Endemol Initiating Coverage Scenarios to Act on Hold

Equity Markets

Initiating coverage

Anna Fokkelman, CFA Netherlands Amsterdam (31 20) 563 8771 [email protected]

Endemol Initiating coverage Scenarios to act on Hold

11 October 2006

06/10/06 Target price (12 mth) Media & entertainment €14.59 €15.5 Reuters EML.AS

12-month forecast returns (%) We initiate coverage with a HOLD and TP of €15.5. The Share price 6.2 status quo looks unlikely to continue: the acquisition of Dividend 3.0 12m f'cst total return 9.3 Endemol France optimises the balance sheet, a buyout gives a meagre IRR and acquisition by a peer looks priced in. Key ratios (%)

2005 2006F

Scenarios to act on. We believe the status quo is unlikely to continue Turnover growth 5.8 17.7 and focus on three alternative scenarios. (1) The acquisition of Endemol EBITDA margin 17.0 16.1 Operating margin 15.0 14.6 France would optimise the balance sheet and gives the highest value of €16. Net debt/equity 34.0 7.4 (2) A buyout at a reported €15.6 is possible, but we calculate an IRR of a ROACE 29.9 34.0 meagre 11%. (3) Acquisition by an industry player is another scenario, but we believe is already priced in at €14.6. Share data at No. of shares (m) 125.0 Status quo, we value Endemol below current trading levels Daily turnover (shares) 72,880 €14.1 on peer multiples and €11.6 on DCF. Free float (%) 75.0 Enterprise value (€m) 1,841.2 Market cap (€m) 1,823.8 Outlook FY06F exceptional, FY07-08F return to normal. For FY06 we forecast strong +17.7% revenue growth and a 16.1% EBITDA margin, and expect guidance to be raised at the 9 November statement. Share price performance

We initiate coverage with a HOLD and €15.5 target price, the 16 15 average of our three scenarios. 14 13 12 Forecasts and ratios 11 10 Yr to Dec (€m) 2005 2006F 2007F 2008F 9 Turnover 900.1 1,059.2 1,117.4 1,172.6 11/05 1/06 3/06 5/06 7/06 9/06 EBITDA 152.8 171.0 188.7 198.0 Price Net profit 83.5 93.2 104.9 111.1 E300 Media & Photography Adj EPS 0.67 0.75 0.84 0.89 (rebased) Adj PER (x) 21.8 19.6 17.4 16.4 Dividend yield (%) 0.5 3.0 3.3 3.6 Source: ING EV/EBITDA (x) 12.3 10.8 9.5 8.9 Price/NAV (x) 13.0 8.1 6.7 5.6 ROE (%) 45.1 51.1 42.1 37.1

Source: Company data, ING estimates research.ing.com E300 Media & Photo: 818.83

SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATION Endemol October 2006

Contents

Summary 3

Valuation status quo 4

Scenarios to act on 7

FY06 outlook strong 11

Risks 16

Appendices 17 Appendix 1: Presenting… Endemol ...... 17 Appendix 2: Market analysis ...... 20 Appendix 3: Competitive environment...... 24 Appendix 4: Strategy ...... 28

Disclosures Appendix 31

2 Endemol October 2006

Summary

Endemol: scenarios to act on We initiate coverage with a HOLD recommendation and a €15.5 target price, being the average of the three scenarios we believe could materialise. Catalysts are acquisition reports and expected strong FY06F trading.

We believe the status quo of Endemol, with 75% shareholder Telefonica looking to divest, is unlikely to continue, and in this report focus on three alternative scenarios. An acquisition of Endemol France would optimise the balance sheet and gives the highest value of €16. A buyout at a reported €15.6 is possible, but we calculate an IRR of a meagre 11%. Acquisition by an industry peer is another scenario, but we estimate, at €14.6, this is already priced in.

Acquisition of Endemol France by listed Endemol NV would optimise the balance sheet and we estimate give the highest value of €16. This scenario is plausible now that the earn-out issue has been resolved. We estimate that Endemol could comfortably finance the acquisition of Endemol France at €450m or 9.7x FY06F EBITDA. Notably such an acquisition would optimise its balance sheet and result in 1.8x net debt/EBITDA FY07F, below the maximum 2x which is in its bank covenants. It would also enhance EPS by 13% versus our current 2007 estimate of €0.84. We attach a €16 value to this scenario.

A potential buyout by private equity at €15.6, as indicated in unconfirmed press reports, is also possible. However, we calculate an IRR of a meagre 11%, assuming a 60/40 debt/equity financed bid and exit after five years at EV/EBITDA of 10x. Such a buyout could be done by private equity together with management .

Acquisition by an industry player is another scenario, but we estimate is already priced in at €14.6, or peer-median EV/EBITDA of 9.6x. There have been many press reports on interest by industry players such as Sony and Mediaset.

Status quo, we value Endemol below the current trading levels at €14.1 on peer multiples and €11.6 on DCF. Endemol has three small listed peers so we have included its broadcasting clients, peers in conglomerates and similarly hit-driven video games publishers in the peer group. For our DCF we have used a 9.5% WACC, 16% EBITDA margin, prospective 25% gearing and 3% terminal growth.

The FY06F outlook is exceptionally strong, in FY07-08F we forecast a return to normal. We forecast strong +17.7% FY06F revenue growth and a 16.1% EBITDA margin in FY06F and expect guidance (11-13% organic revenue growth, EBITDA margin 15- 17%) to be raised at the 9 November statement. Strong revenue growth stems mainly from the UK, North America and Italy on the back of successes of formats like Deal or No Deal, Fear Factor and Big Brother. In FY07-08F, we forecast a return to c.5% projected sales CAGR in line with the historical trend. Endemol’s balance sheet is robust, with low gearing of 36% at the end of FY05. Guidance is for a payout of c.60% of net profit, implying a dividend yield of 3%, or 43% above the average in the media sector.

The appendices include an overview of Endemol’s profile, strategy, past market trends and competition.

3 Endemol October 2006

Valuation status quo

Strong performance since IPO Endemol’s share price has risen by 62% since its IPO on 22 November 2005 at €9. The reasons behind its strong performance include potential takeover of the company and its better-than-expected 1H06 results.

Fig 1 Endemol share price performance since IPO (€)

16

15

14

13

12

11

10

9

8 11/05 12/05 1/06 2/06 3/06 4/06 5/06 6/06 7/06 8/06 9/06

Source: Datastream

_ Peer and DCF valuations; We have used several methods to value Endemol; for the status quo we use peer buyout and geared-up comparison and DCF. Additionally, in the following Scenarios section, we detail buyout valuations in Scenarios and geared-up valuations. section The peer comparison points to a €14.1 value on adjusted FY07F PER. Our DCF yields a valuation of €11.6 per share. Comparison to peers: €14.1 value Three small peers, so Few players are directly comparable with Endemol as direct competitors are either broadcasters, local independents (not listed) or part of enlarged groups including broadcasters or conglomerates and hit conglomerates. Rare exceptions in Europe include three AIM-listed production driven peers added companies (2waytraffic, RDF Media and Shed Productions). Their market capitalisations are very low (maximum €115m), visibility on their revenues is limited, and their catalogues are much less extensive and renowned than Endemol’s. We have included them in our peer comparison. Additionally, we decided to include listed companies such as video games publishers as they boast similar characteristics, ie, a content- and hit-driven business. This explains why we include in our sample companies like Electronic Arts.

We have decided to ignore any EV/revenue multiples, as some companies are more active than others in distribution, which inflates revenues with little impact on the bottom line. Based on the other FY07F multiples – median PER and EV/EBITDA – we estimate a value of €14.1.

