ACTIV. 6.9 4.3 -2.5 6.9 in 2014 mainly due to the tensions that Hachette had with Amazon which had a negative effect on SPORT 3.6 3.6 2.6 3.6 e-book sales (that have higher margin than paper books). The real problem comes from Active: EBIT margin is not even comparable with the Media industry, and this is why Lagardère is now manily focused on cost optimization for this unit: cost reduction will increase EBIT margin if sales remain stable.
Valuation
We used Discounted Cash Flow Model: Free Cash Flow to the Firm (FCFF). We believe this method is suitable as the company neither has a stable dividend policy. However, we have used a variation of this model where we have projected the Operating Free Cash Flow instead. We believe Operating Free Cash Flow is a more predictable measure as the company is a holding company and significantly involved in buying and selling of assets. We have not considered the Multiples Valuation as we believe it will not paint a true picture of the characteristics and the risk of the business as a whole. WACC ASSUMPTIONS: 10.20% Risk Free Rate 0.53% Based on the German 10 year risk free bond. (Rf) Based on A. Damodaran MRP for a mature equity market (last update: June Market Risk Premium (MRP) 5.81% 2016).
Countries default spread, based on credit default swap spreads. We considered Country Risk 1.49% 7 regions to determine the Premium (CRP) overall CRP (Source: A. Damodaran). Equity Risk Sum of MRP and CRP. 7.3% Premium (ERP) Estimated with a «Bottom-Up» approach which better reflects the 1.44 characteristics of Lagardère. We have derived from our own assessment of Beta Levered certain characteristics of the company.
Cost of Equity CoE = Risk Free Rate + β x (MRP+CRP) 11.04% (CoE) We considered the ratio between interest expenses and financial debt. We Cost of Debt 3.18% computed the most recent interest expense of the company as we believe it (CoD) provides a measure closer to what the future holds.
Equity: We believe the company will maintain this capital structure going forward as it 63.95%, has maintained a structure closer to the above in the past and the company Capital Structure Debt: does not show any intention of changing it going forward. Any changes made 36.05% will be minor.
38% overall tax rate assumed for 2015E going forward which represents the Tax Rate 38% French standard tax rate.
Terminal growth rate
For the residual growth we have relied on the long term GDP growth rate of 2.65% provided by OECD. Few companies can be expected to grow faster than the economies. The best estimate for us is the long term GDP growth rate even though it might seem like a conservative measure.
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Sales growth forecast Sales from 2015 to 2018 have been projected business by business under a three stage approach. Travel Retail (+6.14% CAGR 2015/16) has been forecast by finding the statistical correlation between sales of the business, sales of the airline industry and the number of passengers travelling per year (a highly significant positive relationship was found). Publishing has been projected with the average of a quantitative model and a conservative approach (+1.89% CAGR).
Active has been projected partially with a quantitative model and partially following the media Figure: Montecarlo simulation, industry growth (+4.29% CAGR). Sports & Entertainment (+4.54% CAGR) was projected by using Frequency distribution forecast for the sports industry (see appendix for detailed information). Sales growth for years 2019 to 2023 were constantly converged to the terminal growth rate.
Montecarlo simulation
The team performed a Montecarlo simulation to test the share price sensitivity to some important inputs. Beta and future sales of the newly consolidated company - Paradies - can affect the final valuation. The average price resulting from 2000 trials is €27.43. INVESTMENT RISKS Exchange Rate Risk: (P2-I2) The Group is mainly exposed to Euro, USD, Pound Sterling, and Swiss Franc fluctuations.
Interest Rate Risk: (P4-I4) The Group’s revolving line of credit amounting to €1,684 million is exposed to interest rate fluctuation. A steady or dramatic rise in interest rates could affect Lagardere’s ability to repay its outstanding obligations. This would constrain their ability to finance working capital as
well as the repayment of significant debt.
Advertisement fluctuations:(P2-I4) A large portion of the Group’s business is contained directly or indirectly within the advertising revenue. A 1% downturn in advertising sales within Lagardere Active would lead to a €2 to €3 million decrease in the division’s operating profit.
Government related funding:(P1-I3) cuts in governmental funding will have a negative impact on Lagardere Publishing’s business.
Development of E-books:(P4-I3) Since Lagardere Publishing has signed an agreement with Google on the digitalization of published works in French, Lagardere now faces a substantial risk of unauthorized digital reproduction. This risk affects revenues substantially.
Broadcasting Rights Market:(P5-I3) Financial difficulties encountered by certain broadcasters could lead to issues in recovering receivables, bankruptcies, or mergers between broadcasters reducing the intensity of competition among non-premium sports right broadcasters. This affects the sales and profitability of Lagardere Unlimited. Austerity measures that affect Lagardere Travel and Retail:(P3-I2) bearish marco-economic environments coupled with austerity measures deployed within Europe increase Lagardere Travel and Retail’s tax burden.
Tobacco Control:(P5-I1) Tobacco Control and the World Health Organization restrict supply and demand of tobacco; restricting duty free sale of tobacco products to international travelers and banning smoking in public locations. This affects Lagardere travel and retail’s activities
substantially.
Paper Price:(P4-I5) Lagardere Active and Lagardere Publishing need to use large volumes of paper for their business activities. The Group is subject to the risk of fluctuations in paper price, particularly in the European, North American and Asian markets.
Shareholders are minorities:(P4-I4) Due to the SCA legal structure, the General Partners can control the group through voting rights, so shareholders are effectively minorities.
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Table of risks and mitigating factors
Risk Mitigating Factors
Manageable debt structure and equity offering Liquidity and solvency risk programme Exchange rate risk Usage of Currency Forwards and Futures
Interest rate risk Usage of Interest Rate Swaps
Increasing market share and offering competitive Advertising fluctuations rates Increasing market share significantly beyond Government related funding governmental procurement Copyright infringement in E- The Group undertakes preventative legal books measures Focusing on emerging market such as Asia or Broadcasting rights market Africa Increasing group’s financial stability and Austerity measures profitability Increasing geographic spread in which tobacco Tobacco control control is limited and less restrictive Inclusion of price smoothing clauses in purchasing Paper price fluctuations contracts Presence of the supervisory board which Shareholders' minority status represents the shareholders
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APPENDIX ON NEXT PAGE
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APPENDIX 1.1 LAGARDÈRE BRANDS Relay is a prestigious convenience retail brand selling publications and travel essentials with a global presence in travel areas mainly based in railway stations and airports where travelers can find newspaper, magazine, book, a range of reading titles, travel necessities and convenience products and services.
The Relay brand has a unique competition position in the travel retail news and convenience market for its geographic advantage (concentration in France with 1300 stores in 20 countries) and sophisticated operation experience in press and travel essentials (history of 160 years).
Hub Convenience is easily accessible convenience store located in transportation hub for departing and arriving travelers looking for fast and quality food, various beverage options and travel-adapted convenience supplies with a ‘grab & go’ solution.
AELIA is one of the European leading players in Duty Free & Luxury: perfume, cosmetics, alcohol, tobacco, fashion & accessories, gourmet products, confectionery and electronics.
AELIA owns and develops a large portfolio of strong travel retail brand names (Buy Paris Duty Free, Aelia Duty Free, Your Fashion Store, The Fashion Gallery, So Chocolate, etc.) and relies on partnerships with renowned brands such as Hermès, Longchamp, Yves Saint-Laurent, L'Occitane, Hédiard, etc.
Aelia has widespread operation in Europe with 287 outlets in more than 50 airports including Paris-Charles de Gaulle and Paris-Orly airports in France, two of Europe's leading airport hubs. The brand also supports the development projects of LS travel retail ASPAC in Asia Pacific such as Hong Kong, Singapore, Australia, etc.
Aelia also runs in-flight retail through its subsidiary, Dutyfly Solutions (50% owned by Lagardère Travel Retail, 50% owned by Servair) in several international and regional airlines such as Air France, Iberia, Alitalia, Air Caraïbes, etc.
AELIA operates at the Paris Eurostar terminal and at the Eurotunnel site in Calais through Eurodis. Besides they also have on-board Duty Free activities on Irish Ferries from Ireland.
TRIB’S is a brand providing food service in travel areas mainly in airports and railway stations with a quick- service concept, having almost 20 years of experience in the onboard concessions industry. The brand implements the concept with offering fresh, generous and quality products in both self and assisted service to both on-site and off-site customers. Its target is to develop a cozy, modern and chic environment, considerate and proactive staff for customers.
Discover is a dedicated souvenir brand that focuses on local stories in the unique idea of souvenir to offer the traveling memories associated products to each travelers with his or her own traveling story.
Lagardere Paris Racing is a double-entry club: Sport or private, in the great tradition of private sports circles in Western Paris (Paris Polo Club or the Bois de Boulogne, for example), the business includes operating and promoting professional and semiprofessional athletic clubs and events.
Sportfive is an international sports agency specialized in sports marketing (media and marketing rights management, hospitality, customer servicing, stadium consulting) with a global presence in 14 countries. It is one of the largest sports agencies in the world and one of the best football agencies, a leader in the field of European and African football.
Sportfive provides clubs, sports federations and sports events with management services, also sells training camps and friendly matches for teams and federations and operates the marketing rights to a wide range of athletes in different sports.
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Sportfive also develops sponsoring programs, public relations for companies, and helps them to optimize their partnership. Sportfive portfolio includes major events such as the Olympic Games, and other major sports such as handball, tennis5, XV6 rugby, sailing, basketball -ball, or motor sports.
IEC in Sports a media company active in distribution of sport events’ television rights to various media platforms. The company represents clients and distributes television rights worldwide to TV stations and media companies. The company also customizes sports television productions including live productions and host broadcasting, transmission services, editing, and voice-over capabilities. Plus, the company offers consulting services to rights holders and federations regarding media strategy for their sports and events; produces and distributes live to tape programming, and series of ready to air programming, as well as sport news clips for TV, Internet, and mobile customers. Further, it offers sponsorship services.
World Sport Group is a sports marketing, event management and media company in Asia, operating golf, football and cricket events.