4 Endemol October 2006

Fig 2 Endemol peer comparison

Mkt EV/Rev EV/EBITDA PER (close 6/10/06) Curr Price TP Rec cap FY06F FY07F FY08F FY06F FY07F FY08F FY06F FY07F FY08F (m) (x) (x) (x) (x) (x) (x) (x) (x) (x)

Quoted peers 2waytraffic NV £ 1.22 NR NR 115 6.2 3.8 3.0 17.1 9.1 6.6 24.9 14.2 11.2 RDF Media Group Plc £ 2.16 NR NR 60 0.8 0.7 0.5 8.6 6.7 5.0 14.7 12.7 10.9 Shed Productions Plc £ 1.18 NR NR 68 2.0 1.3 1.1 10.4 9.4 7.3 14.1 12.2 10.2 Median 2.0 1.3 1.1 10.4 9.1 6.6 14.7 12.7 10.9

Broadcasters BSkyB £ 5.51 NR NR 9,030 2.3 2.1 1.9 10.3 9.2 8.0 18.9 16.6 14.2 Gestevision Telecinco € 20.5 21.1 Buy 5,049 4.9 4.5 4.2 7.4 6.8 6.3 15.6 14.7 13.8 ITV Plc £ 1.03 NR NR 4,532 2.3 2.2 2.0 11.6 10.7 9.9 16.3 15.7 14.2 Mediaset €8.74 NR NR 11,523 2.9 2.7 2.5 8.3 7.1 6.4 16.8 15.4 14.6 RTL Group € 81.9 NR NR 9,055 2.1 2.1 2.0 12.8 11.9 11.4 22.3 20.3 19.6 TF1 €25.8 27 Hold 5,527 2.0 1.8 NA 13.7 9.6 NA 28.3 17.8 NA Median 2.3 2.1 2.0 10.9 9.4 8.0 17.8 16.1 14.2

Diversified groups Disney (Walt) US$ 31.3 NR NR 55,577 2.3 2.2 2.2 11.1 10.2 9.5 20.0 18.7 16.3 Modern Times Group SKr 378 NR NR 15,185 2.4 2.1 1.8 15.4 11.8 10.4 21.4 17.3 14.9 Time Warner Inc US$ 18.8 NR NR 68,080 NA NA NA 8.2 7.1 6.7 21.7 18.6 15.7 Viacom Inc US$ 38.3 NR NR 27,140 3.2 2.9 2.4 11.0 9.9 8.2 19.4 16.9 14.8 Vivendi Universal € 28.6 30 Buy 32,948 1.8 1.7 1.6 6.3 5.7 5.3 13.6 12.7 11.7 Median 2.3 2.1 2.0 11.0 9.9 8.2 20.0 17.3 14.9

Video games publishers Activision US$ 15.0 NR NR 3,701 3.1 2.0 1.8 NM 17.2 11.3 NM 32.7 22.1 Electronic Arts US$ 54.6 NR NR 18,155 4.9 3.8 3.0 NM 25.8 16.4 NM 48.3 22.6 THQ Inc US$ 29.5 NR NR 1,281 1.8 1.3 1.0 18.7 10.4 9.2 34.9 26.3 19.7 Median 3.1 2.0 1.8 18.7 17.2 11.3 34.9 32.7 22.1

Median 2.3 2.1 2.0 11.0 9.6 8.1 19.4 16.9 14.7 Average 2.8 2.3 2.1 11.4 10.5 8.6 20.2 19.5 15.4

Implied value for Endemol (median ratios) 2,437 2,323 2,323 1,874 1,819 1,605 14.4 14.1 13.1 Current value for Endemol 1,841 1,800 1,758 1,841 1,800 1,758 14.6 14.6 14.6 Up/downside (%) 32 29 32 2 1 -9 -1 -3 -11

Source: Jacques Chahine Finance, ING estimates

_ DCF valuation: €11.6 The characteristics of our DCF model are:

WACC of 9.5% A three-stage DCF model, with our forecast period FY06-08F, a second period of ten years and the terminal period.

• Discount rate of 9.5%. We have assumed a risk-free rate (ten-year bond) of 4.0%, an equity premium of 5.9% (in line with the Dutch AEX index) and media sector beta of 1.21. We have retained in our assumptions a 25% prospective gearing.

• Capex equal to depreciation as this rule is likely to apply in the long run.

• A medium-term EBITDA margin of 16.0%.

• Terminal value growth rate of 3.0% to reflect maturity of the sector in 2019F.

5 Endemol October 2006

Fig 3 Endemol DCF (€m)

2006F 2007F 2008F 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F

Revenues 1,059 1,117 1,173 1,231 1,293 1,332 1,371 1,371 1,371 1,413 1,455 1,528 1,574 Revenue growth (%) 18 5 5553300 3353 EBITDA 171 189 198 209 220 213 219 206 206 226 233 260 252 EBITDA margin (%) 16.1 16.9 16.9 17.0 17.0 16.0 16.0 15.0 15.0 16.0 16.0 17.0 16.0 Change in working capital (23) (11) (12) (12) (12) (12) (12) (12) (12) (12) (12) (12) (12) Cash taxes (55) (62) (65) (71) (75) (72) (75) (70) (72) (79) (81) (91) (88) Other 00 0000000 0000 Capital expenditures (18) (19) (20) (21) (22) (22) (23) (24) (25) (26) (27) (28) (30) Free cash flow 74 97 100 105 111 106 109 99 96 108 112 128 122 Discounted FCFs 74 88 84 80 77 67 63 52 46 48 45 47 41 Sum of PV's NOFCF 814 PV terminal value 644 Risk-free rate (%) 4.0 Weighting (%) Total PV 1,458 Sector beta (5 yr avg.) 121 Net debt (FY06F) 17 Equity risk premium (%) 5.9 Associates 15 Cost of equity (%) 11.1 80 Minorities 7 Yield to maturity (%) 5.0 DCF value 1,449 Effective tax rate (%) 35 No of shares (m) 125 Cost of debt (%) 3.3 20 DCF per share (€) 11.6 WACC (%) 9.5

Source: ING estimates

_ Given the degree of subjectivity surrounding the choice of WACC and EBITDA margin, we provide a sensitivity table below.

Fig 4 Endemol DCF sensitivity table (EBITDA% vs WACC)

8.5% 9.0% 9.5% 10.0% 10.5% 11.0%

15.2 13.1 12.1 11.2 10.5 9.9 9.3 15.6 13.3 12.3 11.4 10.7 10.0 9.4 16.0 13.5 12.5 11.6 10.8 10.2 9.6 16.4 13.8 12.7 11.8 11.0 10.3 9.7 16.8 14.0 12.9 12.0 11.1 10.4 9.8

Source: ING estimates

_

6 Endemol October 2006

Scenarios to act on

75% owner Telefonica Telefonica (indirectly) owns the other 75% of the shares of Endemol NV that are not looking to divest quoted, albeit, we believe it is looking to divest. In early 2004, under a new chairman, Telefonica announced a refocusing on its core business of telecommunications and Endemol was indicated as non-core. According to Screen Digest, in late 2004, Time Warner made a bid of €2bn that was rejected. We estimate the bid was for Endemol NV together with Endemol France. Since then there have been many press reports on potential acquirers, which we will go into in the following scenarios. In any case, we argue that the finalisation of the earn-out of Endemol France by Telefonica (September 2006) has cleared the air and gives Telefonica the opportunity to sell both Endemol NV and its sister company Endemol France, which Telefonica still fully owns. Note that Endemol France’s revenues (estimated at €200m in 2005) are higher than individual Endemol NV country revenues in 2005 (UK: €173m, NL: €150m) and its margins richer (estimated at 22% versus FY06F’s 16.1% overall) underlining its strategic importance.

We see four potential scenarios going forward, and attach the following value estimates to them.

Fig 5 Endemol scenarios and value estimates

Scenario Take into consideration ING est probability Est value (€)

Remain independent Share overhang as Telefonica seeking to divest its 75% stake Unlikely 12.9 Acquisition by industry player Could hurt the independency of the franchise Possible 14.6 Private equity and management bid Management rivalry and IRR meagre 11% Possible 15.6 Endemol NV acquires Endemol France Debt financing would optimise balance sheet Possible 16.0

Source: ING estimates

_ 1. Full float: unlikely Telefonica could float its 75% stake in Endemol NV on the equity market. We believe this scenario has a relatively small probability because of the overhang it would give to the share price. Moreover, if the Endemol France asset remains with Telefonica, uncertainty will linger on a potential acquisition.

Should the status quo continue, we would attach a €12.9 value estimate, or the average of our DCF (€11.6) and peer comparison (€14.1) valuations as set out in the valuation section. 2. Buyout by a TV player: hurts franchise Many press reports on There have been frequent (unconfirmed) press reports of acquisition interest by an interest by industry industry player. In our view Endemol is indeed a unique opportunity, being so creative player and global. Yet it is exactly this independence that makes it unique and able to generate such healthy margins. For that reason, we believe that ownership by a media conglomerate or television channel which are in most cases clients of Endemol could be detrimental to Endemol’s business and hence the potential bid value.

Next to the aforementioned Time Warner, among the list of interested parties have been reported media conglomerate Sony, television channel TF1, Netherlands media group Talpa (which operates a television channel and is owned by former Endemol founder, John de Mol), and Italian and Spanish broadcaster Mediaset.

7 Endemol October 2006

We estimate a bid value of around €14.6, or at the median of the peer group EV/EBITDA FY07F of 9.6x and argue that it is priced in after so many press reports. 3. Buyout offer at €15.6: meagre 11% IRR Unconfirmed press reports (The Times, 22 June 2006) have suggested that private equity player Apax is weighing up a bid for Telefonica’s 75% stake in Endemol of at least £1bn (c.€1.46bn) or c.€15.6 per share. We believe it is possible but by our calculations this implies an IRR of 10.7%, below a, for example, c.15% threshold for private equity. In our view, a bid around the €10 level of early 2006 was plausible, but has become less likely after the recent share price run.