World Sport Group is the exclusive marketing partner of the Asian Football Confederation (AFC), the ASEAN Football Federation (AFF), and a major stake-holder in Asian golf as organizers of the Barclays Singapore Open and the ASEAN Tour. The Group also manages global cricket player Sachin Tendulkar.
Asterix or The Adventures of Asterix is a series of French comics. The rights now belong to Hachette. The Asterix series is one of the most popular Franco-Belgian comics in the world, with the series being translated into over 100 languages, and it is popular in most European countries.
Stock was founded in the 18th century by André Cailleau, who was succeeded in 1753 by Nicolas- Bonaventure Duchesne, who published Voltaire and Rousseau. During the Dreyfus affair, Stock published many essays on the subject, including Dreyfus's own Lettres d'un innocent.
Headline publishing group is part of Hachette Livre UK Ltd. Headline has an outstanding track record in publishing both fiction and non-fiction including autobiography, biography, food and wine, gardening, history, popular science, sport, TV tie-ins.
Salvat Editores, S.A. is a publisher of children's books and young adult books. Some of the books published by Salvat Editores, S.A. include Asterix gladiador/ Asterix the Gladiator. The Spanish translations of The Adventures of Asterix have sold two million copies over the past seven years.
DUNOD, publishers of knowledges, is one of the most famous French publishing houses (for the Academy of Science in 1793) and publishes more than 3000 titles for the academics, the professionals and the general public avid to cultivate and to update its knowledge.
Paris Match is a French language weekly news magazine. It covers major national and international news along with celebrity lifestyle features.
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Elle is the world's largest fashion magazine, with 43 international editions in over 60 countries. There are 33 Elle websites globally, which collectively attract over 25 million unique visitors and 370 million page views per month. The magazine reaches over 69 million readers. The vast majority (82 %) of Elle's audience are women between the ages of 18 and 49.
Europe 1, formerly known as Europe n° 1, is a privately owned radio network created in 1955. It is one of the leading French radio broadcasters and heard throughout France. Europe 1 is transmitted by Europäische Rundfunk- und Fernseh-AG (in English, European Radio and Television Company), broadcasting on longwave at 183 kHz from Felsberg in the Saarland and on FM frequencies throughout France.
Gulli is a French television network dedicated to children's programming. It is available through digital terrestrial television "TNT" in partnership with Lagardère Active, and France Télévisions with children's programmes from France 3. Gulli is also known as Cyperbot.
APPENDIX 1.2 CORPORATE GOVERNANCE, HUMAN RESOURCES, CSR Corporate Governance
Lagardère is a French partnership limited by shares (société en commandite par actions - SCA), which has two categories of partners:two General Partners (Associés Commandités), who are jointly and severally liable, to an unlimited extent, for the Company's liabilities;
Limited Partners (Associés Commanditaires or shareholders) whose liability regarding the Company's losses, like that of shareholders in a société anonyme (form of French joint stock corporation), is limited to the amount of the contributions. The Limited Partners alone designate the members of the Supervisory Board, the General Partners being unable to participate in the voting. Because of the two categories of partners, collective decisions require consultation of both shareholders, in Annual General Meetings, and of the General Partners. The Company is managed by the Managing Partners (Gérants) under the supervision of the Supervisory Board, which represents the shareholders.
Arnaud Lagardère General Partners
Société Arjil Arnaud Commanditée- Lagardère: Arco Chairman and Lagardere SCA Chief Executive Arnaud Officer Lagardère Managing Pierre Leroy: Partners Deputy Chairman Société Arjil and Chief Commanditée- Operating Office Arco Dominique D'Hinnin: Chief Operating Officer
Thierry Funck- Brentan: Chief Operating Officer
(Source: company data and team estimates)
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The French partnership limited by shares (SCA):
An SCA allows an absolute separation of powers between the management bodies (General Partners and Managing Partners) and the supervisory bodies (Supervisory Board). No member of management can be a member of the Supervisory Board. Furthermore, Lagardère SCA encourages the management bodies to run the Company in a responsible and careful manner with a long-term perspective, since the Managing Partners are also General Partners, and thus have unlimited liability for the Company's debts.
Supervisor board
The main task of the Supervisory Board, which is appointed by the shareholders, is to:
▪ Carry out ongoing supervision of the Company's management; ▪ Ensure that the Company has the resources it needs to assess and monitor its risk exposure. To do this, the Supervisory Board meets regularly, and met five times in 2014. It reviews the financial position and operations of the Company and its subsidiaries, the annual and interim financial statements and the outlook for each of the Group's activities, and considers the work carried out by the committees.
The Appointments and Remuneration
The Appointments and Remuneration Committee was created on 27 April 2010 by the Supervisory Board which decided on 11 March 2015 to extend its scope of duties to governance and sustainable development issues and as a result to change its name to the Appointments, Remuneration and Governance Committee as well as its internal rules. The Appointments, Remuneration and Governance Committee's main tasks now include the following:
Regarding Board and Committee membership:
- Defining the selection criteria of future members;
- Selecting and nominating Supervisory Board and Committee members for proposal to the Supervisory Board.