We have based our calculations on the following main assumptions: (1) the reported €15.6 takeout price, (2) a 60/40 debt/equity financed bid, (3) free cash flow estimates from our DCF valuation, (4) a 6.5% interest rate and 36% tax (shield) rate and (5) an exit after five years at EV/EBITDA of 10x. Our calculations are summarised below.

Fig 6 Endemol private equity bid (€m)

Take out price (€) 15.6 Weights (%) Market cap 1,950 EBITDA FY07F 189 Fees @ 2% (39) Debt to be raised 1,153 60 Net debt FY06F 17 Debt/EBITDA FY07F 6.1 Minorities buyout (7) Equity 769 40 EV 1,921 EV 1,921

2006F 2007F 2008F 2009F 2010F 2011F

Cash flow forecasts Free cash flow 96.7 100.4 105.1 111.2 105.9 Interest charges @ 6.5% -74.9 -71.8 -68.2 -64.2 -59.7 Tax shield @ 36% on int charges 27.0 25.8 24.6 23.1 21.5 Cash flow after interest 48.8 54.4 61.5 70.1 67.7 Net debt year-end 1,153 1,104 1,050 988 918 850 Net debt year-end /EBITDA (x) 5.9 5.3 4.7 4.2 4.0 EBITDA/interest cover (x) 2.5 2.8 3.1 3.4 3.6

IRR calculation Cash paid out for equity -769 Sale proceeds 2,130 Debt/cash -850 Cash flow to equity -769 0 0 0 0 1,280 IRR (%) 10.7

Source: ING estimates

_ Buyout with or without We believe it would make sense for management to participate in such a buyout. That management, said, which management? Reported rivalry among executives (FT, 12 September complicated by reported 2006) is a retarding factor. On the one hand, UK-based management Tom Barnicoat rivalry (Endemol NV COO) and Peter Bazalgette (Endemol NV creative officer) are reported to be looking to team up with private equity to buy out Endemol (The Times, 12 September 2006). At the same time, non-quoted Endemol France’s director Stéphane Courbit is reported to be seeking the same thing (The Times, 12 September 2006). Finally, we would argue that the recent appointment of Elias Rodriguez as Endemol NV’s CEO represents the interests of owner Telefonica.

8 Endemol October 2006

4. Buy Endemol France: the happy ending? Acquisition of Endemol A reunion of Endemol with Endemol France and for the combination to stay quoted is France plausible now another potential scenario. In this scenario, Endemol could acquire Endemol France earn-out is resolved from Telefonica. Now that the earn-out issue has been resolved and one of Endemol France’s managers, Jacques Essebag (better known as Arthur), has announced his departure to set up his own television production company, we believe this is a plausible scenario.

Endemol NV could We estimate that Endemol could comfortably finance an acquisition of Endemol France comfortably finance by leveraging up. We have based our analysis on the following assumptions: (1) acquisition of Endemol Endemol France acquisition value of €450m, or 2.1x estimated FY06F revenues France (€210m) and 9.7x estimated FY06F EBITDA (€46.2m, or a 22% EBITDA margin) as per January 2007F, (2) Endemol’s c.5.2% average interest rate and 36% tax rate.

Endemol France We conclude that an acquisition of Endemol France: acquisition would • Can easily be financed by Endemol with debt, resulting in a 1.8x net debt/EBITDA optimise Endemol NV FY07F ratio, below the maximum 2x which is in its bank covenants. Moreover, such balance sheet and a debt-financed acquisition would optimise the balance sheet of Endemol to a enhance EPS growth c.155% gearing (versus FY06F: 8%).

• Enhances its FY07F EPS by 13% to €0.95 versus our current €0.84 estimate.

Based on peer PERs, we would attach a value of €16 to Endemol shares if it gears up to buy Endemol France, which would be accretive to its EPS.

Admittedly, in this scenario Telefonica would still have its 75% stake in Endemol NV. Nevertheless, we estimate a higher value, which would be attractive considering the rich acquisition price it paid (€5.5bn) for Endemol in 2000. We expect Telefonica subsequently to seek to reduce its stake to a minority over the next few years.

Again, a complicating factor would be management, which according to the press reports mentioned earlier, is currently rivalling for the lead. Note the alternative of Endemol France acquiring Endemol NV is also possible, as has been described under scenario 3, ‘private equity bid’. Target price €15.5 Target price of €15.5 is We initiate coverage with a price target of €15.5 and HOLD recommendation. It is the average of three average of the three scenarios that we believe have a chance to materialise for scenarios Endemol, as illustrated in Figure 7. Nevertheless, we point out that it is higher than our status quo valuations, with DCF and peer-average PER pointing to respective values of €11.6 and €14.1.

Fig 7 Endemol scenarios and value estimates

Scenario Take into consideration ING est probability Est value (€)

Remain independent Share overhang as Telefonica seeking to divest its 75% stake Unlikely 12.9 Acquisition by industry player Could hurt the independency of the franchise Possible 14.6 Private equity and management bid Management rivalry and IRR meagre 10% Possible 15.6 Endemol NV acquires Endemol France Debt financing would optimise balance sheet Possible 16.0

Source: ING estimates

9 Endemol October 2006

Catalysts Potential catalysts for the share price in the near term we argue are:

• Increased profile of Endemol as a potential takeover candidate.

• Stronger-than-expected FY06 results (planned for the end of February 2007), on which we expect further guidance at the 9 November trading statement.

10 Endemol October 2006

FY06 outlook strong

Much better-than- Endemol reported much better-than-expected 1H06 results on 26 July. At the same expected 1H06 results time it raised its FY06F outlook to 11-13% organic revenue growth (previously 5-6%), while maintaining its EBITDA margin guidance at 15-17%, within its medium-term targeted range. Recently on 27 September, CFO Jan Peter Kerstens confirmed to Reuters that Endemol expects to hit the top end of its FY06F revenue guidance range.

We expect FY06F We believe FY06F guidance is conservative and expect it to be raised at the 3Q06 guidance to be raised trading statement (9 November). Our FY06F forecasts are looking for significant on 9 November +16.6% organic revenue growth (or 17.7% total), a 16.1% EBITDA margin and 11.6% EPS growth. Consensus lies at 15.4% total revenue growth, EBITDA margin of 17% and 12.3% EPS growth.

Forecasting Endemol’s revenue evolution is a difficult exercise for several reasons:

• Sales are highly hit driven. As for the music, movie production or video game industries, future sales depend strongly on back catalogue and new launches. The quality of the back catalogue (formats previously launched) can give some insurance that it will continue to generate revenues, but some concepts could fade away. So far, the group has been successful in creating new formats. This is a day- to-day challenge and we have no assurance that future programmes will be as audience enhancing for broadcasters and therefore encounter the same success. Sales are highly dependent on blockbusters like Big Brother.

• Sales are highly dependent on Big Brother. In 2005, the ten most successful programmes generated as much as 55% of sales. The remaining 45% of sales was generated by c.300 programmes. The group is highly dependent on its blockbusters, particularly Big Brother, which accounted for just below 20% of 2005 sales. Big Brother was produced for one country in 1999 (the Netherlands) and quickly grew to 22 countries in 2005. This programme is a cash cow for the group and the signing of eight new countries in 2005 (including Chile, the Philippines and Finland) shows its recurring success. However, should its success fade and the number of countries where it is produced diminish, this could jeopardise the group’s growth prospects. The second top format in 2005 was Fear Factor (produced for ten countries in 2004 and eight in 2005).

Fig 8 Top Endemol formats: production frequency in no. of countries

Format 1999 2000 2001 2002 2003 2004 2005 2006F

Big Brother 110171619122220 Deal or No Deal 1 4 16 26 >35 Fear Factor 9 8 10 8 6 Participation TV 6 9 12 17 >25

Source: Company data

_ • Sales are dependent on few clients. In 2005, Endemol’s top five clients contributed c.45% of total turnover. They were Mediaset Group (including Telecinco), RTL Group, NBC, Channel 4 and RAI. At first glance, this figure of c.45% appears high and could suggest that if Mediaset Group (c.15% of total sales in our estimate) or RTL Group were to stop broadcasting one format, it would have significant consequences for our forecasts. This is mainly true, but should be toned

11 Endemol October 2006

down as these groups operate across borders, implying that RTL could stop broadcasting a format in the Netherlands but not in Germany or Belgium for example. Programme sourcing decisions are generally made on a local level. Revenue estimates by country We have built up our forecasts from the individual countries and expect the following FY06-08F trends.

Fig 9 Endemol revenue growth by country (%)

Country FY03 FY04 FY05 FY06F FY07F FY08F

Netherlands 6.4 -14.1 3.0 12.2 3.0 3.0 UK 27.2 10.9 18.4 37.0 8.0 4.0 North America 24.1 107.3 1.1 18.0 4.5 4.8 Spain -13.9 2.2 7.0 5.0 4.0 5.9 Italy 16.4 16.4 -4.9 23.0 3.0 3.0 Germany 5.8 5.3 -2.9 -10.0 0.0 0.0 Other -19.4 88.8 10.4 19.0 10.0 10.0 Total 4.4 15.0 5.8 17.7 5.5 4.9

Source: ING estimates

_ Fig 10 Endemol revenue by country (€m)

Country FY03 FY04 FY05 FY06F FY07F FY08F

Netherlands 169.9 145.9 150.2 168.5 173.6 178.8 UK 131.8 146.1 173.0 237.0 256.0 266.2 North America 66.1 136.9 138.4 163.4 170.7 178.9 Spain 115.5 118.1 126.3 132.7 138.0 146.1 Italy 95.6 111.3 105.9 130.3 134.2 138.2 Germany 81.1 85.4 82.9 74.6 74.6 74.6 Other 79.7 150.6 166.2 197.8 217.6 239.4 Intercompany 0.0 (43.3) (42.9) (45.0) (47.3) (49.6) Total 739.7 850.9 900.1 1,059.2 1,117.4 1,172.6

Source: ING estimates

_ Netherlands NL: we expect good Where before the 1H06 results we were cautious on the Netherlands because of the 1 growth in 2006 and January 2006 restrictions placed on call TV, much stronger-than-expected interims deceleration thereafter made it clear that Endemol has effectively adapted its programmes to be compliant. Other contributors to FY06F revenue growth are the (September 2005) launch of the free-to-air channel Talpa, the renewed airing of Big Brother (autumn 2006) as well as an estimated €8m of revenue from the (proportionate) consolidation of NL Film & TV. Nevertheless, in the medium term we argue that the Dutch television production marketplace is crowded, hence we prefer to be cautious and forecast deceleration of organic revenue growth from a strong +12% in FY06F, to a more moderate 3% in FY07-08F. UK UK impressive growth Our estimates are looking for an impressive 37% revenue growth in FY06F. This is a driven by Deal or no continuation of the strong start to 1H06 (+53%), boosted by the successful introduction Deal of Deal or no Deal (a two-year contract on Channel 4 from end-FY05 to end FY07F), a new series of Big Brother (summer 2006), and sports reality programming. As for the Netherlands, we forecast a deceleration to 8% and 4% growth respectively in FY07 and 2008F because we view the marketplace as competitive.

12 Endemol October 2006

North America North America: North America is a strategic growth priority for Endemol. Following a strong 1H06 resurgence of game performance with 28% currency-adjusted growth, we forecast 18% FY06F, driven by shows and potentially for example (1) the hit Deal or no Deal which is one of the most watched programmes another series in and gives ancillary revenue streams, (2) syndication of a sixth series of Fear Factor in syndication 2H06F, and (3) a resurgence of game show popularity in the US. Note our FY07-08F estimates do not include potential syndication of another series in the US. Spain We expect Spain to catch up in 2H06 after a slow 1H06 (+1%) with the return of successful programmes such as Big Brother and Operación Triunfo in 2H06. We forecast FY06F revenue growth of 5%. Italy Italy we estimate to make a leap in FY06F with Big Brother back on air (in 1H06) after being absent in FY05, but also a pick-up in scripted volume in 2H06. After reporting revenue decline of 4.9% in FY05, we forecast +23% in FY06F. Germany German market slow We expect Germany to continue to be a challenging market with low adoption of new and competitive formats. We also have the impression that Endemol is seeing competition there from competitor Fremantle. We expect the absence of Big Brother in 2006 to lead to 10% organic revenue decline in FY06F. It could potentially be commissioned for 2007 and provide an impetus, but we have not included it into our estimates yet (FY07-08F: 0% pa). Other Strategic growth The other category encompasses territories where Endemol has a relatively small but priority: start-ups, eg, in growing permanent presence (eg, Portugal, Poland, Argentina) or recently started a Asia subsidiary (India, South-East Asia). Considering that it is one of the strategic growth priorities, we forecast strong 10% growth pa going forward. Outlook FY06F exceptional, FY07-08F return to normal FY06F expected to be Taken together, we expect FY06F to be an exceptional year with +17.7% revenue exceptionally strong growth, predominantly organic (+16.6%). We assess that the 10% sales CAGR posted year by the group between 1994 and 2005 was split 5% organic and 5% acquisitional. As such, our c.5% projected sales CAGR for 2007-08F is in line with the historical trend. In 2007-08F we estimate that the group’s sales are set to grow around 100bp below the format-producing market, ie, organic growth of 5.5% in 2007 and 4.9% in 2007. This is due to the fact that Endemol has been on the market for a long time and could lose market share to new entrants or more aggressive competitors. Nevertheless, organic growth is expected to remain decent with drivers being: (1) growth in global TV advertising; (2) a need for broadcasters to find audience-enhancing formats; and (3) a gradual shift in programming costs from expensive movies to cheaper reality TV programmes. Cost analysis Endemol’s costs are relatively variable, hence its medium-term guidance of 15-17% EBITDA margin. The three main costs are:

• Cost of outsourced work (COW), which accounted for 61% of sales in 2005, mainly the costs associated with production.

13 Endemol October 2006

• Personnel costs. This includes wages and salaries of staff having compulsory social security contributions, pension and early retirement costs, cash settled for Telefonica stock option plans and other personnel costs. The number of full-time equivalents at end-2005 was 3,928, up 21% versus 2004. This increase is mainly due to higher volume in the UK and Spain, resulting in more workers on temporary contracts. Note that staff on limited contracts represented 70% of the total workforce in 2005. These charges can be adjusted easily according to the level of activity the group is facing. Personnel incentives include loyalty bonuses, a Telefonica stock option plan and an IPO incentive scheme.

• Other operating costs include housing, representation and selling expenses.

All these costs remained globally unchanged as a percentage of sales in 2002-05. We expect this trend to continue and for EBITDA margins to lie in a range of 15-17% in 2006-08. Upside to our estimates could come from the signing of new syndicated deals in the US, ie, a deal that enables Endemol to resell programmes that have already been produced and sold previously. These deals are lucrative as they almost come entirely as net profit. A good example of a syndication deal is Fear Factor, of which four series in syndication brought an additional €27.5m of revenues in 2004.

Fig 11 Endemol profit and loss forecasts (€m)

2003 2004 2005 2006F 2007F FY08F

Revenues 739.7 850.9 900.1 1,059.2 1,117.4 1,172.6 COW (413.3) (509.0) (546.9) (645.7) (672.8) (706.0) Personnel costs (140.8) (137.1) (139.5) (168.4) (177.6) (186.4) Other costs (58.5) (72.5) (60.9) (74.1) (78.2) (82.1) EBITDA 127.2 132.4 152.8 171.0 188.7 198.0 Depreciation (12.2) (14.7) (16.5) (15.9) (16.8) (17.6) Impairment of goodwill (0.2) (0.5) (0.8) 0.0 0.0 0.0 EBIT 107.7 117.2 135.4 155.1 172.0 180.4 Financials (4.9) (7.7) (0.4) (2.6) (0.9) 0.7 Associates 1.5 1.7 1.4 0.7 0.7 0.7 PBT 104.3 111.2 136.4 153.1 171.7 181.9 Tax (39.8) (41.5) (48.8) (55.1) (61.8) (65.5) Minorities (1.4) (5.3) (4.1) (4.8) (5.0) (5.3) Net profit 63.1 64.5 83.5 93.2 104.9 111.1 No. of shares (m) 0.0 125.0 125.0 125.0 125.0 125.0 EPS (€) 0.000 0.516 0.668 0.746 0.839 0.889

Source: ING estimates

_ Financial position Strong balance sheet Endemol’s balance sheet is strong, with a net debt position as low as €50m at end- with FY05 gearing of 2005, implying 36% gearing. Solvency amounted to 25%, well above its 20% 36% covenant. Endemol has a €250m credit facility in place from September 2005 with a three-year term (with an option to extend to a maximum of five years). It is a revolving multi-currency facility, which could be used to fund any working capital requirement, acquisition and other cash needs. As of end 2005, off-balance-sheet items amounted to €6.5m relating to call options and €1.4m of put options. These options all relate to acquisitions.