Regarding remuneration:
- Monitoring, where relevant, any components of remuneration that are not paid under the agreement with Lagardere Capital & Management (which, being a related-party agreement is monitored by the Audit Committee) and may be allocated to Lagardere SCA's executive corporate officers from Group companies. Under current laws, this concerns share options and performance shares and the proportion they represent of the executive corporate officers' total remuneration;
- Proposing the overall amount of attendance fees to be paid to members of the Supervisory Board and Committees as submitted to the Annual General Meeting, and the rules for determining and distributing the amount of attendance fees, in particular based on members' attendance at meetings.
Regarding governance:
- Regularly reviewing the independence of Supervisory Board members in the light of independence criteria defined by the Supervisory Board;
- managing the annual assessment of the operations of the Board and its Committees;
- carrying out advance assessments of potential risks of conflicts of interest between Supervisory Board members and the Lagardere group.
Regarding sustainable development (CSR):
- examining the main labour, social and environmental risks and opportunities for the Group and the CSR policy in place;
- reviewing the reporting, assessment and monitoring systems allowing the Group to prepare reliable non-financial information;
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- examining the Group's main lines of communication to shareholders and other stakeholders regarding CSR issues;
- examining and monitoring the Group's rankings attributed by non-financial rating agencies.
(Source: company data)
Corporate governance code of listed corporations
Listed corporations developed principles for corporate governance which were first published in the "VIENOT" report of July 1995. Since then, the recommendations have been supplemented and successively updated in July 1999, September 2002, January 2007 and October 2008 on the compensation of executive directors1 of listed corporations, and in April 2010 on the presence of women on boards. This collection of recommendations was prepared by working parties of the Association Française des Entreprises Privées (Afep) and the Mouvement des Entreprises de France (Medef). These recommendations have stemmed from initiatives of the business community itself, which attaches importance to defining certain principles of good operation and transparency intended to improve management practices and to respond to the expectations of investors and the public. This new version gave rise to a consultation, in particular of the public authorities, organisations representing individual and institutional shareholders and proxy advisors.
This set of recommendations, which constitutes the Afep-Medef Code, may be designated by listed companies as their reference code pursuant to Articles L.225-37 and L.225-68 of the French Commercial Code.
Most of these recommendations have been written with reference to public limited companies (sociétés anonymes) with a Board of Directors. Public limited companies with a Supervisory Board and Management Board, as well as partnerships limited by shares (société en commandite par actions) will therefore need to make adjustments as appropriate to implement these recommendations.
(Source: Lagardère website)
Human Resource
The Lagardère group’s performance depends directly on the skills of its employees and the suitability of its resources. To allow for optimum leverage of human resources and adaptation to the nature of the Group’s various business lines, the operating units manage their own human resources but follow priorities, principles and commitments common to all the divisions and formalized at Group level in agreement with the business lines’ Human Resources Directors.
Guiding its entities through social transformation (especially growing digitalisation) and talent diversity has become a central focus of the Lagardère group strategy.
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The need to adapt Lagardère Active to the new challenges it faces was the object of a permanent dialogue with employees. This was made concrete by numerous meetings with employee representative bodies of the various companies concerned, as well as two Group Committee meetings. The quality of work of human resources teams at all levels and in close collaboration with employee representatives allowed for the sale of 10 press titles and the reorganisation of the Press business, avoiding lay-offs through a voluntary redundancy programme.
Enhancing the in-house training offering Following on from the Integration and Leadership seminars, Lagardère decided in 2014 to develop its in-house training offering for talented staff. Five additional themes are therefore on offer, allowing young managers to discuss common issues such as the fundamentals of management, conflict management, negotiation, managerial communication and public speaking.
Developing internal mobility Continuing with the process of identifying talented employees, the Lagardère group also strengthened its tools with regard to internal mobility. The ad hoc committee created in 2013, comprising human resources directors from all divisions, met five times in 2014 and reviewed 80 positions and applicants. In addition, 23 newsletters listing all positions vacant within Lagardère were sent to human resources representatives in charge of mobility. (Source: 2014 Lagardère annual financial report and Lagardère website)
Corporate social responsibility
Lagardère has implemented a Corporate Social Responsibility (CSR) policy guided by three objectives: meet increasing regulatory; requirements, adapt its CSR practices to Group strategy, and strengthen stakeholder relations.
At Group level, the Sustainable Development Department - reporting to Thierry Funck-Brentano, Co-Managing Partner of Lagardère SCA - co-ordinates a steering committee in which several Group-wide departments are represented (including Human Resources, Communications, Purchasing, Legal, Risk, Finance, IT and the Jean-Luc Lagardère Foundation), as well as each division's sustainable development managers.
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Lagardère's CSR policy is now centred around five strategic priorities:
promoting access to culture and entertainment;
supporting corporate efforts to advance diversity and social transformation;
ensuring responsible management of the paper cycle and digital expansion;
strengthening sustainability of products, sites, content and services;
guaranteeing high standards of business ethics.
Promoting access to culture and entertainment
Accessibility of content, products and events.
Protection, support and education for young people.
Media education, raising awareness about social issues and sustainable development.