14 Endemol October 2006

Fig 12 Endemol balance sheet (€m)

2003 2004 2005 2006F 2007F FY08F

Intangible assets 145.3 148.5 155.5 155.5 155.5 155.5 Tangible assets 44.6 41.4 40.6 42.7 44.9 47.3 Financial assets 46.4 125.7 37.6 67.1 67.1 67.1 Inventories/deferred tax asset 18.8 32.5 23.0 31.8 33.5 35.2 Trade receivables 266.0 228.4 240.5 317.8 346.4 363.5 Cash 20.0 117.8 67.4 67.4 67.4 67.4 Total assets 541.2 694.3 564.7 682.3 714.9 736.0 Shareholder funds 149.4 229.5 140.7 223.9 273.8 324.9 Minority interests 5.3 5.8 7.3 12.1 17.1 22.4 Financial debt 47.8 129.6 117.8 84.9 43.4 1.6 Current liabilities 338.8 283.0 287.1 349.6 368.7 375.2 LT liabilities 46.3 11.8 11.8 11.8 11.8 Total liabilities 541.2 694.3 564.7 682.3 714.9 736.0

Net debt (cash) 27.8 11.8 50.4 17.5 (24.0) (65.8) Gearing (%) 18.6 5.1 35.8 7.8 -8.8 -20.3

Source: ING estimates

_ Cash flow analysis Dividend payout guided Endemol’s cash flow is relatively straightforward. The key points are: at c.60% of net profit • We expect the work carried out internally in terms of cash pooling to enable the group to contain the change in working capital requirement at low levels.

• At end-2005, earn-out obligations amounted to €24.5m, all short-term. The main liabilities relate to the companies acquired in Spain and the UK. They are included in our forecasts.

• We expect recurring capex to amount to 1.7% of sales. Capex has shown no real surprise in the past and should remain at this level, in our view.

• Management guidance is for a payout ratio of c.60% of net profit. Based on a €93m 2006F net profit, this implies a dividend yield of 3%, 43% above the average dividend yield in the media sector. Note that the group has already distributed a €90m pre-IPO dividend in 2005.

Fig 13 Endemol cash flow statement (€m)

2003 2004 2005 2006F 2007F FY08F

Operating result 107.7 117.2 135.4 155.1 172.0 180.4 Amortisation & depreciation 19.5 15.2 17.4 15.9 16.8 17.6 Change in WCR (77.2) 29.9 (11.5) (23.5) (11.2) (12.3) Financial expenses (4.3) (1.8) (3.0) (1.9) (0.2) 1.4 Taxes paid (39.8) (37.1) (29.7) (55.1) (61.8) (65.5) Other (23.8) (12.1) 0.0 0.0 0.0 Operating cash flow (A) (77.2) 99.7 96.6 90.4 115.5 121.7 CAPEX (12.7) (13.9) (16.1) (18.0) (19.0) (19.9) Acquisitions (19.2) (21.6) (30.0) (29.5) 0.0 0.0 Assets disposal 0.0 0.0 0.0 0.0 0.0 0.0 Investing cash flow (B) (31.8) (35.4) (46.1) (47.5) (19.0) (19.9) Capital increase 0.0 0.0 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 0.0 0.0 Dividends paid 0.0 0.0 (173.9) (10.0) (55.0) (60.0) Change in net debt (cash) 109.1 (64.2) 123.5 (32.9) (41.5) (41.8) Financing cash flow (c ) 109.1 (64.2) (50.4) (42.9) (96.5) (101.8)

Source: ING estimates

_

15 Endemol October 2006

Risks

There are several risks to investing in Endemol:

• Share price volatility because Endemol is subject to many press reports on its potential acquisition. On the flipside, share price disappointment because divestment by Telefonica may not materialise.

• High dependency on clients and reality TV formats, eg, Big Brother.

• Limited scope for margin improvement; as explained in the Financials section, we expect EBITDA margin to remain in the 15-17% range

• Share overhang; Telefonica owns 75% of the shares and has announced that Endemol is non-core.

• Competition: includes pure players such as FreeMantle Media, in-house players and local independents.

• Staff retention; TV format business = people’s business. Key founders (Van Ende and de Mol) are no longer on board. No guarantee that the ‘streak of genius’ will continue unabated. Risk of other staff members leaving the company. Need to retain talented people.

• Uncertainty regarding France, which is not part of the listed entity but works closely together with it and could be acquired by Endemol NV.

• Consequence of media fragmentation; possible pressure on broadcasters to reduce costs and to produce content internally as audience decrease.

16 Endemol October 2006

Appendices

Appendix 1: Presenting… Endemol Profile Leading global Endemol is a leading global entertainment production company. One of its strengths is entertainment to translate its popular formats into local-language versions for its foreign markets. It production company has a formidable library with over 900 formats (including 150 scripted titles) and strong creative teams to draw on. Most programmes are created internally, for example, in 2005 more than 100 formats were created.

Strong track record of In 2004, Endemol produced as much as 3,500 hours of programming (source: Screen creativity Digest). As such, it is global market leader with a c.22% share and nearly double the size of its nearest competitor. The company has a strong track record of creativity. Endemol’s best-known format is undoubtedly Big Brother, which has been broadcast in 119 territories around the globe since 1999 and represented just below 20% of 2005 revenues. Next to this reality television format, Endemol’s strengths lie in, for example, the game show, makeover and talent show genres. These non-scripted genres made up 77% of revenues in 2005, scripted (drama, soap, comedy) 14% and digital media 9%.

Fig 14 Endemol 2005 €900m revenue by source Fig 15 Endemol 2005 €900m revenue by country

Digital Netherlands 9% Other 18% 16%

Scripted 14%

Germany 9% UK 18%

Italy 11%

Non scripted 77% North America Spain 15% 13%

Source: Company data Source: Company data

_ Present in 24 countries; To keep more closely in touch with viewers’ preferences, Endemol has a local six main countries made presence in 24 countries (with sales in over 100 countries). Its six main countries are up 82% of 2005 revenue the Netherlands, Germany, Spain, Italy, the UK and the US. Together they made up 82% of revenues in 2005.

Top five customers Endemol’s customers include both commercial channels and national networks. The make up 45% of 2005 company makes a point of not committing itself to work for any particular channel. revenues; Endemol’s top five customers made up c.45% of its 2005 revenues. Illustrative of the it aims to diversify importance of Endemol’s formats to its broadcaster clients is that they are generally prime time, weekly shows. As such, the audience share of Endemol formats tends to be higher than the average of the channel.

17 Endemol October 2006

Strong relationships The strong interdependence between Endemol and its broadcaster clients is often laid with clients: some multi- down in multi-year contracts. For example, the deal signed with HMG, which is the year contracts Dutch subsidiary of RTL Group, runs until December 2006. Note that although some Endemol customers belong to international broadcaster groups, programme sourcing decisions are generally made on a local level. Company history Created in 1994, Endemol was created in 1994 from the merger of Dutch production companies John de rapid expansion by Mol Produkties and Joop van den Ende Productions. The company has expanded acquisition and start- rapidly into the largest independent television producer globally through acquisitions ups and start-ups of TV production companies outside the Netherlands. In July 2000, Telefonica acquired (100%) of Endemol in a €5.5bn all-share deal, to leverage its content on Telefonica’s network of media platforms in Spain and Latin America. At end-2003, the remaining co-founder John de Mol left Endemol, to subsequently start a media investment and broadcasting company (Talpa). Talpa is now a client of Endemol. The current CEO of Endemol, Elias Rodriguez, was appointed in June 2006.

Telefonica, under a new chairman, announced a refocusing on its core business of telecommunications in early 2004 and Endemol was indicated as non-core. Finding no satisfactory potential acquirer, it floated 25% of Endemol NV (excluding Endemol France) on the equity market on 22 November 2005. Management team Management team of Endemol’s management team consists of four individuals. The company is led by Elias four Rodriguez, who has been with Endemol since June 2006. Previously, he was responsible for Telefonica’s non-core subsidiaries. The other main managers are Tom Barnicoat and Peter Bazalgette, who both come from Endemol UK and have been appointed respectively chief operating officer and chief creative officer of Endemol Group since January 2005. CFO Jan-Peter Kerstens joined the Endemol group in 2000 and was appointed CFO in June 2006.

Fig 16 Endemol management team

Name Age Position Experience

Elias Rodriguez 46 CEO CEO of Endemol since June 2006 Previously responsible for Telefonica’s non-core subsidiaries General Electric, UBS and Arthur Anderson Jan Peter Kerstens 44 CFO Appointed June 2006, acting CFO since Oct 2005 Six years with Endemol as treasurer, controller and VP finance Tom Barnicoat 54 COO COO of Endemol since Jan 2005 Ten years CEO of Endemol UK Peter Bazalgette 53 CCO CCO of Endemol since Jan 2005 Extensive UK television experience

Source: Company data

_ Elias Rodriguez, chief executive officer Elias Rodriguez comes Elias Rodriguez serves as chairman and chief executive officer of Endemol Group. He from Telefonica was appointed on 5 July 2006. Prior to his appointment at Endemol, Rodriguez was the CFO of Terra Lycos from January 2001, a leading internet services and online content provider, and a listed company in Madrid and in New York.

Jan Peter Kerstens, chief financial officer CFO Jan Peter Jan Peter Kerstens was appointed chief financial officer in June 2006, but already Kerstens 6 years with fulfilled the CFO functions since October 2005. He has been with Endemol since 2000. Endemol

18 Endemol October 2006

He started as group treasurer, then became group controller and senior vice president finance.