Freedom of expression, content diversity, pluralism of ideas, defending the written word and authors, promoting reading.
Supporting corporate efforts to advance diversity and social transformation
Choosing talent to reflect diversity in society and our markets.
Supporting employees throughout their career.
Encouraging and promoting talent.
Developing close relations with employees.
Ensuring responsible management of the paper cycle and digital expansion
Responsible management of the paper cycle (using certified and recycled paper, production, management of unsold copies).
Responsible management of digital expansion (data protection, protection of intellectual property, management of waste electrical and electronic equipment).
Strengthening sustainability of products, sites, content and services
Sustainability of buildings and businesses.
Impact of operations on consumer health and safety.
Guaranteeing high standards of business ethics
Ethics, Code of Conduct.
Compliance, tools and procedure.
Responsible procurement.
With its involvement in the worlds of culture, knowledge, information, entertainment, sport and travel, Lagardère carries a particular responsibility as a diversified media activities group.
Lagardère offers a vast range of cultural entertainment (from books written by authors expressing diverse ideas, to the distribution of local cultural products in airports worldwide, to sports events on different channels, etc.). As a cross-media operator, the Group must continuously reassess its impact on society. This has prompted Lagardère to co-found the Media CSR Forum with CSR departments from other media groups. This body leads the development and exchange of best practices specific to the responsibility of the media sector. Through this forum, Lagardère’s Sustainable Development/CSR Department helped draft a guide to CSR in the media industry which is available on the ORSE (French CSR monitoring body) website.
In addition to its responsibility regarding its content, Lagardère also carries a responsibility to the community and to the society at large through its range of brands. Lagardère works to foster social cohesion by promoting culture, sport, the education and emancipation of women in France and worldwide, accessibility of content, and child protection through its many partnership and sponsorship operations. 18 | Page
This role is mainly embodied at Group level by the Jean-Luc Lagardère Foundation, which was created in 1989 under the auspices of the Fondation de France. It was set up to implement Lagardère’s commitment to culture, community and sport and develops a number of programs to promote cultural diversity, encourage creation and drive success.
Every year since 1990, the Foundation has awarded culture and media scholarships to talented young people under the age of 30 (or under 35 for certain categories). Scholarships are awarded by prestigious juries in ten categories: Writer, Film Producer, Television Scriptwriter, Musician, Bookseller, Print Journalist, Photographer, Documentary Film-maker, Animated Film-maker and Digital Artist.
(Source: 2014 Lagardère annual financial report)
APPENDIX 2 PORTER'S FIVE FORCES
PUBLISHING
2/5 Low competition as in every Oligopolistic market. Rivalry among competitors 2/5 Despite barriers to entry are very low, the riskiness of the business makes it difficult for Threats of new entrants a newcomer to compete with existing players. 1/5 Even considering the threat of e-books, it's difficult to find a real alternative to a book. Threat of substitutes 3/5 Books are considered a socially important product. Firms cannot lever on price without Bargaining power of buyers any government complain. (US trial against major publishers)
4/5 Amazon is considered as the most dangerous supplier: it supply to Lagardère the Bargaining power of suppliers 'selling' service, which is the last and most important step of a book's supply chain.
TRAVEL RETAIL Even if there is competition before a concession is to be assigned, once the company Rivalry among competitors 2/5 obtains it, competition disappears until end of contract. Low threat due to high barriers to entry. Barriers are not only economical but Threats of new entrants 2/5 intangible. The relationship built between the existing firm and airports and between firm and brands that it franchises is an obstacle for newcomers. Consumers have no alternatives once they do the check-in. Only threat may come from Threat of substitutes 1/5 airports that might eventually decide to run the travel retail business on their own. Consumers have no bargaining power. Consumers are travelers, and when you travel Bargaining power of buyers 1/5 you feel less pressure on how much money do you spend. They are price takers that tend to overbuy. There are two major suppliers: airports and brands. Airport give the concession basing on what portfolio of brands can the travel retailer bring with him. Therefore, Brands Bargaining power of suppliers 4/5 can have a high bargaining power when discussing the royalties' percentage. Travel retailers risk to lose their concessions if they lose their major brands.
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ACTIVE Readers can easily switch from one magazine to the other. It's difficult to maintain Rivalry among competitors 4/5 readers if you don't have a strong brand.
Due to Internet and digitalization, most of the barriers to entry fell apart for magazines. It's easy to enter the business with low costs (no need to print for e-magazines). Threats of new entrants 3/5 Regarding radio broadcasting, there is a high regulatory barrier: in France radio broadcaster must be approved by the French broadcasting authority (CSA). E-magazines could be considered as a valid substitute years ago. Now the industry is Threat of substitutes 2/5 adapting to this technological shift. Firms have to boost sales: the more they sell, the higher the advertisement revenues. Bargaining power of buyers 4/5 Consumers can choose the cheaper magazine, forcing other companies to drag prices down.
A distributor or printer has no bargaining power as the firm can decide to choose another supplier or to renounce to the print-version and focus on the e-version. Bargaining power of suppliers 2/5 Established free-lance writers might have some bargaining power as their fame can attract new readers for the magazine.