Tom Barnicoat, chief operating officer Experienced COO Tom Tom Barnicoat has been chief operating office of Endemol group since 1 January Barnicoat 2005. As COO, he is responsible for all the Endemol operating companies across 22 countries. He also oversees the group's Digital Media operations, as well as its Commercial Affairs division. He has extensive experience, having been chief executive officer of Endemol UK for ten years.

Peter Bazalgette, chief creative officer Creative company with In line with the creative mindset of the company, Endemol has a specific manager to own creative officer: stimulate creativity, Peter Bazalgette, in the position of chief creative officer. In 1990, Peter Bazalgette he sold his own company Bazal (now Endemol UK production) to Broadcast Communications (now Endemol UK). He boasts extensive television experience in the UK. He created several internationally successful television formats, such as Ready Steady Cook and Changing Rooms. Next to overseeing the creation of content across Endemol, he is also chairman of Endemol UK. Specific organisational elements Endemol’s head office is structured around three main areas – operations, creativity and finance – next to general head office functions. The operating companies are organised by country, with the most important being the UK, Netherlands, US, Spain, Italy and Germany. Important in light of Endemol’s core strength as an entertainment producer are stimulating creativity, staff retention and protection of its intellectual property (IP).

Optimal exploitation of creativity. Endemol promotes creativity, its lifeline, across the group through: (1) a database of formats and programmes made accessible to all affiliates; (2) creative exchange meetings to share new formats, best practices, and revive old formats; (3) incentives to share IP; and (4) creative support units.

Staff retention is key to Endemol’s creative business. Important incentive schemes include: (1) for top management, a stock option plan that will be put in place at the IPO; (2) a Telefonica stock option plan remains in place up to 2007; and (3) traditional bonuses based on personal achievement and overall group profitability. In early 2005, the contracts of key managers were renegotiated and extended until 2007-09. Endemol employs approximately 1,200 full-time permanent staff, but its effective workforce is three times that size due to temping and outsourcing contracts.

Endemol aims for full Protection of IP. Endemol has a library of c.900 formats (including 150 scripted control of rights and titles). It aims to keep full control over the rights to programmes developed in-house. carefully protects its IP However, broadcasters have caught onto the ancillary revenue potential of certain – its formats formats and the rights to, for example, English-language productions are increasingly negotiated and hard to retain for producers. The company has extensive structures in place to protect its IP, like a timely registration of its formats and co-ordinated legal action against IP offenders.

19 Endemol October 2006

Appendix 2: Market analysis The format market The format industry has The format industry is reaching a certain level of maturity. Non-scripted shows are now become more mature scheduled prime time and many are hits. The range of formats runs from game shows to reality shows, entertainment, scripted comedy, daily soaps, clips, etc. As shown in Figure 17, Endemol is active in the first part of the value chain – ie, content creation and production. This is why our market analysis primarily focuses on the format production market.

Fig 17 Traditional TV value chain

Content Production Aggregation Distribution Creation

Cable/ Content Production End TV Broadcaster Satellite Creation Company User Operator

Roles performed by Endemol

Source: Company data

_ Format market In the section below, we concentrate on the six main countries that represented 82% of potentially much larger Endemol’s revenues in 2005 – the Netherlands, Germany, Spain, Italy, UK and the US. We have used a report by Screen Digest from April 2005 as the primary source. However, we note that it hardly takes into account small independent producers that operate in only one country. As such, it understates the market in which Endemol operates. For lack of other comprehensive sources, we believe the report gives a good indication of the relative positions of players and genres in the format market.

The format market compared with TV advertising market A 5.4% CAGR expected In 2004, the global format production market reached €2.4bn in value (+5.0% versus for the format market 2003). Market growth slowed in 2004 after an excellent year in 2003 (+26.3%). Over 2002-04, the average CAGR was c.10.6%. Given the limited information on market forecasts, we express format production as a percentage of advertising expenditure on TV. Subsequently, estimating the penetration rate of the format production in 2007, we derived a potential CAGR for the format production market in 2004-07F.

20 Endemol October 2006

Fig 18 Format production market versus TV advertising market

Total expenditure TV advertising TV advertising Estimated Estimated 2004-07F CAGR on format expenditure at Penetration expenditure at penetration expenditure on on expenditure production current prices rate current prices rate format production on format (2004) (2004) (2004) (2007F) (2007F) (2007F) production (€m) (€m) (%) (€m) (%) (€m) (%)

Netherlands 90 743 12.1 800 10.5 84 -2.2 Germany 373 3,877 9.6 4,101 10.0 410 3.2 Spain 223 2,676 8.3 3,318 8.0 265 5.9 Italy 275 4,621 5.95,740 7.0 402 13.5 UK 225 3,392 6.63,885 6.0 233 1.2 US 468 20,889 2.2 22,450 2.4 539 4.8

Total six countries 1,653 36,198 4.6 40,294 4.8 1,933 5.4

Source: ZenithOptimedia, Screen Digest, ING estimates

_ We believe the worldwide TV advertising market still has some interesting growth opportunities for Endemol, both in existing and new markets. The market is fragmented and competitors are seeking scale, volume and international presence. By country It appears that the countries where Endemol has its biggest market share are the Netherlands (its home country) and Spain (home country of Telefonica).

Fig 19 Market trends in top six countries for Endemol in value (%)

Share of the country in Market share of Endemol Share of the country in 2002-04 revenues CAGR 2002-04 revenues CAGR the global format market in the country Endemol's revenue of the market in the of Endemol in the (2004) (2004) (2004) country country*

Netherlands 3.8 51.3 17.1 -3.6 -4.4 Germany 15.8 30.1 10.0 31.8 5.6 Spain 9.5 55.5 13.9 4.1 -6.2 Italy 11.7 31.6 13.1 38.4 16.4 UK 9.5 25.9 17.2 -0.2 18.8 US 19.8 5.2 16.1 8.2 60.4

Total six countries 70.1 27.3 87.4 13.4 10.5

Source: Screen Digest, * Company data, ING

_ US appears the next The most mature markets when looking at market growth seem to be the Netherlands major growth driver for and the UK, where revenues slightly declined on average in 2002-04. On the contrary, Endemol the US appears to be the next major growth driver for Endemol. It has a mere 5.2% market share in this country, but its sales increased by a CAGR of 60.4% in 2002-04 to already generate 15% of company revenues in 2005. This opportunity in the largest global television market explains why Endemol has put the US as the No.1 priority in its development strategy. Endemol also intends to develop in other countries including Indonesia, India and South Korea. We have limited information on the size of the format market there. However, Endemol’s growth prospects in these countries should be fuelled by a positive base effect (Endemol has no presence) and sound growth prospects of global advertising spending.

In volume In terms of total hours of format programming broadcast, the total market represented 15,656 hours in 2004 (+5.9% versus 2003, and a CAGR of 10.4% over 2002-04). In Endemol’s six main countries, the volume CAGR over 2002-04 was 5.0%.

21 Endemol October 2006

In terms of production, the UK is the No.1 originating country with 4,427 hours broadcast in 2004 (around 28% of the market share). Other important countries in terms of origin are the Netherlands, home country of Endemol, and the US. The UK is the biggest exporter of formats and Germany is No.1 importer of formats.

In prices

Fig 20 Average value per hour of format programming broadcast (€) Average value per hour Average value per hour Average CAGR of format programming broadcast 2004 of format programming broadcast 2002 2002-04 (%)

Netherlands 91,097 87,678 1.9 Germany 184,369 124,849 21.5 Spain 125,402 137,128 -4.4 Italy 156,396 116,606 15.8 UK 177,904 162,428 4.7 US 468,101 380,138 11.0 Average of the six countries 187,694 160,835 8.0 Average of the market 150,733 138,543 4.3

Source: Screen Digest

_ Formats in Spain and The average production spend for the six countries reached €187,694 in 2004 (+8.0% Netherlands far less on average versus 2002), and €150,733 on average for the market. With an overall expensive than the US, increase of 10.5% pa in value over the last two years, we conclude that the major which is top of the increase in the six countries came from a price effect, and that the average value per range hour of format broadcast has increased significantly over the past two years. The volume effect is more limited (average CAGR of +2% in 2002-04 for the six countries). Generally speaking, the Netherlands and Spain seem to have the less expensive hours of format programming, whereas the US has an above-market average value of €468,694 per hour of format broadcast. By genre The success of game Game shows are the most popular format, representing almost half of the total hours of shows and reality TV format programming at an average production spend of only €94,590. Reality shows come in No.2 in terms of hours of format programming market share. The magazine/studio-based format is slightly declining in market shares compared with the other genres. Formats with the biggest growth in hours programming are makeover (+348% versus 2003) and home improvement (+123%).