SPORTS & ENTERTAINMENT
Market for Marketing rights is characterized by monopolistic competition. There are many Rivalry among 3/5 participants, competition is based on creativity, network with top brands and soft skills to attract best competitors athletes and clubs. For Marketing rights there are no barriers to entry: most of the major sports rights marketing Threats of new companies were born between 2006 and 2012. They went rapidly on top. For TV rights barriers are 3/5 entrants high because sports federations have a monopoly on their rights (FIFA, NFL, NBA).
The only threat could come if sport clubs start to manage their marketing relationships on their own. Threat of TV rights is the only TV content that hasn't suffered from digital innovations (streaming and so on). 1/5 substitutes You can watch a movie on Netflix, but you can't pretend to enjoy a sport event by watching it on a computer screen. Marketing rights: Clubs and individual athletes don't have the competences to find new sponsors. Bargaining power of 2/5 TV rights: buyers are the TV channels, which need sport events to increase their audience share and buyers thus advertisement revenues. Bargaining power of It's not a manufacturing activity, therefore there are few suppliers to bargain with. For TV rights sport 2/5 suppliers associations are the suppliers of the TV right: they have bargaining power.
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APPENDIX 3 SALES FORECAST PUBLISHING An econometric is used to forecast Q4 of 2015:
Conservative model is based on past 5 years performance and it is averaged with the quantitative model.
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TRAVEL RETAIL Is forecasted by using these statistical relationships with both airline industry sales and number of passengers travelling per year:
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ACTIVE and SPORTS & ENTERTAINMENT Q4 2015 is derived with the average of 3 econometric models.
Growth for Sports & Entertainment is based on forecast from ATKearney (expected CAGR) Growth for Active is based on forecast of sales of Advertisement Industry (source: Factset)
APPENDIX 4 Invested Capital, Total Funds Invested & Sources Of Capital
TOTAL FUNDS INVESTED FY FY FY FY FY FY 2014 2013 2012 2011 2010 2009
A. OPERATING ASSETS
Operating Current Assets
Cash & Cash Equivalents 528 1748 648 654 616 764
Less: Excess Cash 0 802 0 0 0 0
Cash Available For Operations 528 946 648 654 616 764
Accounts & Notes Receivable 1280 1239 1255 1276 1189 1468
Inventories 578 559 581 542 523 538
Other Operating Current Assets: 876 947 922 828 803 757
Advances Paid 30 29 36 30 32 29
Recoverable From Writers 335 324 343 311 326 302
Recoverable From Suppliers 84 81 91 89 102 98
Prepaid Expenses 209 306 269 229 185 146
Income Tax Receivable 279 277 262 264 250 275
Impairments -61 -70 -79 -95 -92 -93
Total OCA 3262 3691 3406 3300 3131 3527
Operating Current Liabilities
Accounts Payable 1702 1645 1651 1613 1618 1754
Accrued Taxes 443 433 460 480 438 480
Other Operating Current 774 933 891 932 884 778 Liabilities
Advances & Prepayments 10 18 24 22 25 19
Due to Writers 229 245 243 237 234 234
Due to Customers 79 86 96 100 108 99
Deferred Income 207 344 279 247 211 181
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Sundry Payables 249 240 249 326 306 245
Total OCL 2919 3011 3002 3025 2940 3012
i) Operating Working Capital 343 680 404 275 191 515
ii) Property Plant & 840 762 739 712 625 635 Equipments
Other Operating Assets:
Intangible Assets 2785 2504 2815 2583 3429 4196
Investments in Affiliates 159 152 1451 1771 2054 2169
2944 2656 4266 4354 5483 6365
Other Operating Liabilities: 0 0 0 0 0 0 iii) Net Other Operating Assets: 2944 2656 4266 4354 5483 6365
INVESTED CAPITAL 4127 4098 5409 5341 6299 7515
B NON OPERATING ASSETS
Non-Operating Current Assets
Derivatives & Hedging Assets 7 4 5 12 15 13
Others 93 68 84 123 165 132
Short Term Investments 38 36 55 83 106 78
Excess Cash 0 802 0 0 0 0
Assets Held For Sale 0 0 437 13 1097 0
Total NCA 138 910 581 231 1383 223
Non-Operating Current Liabilities
Derivatives & Hedging 1 1 1 3 92 96
Current Provisions for 273 342 293 317 342 370 Contingencies
Liabilities with Assets Held for 0 0 0 0 399 0 Sales
Total NCL 274 343 294 320 833 466
24 | Page i) Net Non-Operating Current -136 567 287 -89 550 -243 Assets
Misc LT Assets 125 123 132 147 112 206
Tax Loss Carry Forwards 44 24 46 19 27 24 ii) Other Non-Operating 169 147 178 166 139 230 Assets:
TOTAL FUNDS INVESTED 4160 4812 5874 5418 6988 7502
SOURCES OF FINANCING
FY FY 2013 FY FY FY FY 2014 2012 2011 2010 2009
A Debt
LT Borrowings 1023 617 2164 1842 1953 2163
LT Capital Leases 7 0 1 1 0 11
1030 617 2165 1843 1953 2174
B Debt Equivalents
Pension Liabilities 155 117 119 101 101 102
Current Debt 490 806 238 163 541 492
Other Debts 112 108 93 147 219 395
757 1031 450 411 861 989
C Equity Equivalents
Provisions & Contingencies 158 158 168 162 170 179
Net Deferred Tax Liability 134 79 100 -22 -14 78
Total 292 237 268 140 156 257
D Equity
Equity Attributable to Owners of 1982 2849 2909 2949 3886 3958 the Parent
E MINORITY INTEREST
Minority Interest 99 78 82 75 132 124
SOURCES OF FINANCING 4160 4812 5874 5418 6988 7502
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APPENDIX 5 NOPLAT & FCF
NOPLAT FY FY FY FY FY FY 2014 2013 2012 2011 2010 2009
EBITDA 547.00 523.00 548.00 625.00 667.00 669.00
Less: Taxes 207.86 198.74 208.24 237.5 253.46 254.22
NOPLAT 339.14 324.26 339.76 387.50 413.54 414.78
FCF FY FY FY FY FY 2014 2013 2012 2011 2010
Operating EBIT 324.00 309.00 302.00 320.00 429.00
Less: Taxes 123.00 117.00 115.00 122.00 163.00
Operating EBIT after tax 201.00 192.00 187.00 198.00 266.00
Add: Depreciation & Amortization 223.00 214.00 246.00 305.00 239.00
Less: Provisions -42.00 -20.00 -11.00 -26.00 0.00 Reversal
382.00 386.00 422.00 477.00 505.00
Add/Less: Operating WC Investment 81.00 -22.00 135.00 46.00 -176.00
Less: Fixed Capital -233.00 -288.00 -244.00 -227.00 -218.00 Investment
FCFF 230.00 76.00 313.00 296.00 111.00
Appendix 6 Performance Analysis
ROIC (Without Goodwill) FY FY FY FY FY FY 2014 2013 2012 2011 2010 2009
NOPLAT 339.14 324.26 339.76 387.50 413.54 414.78
INVESTED CAPITAL (Without Goodwill) 2387.00 2479.00 3610.00 3504.00 3716.00 4705
INVESTED CAPITAL AVERAGE (Without 2433.00 3044.50 3557.00 3610.00 4210.50 4705 Goodwill)
13.94% 10.65% 9.55% 10.73% 9.82%
DECOMPOSING ROIC (Without FY FY FY FY FY Goodwill) 2014 2013 2012 2011 2010
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Tax Burden 62.00% 62.00% 62.00% 62.00% 62.00%
EBIDTA/Revenue 7.63% 7.25% 7.44% 8.16% 8.37%
Revenue/Invested Capital 294.70% 237.02% 207.20% 212.11% 189.19%
13.94% 10.65% 9.55% 10.73% 9.82%
Revenue/Invested Capital FY FY FY FY FY 2014 2013 2012 2011 2010
Revenue/Operating Working Capital 20.90 10.61 18.24 27.84 41.71
Revenue/Property, Plant & Equipment 8.54 9.47 9.97 10.75 12.75
Revenue/Intangible Assets 2.44 2.72 1.73 1.76 1.45
Appendix 7 Historical Trends
HISTORICAL TRENDS FY FY 2013 FY FY FY FY 2014 2012 2011 2010 2009
Operating Earnings Before Interest
Sales 7170 7216 7370 7657 7966
Operating EBI 159 172 176 172 266
Operating EBI/Sales 2.22% 2.38% 2.39% 2.25% 3.34%
Average 2.51%
Operating Working Capital
Operating Working Capital (Excluding -185 -266 -244 -379 -425 Cash)
Operating Working Capital/Sales -2.58% -3.69% -3.31% -4.95% -5.34%
Average -3.97%
CAPEX
Fixed Assets & Intangibles -233 -288 -244 -227 -218
Fixed Assets & Intangibles/Sales -3.25% -3.99% -3.31% -2.96% -2.74%
Average -3.25%
Depreciation & Amortization
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Property, Plant & Machinery (Gross) 4649 4299 4534 4254 5044 5779
Depreciation & Amortization 223 214 246 305 239
Rate 5.19% 4.72% 5.78% 6.05% 4.14%
Average 5.17%
WC Requirement FY FY FY FY FY FY FY FY FY 2023 2022 2021 2020 2019 2018 2017 2016 2015
Sales Forecast 9345 9104 8848 8580 8302 8015 7721 7429 7017
Working Capital -371.0 -362.0 -351.0 -341.0 -330.0 -318.0 -307.0 -295.0 -279.0
Change 9.0 11.0 10.0 11.0 12.0 11.0 12.0 16.0 94.0
Appendix 8 Cost of Capital
COST OF EQUITY
Current Risk Premium For Mature Market 5.81%
Risk Free Rate
German 10 Year Bund 0.53%
Total Equity Risk Premium
Region Revenue % CRP ERP Total ERP WA ERP
France 2487 34.69% 0.60% 5.81% 6.41% 2.22%
Other European 3248 45.30% 1.92% 5.81% 7.73% 3.50% Countries
US & Canada 749 10.45% 0% 5.81% 5.81% 0.61%
Middle East 26 0.36% 2.28% 5.81% 8.09% 0.03%
Asia - Pacific 511 7.13% 3.80% 5.81% 9.61% 0.68%
Africa & Latin America 149 2.08% 6.21% 5.81% 12.02% 0.25%
7170 100.00% 7.30%
BETA
As calculated by team 1.44
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Cost of Equity 11.04%
Cost of Debt
Interest Expense for 73 2014
Interest Bearing Debt as on 31/12/2013 1423