Fig 21 Split in hours of the format market (2004) Fig 22 Average value of format (2004, €/hour) Home EntertainmentChart improvement Clips 2% 2% Makeover 2% 2% Reality 258,285 1% Dating Game show 94,491 Reality Magazine/stud 3% Scripted 178,584 io-based 23% 6% Variety 186,001

Variety Magazine/studio-based 130,577 5% Dating 195,590 Scripted Makeover 286,419 6% Entertainment 164,205 Chart 100,602 Home improvement 137,520 Clips 62,937 Game Show Total 150,743 48%

Source: Screen Digest Source: Screen Digest

_

22 Endemol October 2006

The average production value per broadcast hour depends on the format of the programme. More expensive formats are makeover and reality shows, and we believe Endemol is well positioned in these high-value formats. Scripted shows, another priority of Endemol, are in an upturn trend as well: +27% in 2004 versus 2003 in hours of format programming. The digital media market Internet advertising The digital/internet media represents a small portion of the overall advertising expenditure forecast to expenditure, only 3.6% in 2005 according to ZenithOptimedia, but is expected to grow grow at an impressive more quickly than TV advertising expenditure. Between 2005 and 2008F, internet 13% CAGR in 2004-07 advertising expenditure is projected to grow by 13.0% on average worldwide (versus only 6.1% for TV advertising expenditure). Two major developments should be significant drivers for the industry: (1) technological developments should help the customer to acquire entertainment content on different platforms; and (2) subscription fees and pay-per-content are the main indirect revenue sources.

23 Endemol October 2006

Appendix 3: Competitive environment Three types of competitors Competition from Taking a broad view, Endemol faces three different types of competition: broadcasters’ own Global players that operate more or less independently of a broadcaster in multiple production or countries are limited; FremantleMedia is more or less the only one. independents In-house production companies, owned by Endemol’s client broadcasters, produce for their own channels, but can also compete freely on the market. The Hollywood studios are a good example.

Local players that work independently of broadcasters are generally small and compete in only one country. Endemol is global market leader Endemol has c.22% As explained earlier, Endemol operates in the format production market, which is market share and is estimated at €2.4bn in 2004 for the 24 largest countries. An initial comparison of the nearly twice the size of players by producer – a good indicator because compared with distributors and the No.2 originators they take the largest share of the revenue pie – shows that Endemol has a (FremantleMedia) in c.22% global market share by revenues and hours produced. As such, it is nearly twice production the size of the No.2 (FremantleMedia) when looking at production spend and hours, even though in revenues the two do not differ much. Endemol is also several times larger than the rest of the competition. That said, competition is often local and genre specific.

Fig 23 Endemol competition (2004)

Production spend Hours by producer Share by producer Share (€m) (%) (%)

Endemol 511 22Endemol 3,460 22 FremantleMedia 328 14FremantleMedia 1,755 11 Endemol France 86 4 Meter Film & TV 730 5 Strix 61 3 Endemol France 547 3 Meter Film & Television 61 3 Strix 412 3 Granada 61 3Granada 330 2 BBC 53 2BBC 321 2 Kingworld Productions 50 2 Magnolia 298 2 Magnolia 47 2 Zodiak Television 154 1 France Televisions 41 2 Sony Pictures TV 46 0 Tout sur l'écran 40 2 Metronome 36 0 Others 1,021 43Others 7,568 48

Total 2,360 100Total 15,656 100

Source: Screen Digest

_ Fremantle: Endemol’s closest competitor Fremantle has similar FremantleMedia is Endemol’s nearest competitor in terms of size, strategy, global size and strategy as coverage and formats. It is now fully owned by RTL Group, following the merger of Endemol, but differs in Pearson Television and CLT-UFA in 2000, but operates independently from the margin due to broadcaster. Fremantle has a similar history of acquisitions and generally acts as a distribution activities local producer, but differs from Endemol in that it has a team of ‘flying producers’ that travel globally to assist the broadcaster clients in creating, producing and keeping popular the formats. Also, Fremantle differs in that next to production of programming, it has a sizeable format distribution business. Fremantle International Distribution sells

24 Endemol October 2006

some 17,500 hours of programming to 150 countries. We believe this in part explains the c.400bp margin differential between the two companies.

Fig 24 Endemol and FremantleMedia compared (2004)

Revenue EBITDA EBITDA margin Hours by producer* No. of countries active (€m) (€m) (%)

Endemol (ex France) 851 132 15.6 3,460 22 FremantleMedia 866 101 11.7 1,755 >30

* Screen Digest taken as source for comparison reasons Source: Company data, Screen Digest

_ Fremantle: a strong Looking more specifically at Endemol's main markets in terms of format production competitor in the US spend per producer and format hours produced, we conclude that Fremantle is a and Germany, but no formidable competitor for Endemol in Germany, where its UFA is the leading presence in Spain production company, and that in the US, Fremantle is several times larger than or Italy Endemol. On the other hand, Fremantle does not seem to be present in Italy and Spain, and is smaller than Endemol in the UK and the Netherlands.

Fig 25 Endemol versus Fremantle in main Endemol markets

Endemol production spend** Market share* Fremantle production spend** Market share* (€m) (%) (€m) (%)

UK 172 25 46 7 Netherlands 154 57 42 15 Germany 257 27 345 36 Spain 316 50 N/A N/A Italy 200 28 N/A N/A US 80 6 374 28

Market share defined per country, average over 2002-04. ** Spend by producer, sum of 2002-2004 because there are large yoy swings. Source: Screen Digest

_ Main Fremantle formats Similar to Endemol, Fremantle’s top formats are in the reality, game show and are reality and game makeover formats. This seems logical taking into consideration that these formats shows travel well, are less risky and are among the more valuable per hour on the market (see the Market analysis appendix). Reality is currently the most popular format for both, in the form of Idols for Fremantle and Big Brother for Endemol.

Fig 26 Endemol and FremantleMedia main formats compared

FremantleMedia Endemol Main format Type Main format Type

Idols Reality Big Brother Reality Family Feud Game Show Fear Factor Reality The Price is Right Game Show Deal or No Deal Game show The Apprentice Reality Extreme Makeover: Home Edition Home improvement/makeover The Restless Years N/A Operación Triunfo Reality Sons and Daughters Scripted All You Need Is Love Dating Ready Steady Cook Game show Changing Rooms Home improvement/makeover

Source: Screen Digest

_ In-house players In-house players are Another category of competitors is the production companies set up by the national formidable competition and commercial TV broadcasters themselves. The largest in-house players are in the for Endemol US. The US has a strong tradition of innovation in entertainment and every Hollywood major (Disney, Time Warner, Viacom) has its own TV production department.

25 Endemol October 2006

Nevertheless, we do not view the Hollywood majors as Endemol’s direct competitors, mainly because Endemol specialises in entertainment shows. They, by contrast, churn out ready-made distinctly American soaps, sitcoms and talk shows, which are sold unadapted throughout the world. We could say they are indirect competitors in the sense that they compete with Endemol for prime-time viewers.

The in-house producers in non-US markets are formidable competition because they are large and have the advantage of having local footing like Endemol.

Fig 27 Top 5 in-house and local competitors by market and production spend Σ2002-04

Producer Production spend* In-house or local independent Owner (€m)

UK Endemol 172 Granada 150 In-house ITV BBC 108 In-house BBC Fremantle 46 In-house RTL Group RDF Media 35 Independent Celador 27 Independent

Netherlands Endemol 154 Fremantle 42 In-house RTL Group Eyeworks 18 Independent IDTV 18 Independent Kanaka 8 N/A VARA 6 In-house Public broadcaster

US Fremantle 374 In-house RTL Group Kingworld 150 N/A Endemol 80 NBC 75 In-house NBC Universal Survivor 75 N/A Telepictures 52 In-house Time Warner

Spain Endemol 316 BocaBoca 64 N/A Videomedia 53 N/A Globomedia 52 Independent Vamos@vertele 30 N/A TVE 24 In-house TVE

Italy Endemol 201 Magnolia 190 Independent Mediaset 59 In-house Mediaset Triangle 46 NA Einstein 30 NA Fox World 29 In-house News Corp

Germany Fremantle 345 In-house RTL Group Endemol 257 Polyphon film 59 NA Tresor TV 53 Independent WDR 52 In-house Public broadcaster Constantin 29 NA

* Revenue from format production spend in local market, sum of 2002-04 because there are large YoY swings Source: Screen Digest

_ Local independents A multitude of local Endemol faces a multitude of local independent producers as competitors. As is clear independents from Figure 27, at around a maximum of €50m in revenues they are generally of smaller size compared to Endemol. The exception is in Italy where Magnolia is a large independent producer and of comparable size to Endemol Italy in terms of revenues.

26 Endemol October 2006

Barriers to entry Creative power, scale Barriers to entry in the television format production market are high. Very few players and local preferences have what it takes, namely: are formidable barriers Creative power to invent new genres and keep formats popular for season after season. Moreover, the capacity to protect ideas.