After Tax Cost of Debt 3.18%
CURRENT CAPITAL STRUCTURE
Weights
Market Cap 3347 63.95%
Debt:
ST Debt 803
LT Debt 1084 1887 36.05%
Total 5234
WACC
Cost Weights WxC
Equity 11.04% 63.95% 7.06%
Debt 3.18% 36.05% 1.15%
Total 8.20%
Structure Premium 2.00%
WACC 10.20%
TERMINAL GROWTH RATE
Terminal Growth Rate (Source :OECD)
World GDP Growth 2.35% Rate
Appendix 9 Free Cash Flow Valuation
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FCF FY FY FY FY FY FY FY 2017 FY 2016 FY 2018 2015 2023 2022 2021 2020 2019
Sales 9345 9104 8848 8580 8302 8015 7721 7429 7017
Sales Growth 2.65% 2.89% 3.12% 3.35% 3.58% 3.81% 3.93% 5.87% -2.13%
Operating EBI 235 229 223 216 209 202 194 187 176
Add: Depreciation & Amortization 348 333 317 302 288 274 260 247 235
583 562 540 518 497 476 454 434 411
Add: Operating WC Investment less Cash 9.0 11.0 10.0 11.0 12.0 11.0 12.0 16.0 94.0
Less: Investment in Fixed Assets & -304 -296 -288 -279 -270 -261 -251 -241 -228 Intangibles
FCFF 288.0 277.0 262.0 250.0 239.0 226.0 215.0 209.0 277.0
N 8 7 6 5 4 3 2 1
DCFF 127.32 132.71 139.56 147.03 153.22 160.64 172.09 251.35
WACC 10.20%
PV of Cash Flows 1283.92
Terminal 3812.51 value
Value of Invested Capital 5096.43
Value of Non Operating 33.00 Assets
Total 5129.43 Assets
Less: Book Value of Debt 1625.00
Other Liabilities 447.00
Market Value of Shares as on 01/01/2015 3057.43
Market Value of Shares as on 30/06/2015 3537.15
Shares Outstanding 131.13328 6
Price 26.97
Appendix 10 BETA estimation For our elaborations, we decided not to rely on the regression Beta. its instability over time can become a limit when you have to boil down a large amount of information into a single figure.
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We analysed the unsystematic risk of Lagardère using a mix of judgemental and Analytical steps that, put together, are named 'Smart' Beta.
Smart Beta is derived by analysing four characteristics of Lagardère SCA:
RISK FACTOR DESCRIPTION WEIGHT
Business Model Communication Is the business easy to understand 40% from a investor point of view?
Financial Leverage Is the company highly geared 30% compared to peers?
Cyclicality Is the Business Cyclical? Is it dependent 20% from GDP growth?
Operating Leverage Is the cost structure risky? How much 10% are the fixed costs compared to variable costs?
For each risk factor a Beta was given as the average of the Beta given by the assessment of each team member.
Then the Betas for the four risk factors have been weighted according to the weights in the table above to obtain our Forecast Beta:
Business Model Communication: Beta 1.6000
For an investor point of view, Lagardère's business model is very difficult to understand. The company is an ecosystem of 431 companies. A thorough analysis is needed just to understand from where do sales come from.
Financial Leverage: Beta 1.8250
Lagardère's financial laverage is much higher than peers. It's always difficult to assess if a level of Financial Leverage is moderate or high. It depends on several factors, some of them also cultural, depending also on the country of origins of the company. For this assessment we analysed the industry benchmark ( ) which gives a financial leverage much lower than the financial leverage of Lagardère.
Cyclicality: Beta: 1.0000
Lagardère as a total is relatively neutral to business cycles. The two major sources of sales (Travel Retail and Publishing) compensate each other.
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While Travel Retail sales depend on the Airline Industry which is pro-cyclical, Publishing seem to have a negative correlation with real GDP growth of the main countries in which operates. The two opposite reactions to business cycles compensate.
Positive Correlation between Travel Retail and Airline Industry:
Rsquared = 0.83
P-Value = 0.007
Negative correlation between Publishing and various GDPs:
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Operating Leverage: Beta 0.6000
Operating Fixed costs are mainly represented by Payrolls and Depreciations, which represent only 24.35% of total operating costs.
Finally, "Smart" Beta is derived:
RISK FACTOR BETA WEIGHT
Business Model 1.6000 40% Communication
Financial Leverage 1.8250 30%
Cyclicality 1.0000 20%
Operating Leverage 0.6000 10%
SMART BETA 1.4475
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