Scale to spread the creative and production costs over as many (country) versions as possible.

Local flavour – each country or community has its own language, tastes and culture. To capture the most eyeballs, formats are best adapted to local tastes.

Strong and established relationships with broadcasters.

Strong brand.

27 Endemol October 2006

Appendix 4: Strategy Philosophy Philosophy: creativity, Endemol’s philosophy is to foster a hit-driven business, with a worldwide presence to B2B operator, client serve customers locally. The prime focus is on creativity and Endemol positions itself neutral in the B2B part of the market, distributing its content via aggregators. Endemol aims to remain as platform and client neutral as possible and make minimal investment in hard assets.

Foster growth of core, Endemol’s strategy is to foster growth of the core business and diversify its revenue plus selective growth in streams through expansion in targeted fields (in order of priority): North America, North America, scripted, scripted, digital media and new territories. This may well involve acquisitions or start- digital, new territories ups. Grow core business Five-pronged strategy to Endemol has a five-pronged strategy to grow its core business: grow the core • Optimal exploitation of creativity to deliver the best formats via the best talent. Structures in place include: (1) a database of formats is accessible to all affiliates; (2) creative exchange meetings; (3) incentives to share IP; and (4) creative support units.

• Proactive management of format lifecycle and IP trading around the group. Endemol is alert to the potential of its format library (>900 formats, including 150 scripted titles) and strongly encourages IP transfer across the group. The best illustration of this is the Global Creative Team, which meets six times a year to develop and share creative ideas, and also to, for example, dust off old formats, modernise and re-launch them on the market. The result is that Big Brother has been produced in 36 territories and broadcast in 119, while Fear Factor has been produced in 23 and broadcast in 118.

• Sustain broadcaster relationships. Endemol subsidiaries are led by local entrepreneurs, who have close relationships with the key buyers of the leading (commercial) broadcasters in each country. Programme sourcing decisions are generally made on a local level.

• Cross-company revenue enhancement and cost reduction. Revenue- enhancing initiatives include merchandising/consumer products, music publishing and ready-made sales. Cost-reduction initiatives include back-office integration of subsidiaries in the same country and sharing best practices in production between territories.

28 Endemol October 2006

Fig 28 Endemol’s five-pronged strategy to grow the core business

Continuous creativity

Cross- company Proactive revenue enhancement Endemol's strategy format management and cost reduction

Sustain broadcaster Stimulate IP transfer relationships across group

Source: Company data

_ North America: selective growth Selective growth in Endemol aims to grow its revenues in North America in several targeted fields, not just North America: in direct competition with the strong Hollywood studios. syndication, scripted The top priority lies in the networks/syndication and cable distribution channels. and Hispanic Endemol aims to proactively develop syndication-friendly formats and bring other successful formats into second-run syndication.

In scripted, Endemol aims to avoid high-risk production models by first selling script projects to networks directly, in order for the networks and the related studio to cover potential deficits. In additional, by binding key talent in order to gain the required experience.

For the Hispanic market, which in the US is comparable in size to the Spanish market in Europe, Endemol plans to set up a separate division, with a Hispanic executive to leverage existing Spanish and Latam Endemol formats into this market. Similarly, Endemol aims to expand in the Canadian market. Leverage scripted Scripted travels well; Scripted (drama, soap, comedy), although representing only 7% of market production Endemol aims to spend, is an important field of growth for Endemol because it is an entertainment genre leverage its current that dovetails on its other primetime hits, travels well thanks to the global appetite for business to the US, UK, English language-scripted programmes, has potential for direct funding by advertisers Spain and Germany (in the form of sponsorship, product placement, etc). Combined with the fact that it already represents 14% of FY05 Endemol turnover, but from only three of its six largest countries, brings opportunities to leverage the business.

Generally speaking, in producing scripted, the risks are higher because pre-financing sums are larger. In order to reduce this risk, Endemol’s approach is to avoid deficit financing by partnering (and sharing risks) with broadcasters/studios and sharing the back-end. Also, Endemol will prioritise its scripted production in countries where it already has a large presence and strong relationship with broadcasters. Specifically, Endemol aims to build positions in the US and UK, grow in Spain and Germany, and keep its scripted market share in Netherlands and Italy.

29 Endemol October 2006

Digital media Tap new revenue Endemol aims to tap new revenue streams from digital media, not only building on its streams from existing existing television brands, but also on non-TV brands. Format development is as well as non-TV increasingly done with a multiplatform scope in mind. To be more specific, Endemol brands targets the following, more or less from high to low priority:

• Participation TV: call TV, auction TV, teleshopping.

• In-programme-branded content: SMS, voting.

• Re-use of TV content: clips and video streaming online.

• Off-programme-branded content: ring tones, wallpapers, branded games for IP/mobile and branded web pages.

• Tailor-made content: new TV programmes for IP/mobile, narrowcasting, non- branded IP/mobile games and non-branded web pages. Enter new territories Bolster positions in Endemol aims to selectively enter new territories. Its entry strategy has two tiers, Southeast Asia, India, depending on whether it already has recurrent direct sales in a territory or opportunistic Central Europe and sales. When opening up facilities, Endemol aims to manage risks through long-term China volume contracts that ensure work from the start.

Fig 29 Endemol territories entry strategy

Current status Recurrent direct sales Opportunistic sales

Entry strategy Short-term Medium-term Build direct presence through start-ups Low risk with limited investments Management with local knowledge Via direct sales, JV or acquisition Examples Southeast Asia, India Central Europe, China

Source: Company data

_ Bolt-on acquisitions as well as start-ups Acquisition criteria: eg, Endemol aims to execute its strategy in part through acquisitions as well as start-ups. creative skills and Its criteria are familiar – strategic fit, developed creative skills, matching growth and management profitability expectations, and management commitment for the medium/long term. In commitment terms of financial criteria, they are: accretive in medium/long term and financially solid for television acquisitions. Specifically for digital media: about or above breakeven, recurrent paying customers and active in the B2B segment. As explained in the Financials section, the group has a €250m credit facility, which we believe could be used for external growth.

30 Endemol October 2006

Disclosures Appendix ANALYST CERTIFICATION The analyst(s) who prepared this report hereby certifies that the views expressed in this report accurately reflect his/her personal views about the subject securities or issuers and no part of his/her compensation was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this report.

IMPORTANT DISCLOSURES For disclosures on companies other than the subject companies of this report visit our disclosures page at http://research.ing.com or write to The Compliance Department, ING Financial Markets LLC, 1325 Avenue of the Americas, New York, USA, 10019. US regulatory disclosures • The following subject company/ies of this report are or have been a client of ING Financial Markets LLC or an affiliate within the last 12 months and have received investment banking services: Endemol NV • One or more members of ING Group has received compensation for investment banking services from the following subject company/ies of this report within the last 12 months: Endemol NV Valuation & risks: For details of the methodologies used to determine our price targets and risks related to the achieve- ment of these targets refer to main body of report and/or the most recent company report at http://research.ing.com.

European regulatory disclosures • The following subject company/ies of this report are or have been party to an investment banking agreement with one or more members of ING Group over the last 12 months: Endemol NV The remuneration of research analysts is not tied to specific investment banking transactions performed by ING Group although it is based in part on overall revenues, to which investment banking contribute. Financial interests: One of more members of ING Group may hold financial interests in the companies covered in this report other than those disclosed above. Securities prices: Prices are taken as of the previous day’s close on the home market unless otherwise stated. Job titles. The functional job title of the person/s responsible for the recommendations contained in this report is equity research analyst unless otherwise stated. Corporate titles may differ from functional job titles. Conflicts of interest policy. ING manages conflicts of interest arising as a result of the preparation and publication of research through its use of internal databases, notifications by the relevant employees and Chinese walls as monitored by ING Compliance. For further details see our research policies page at http://research.ing.com.

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RATING DISTRIBUTION (as of end 2Q06) RATING DEFINITIONS

Equity coverage Investment Banking clients* Buy: Forecast 12-mth absolute total return greater than +15%

Buy 44% 19% Hold: Forecast 12-mth absolute total return of +15% to -5% Sell: Forecast 12-mth absolute total return less than -5% Hold 46% 17% Total return: forecast share price appreciation to target price plus forecast annual Sell 10% 11% dividend. Price volatility and our preference for not changing recommendations too 100% frequently means forecast returns may fall outside of the above ranges at times. Research published prior to 15/12/05: EMEA equities’ ratings were based on US * Percentage of companies in each rating category that are Investment Banking dollar total returns; Western Europe’s were based on: absolute return +25%, Strong clients of ING Financial Markets LLC or an affiliate. Buy; greater than +10%, Buy; +10% to -10%, HOLD; lower than -10%, Sell.

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31 Endemol October 2006

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