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CFA Challenge Michael Caro

Regional Economic Development Council: New York City

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CFA Institute Research Challenge Hosted by Local Challenge CFA France Team C

Recommendation : SELL


Last Price : €25


This report is published for educational purposes only by students competing in the CFA Institute Research Challenge

DCF €23

SOTP €18

Lagardère: Muddled Past,

Gloomy Future We initiate coverage of Lagardère SCA (MMB) with a SELL recommendation with a target price of €21 suggesting 17% downside potential

Our SELL recommendation is based on three key points: (1) an unattractive risk/reward profile,



Market Profile 52-week Price Range (€)

Average 3M Daily Volume


Shares Outstanding (M)

Market Capitalization (€M)

Insider Ownership

Free Float

Sources: Factset,

Damodaran & team estimates Key Metrics 2014 2015E 2016E

Our 3 keys points are supported by an historically non fundamentaly high valuation multiple (8

a 18% premium to the historical average) mainly due to a lower conglomerate discount which we believe is unjustified for the moment

We derived our target price of €21 from a combination of a DCF model and sum-of-the-parts valuations model(including a 25% conglomerate discount) with an equal weighting of both methods

Our Sell recommendation relies on… A lack of a business mix advantage with an unaggressive strategy in a highly consolidating media industry in addition to: •

Strong pressure on cash generation: We believe the risk/reward profile of the group is unattractive due to (1) highly cyclical sales,


we forecast free cash flow 2015-19e CAGR of just 1% due to pressure on margin and from working capital

Follower attitude with a short-sighted view corporate strategy: (1) management lacks expertise in acquisition valuation,

which has led to huge impairment losses in the past,

contrary to peers practice and (3) complete ‘‘home-made’’ corporate management that limits influx of external expertise


we see low shareholders representation and governance risks with a group structure of double voting rights for share registered in the name of same shareholders for more than 4 years

Sales (€M)


EPS (€)



Main risk: We believe any major acquisition announcement could have a temporary positive impact on the share price as well as news flow on assets divestment (Magazine and Distribution)

However we believe this risk is limited due to weak organic growth in these activities and their currently low valuation



Stoxx 600 Media

Team Sentiment Summary News Flow

High (+)


High (-)

Competitive Advantage

Low (-)

Growth Potential


Low (-)

High (+)


High (-)


Low (-)

Source: Factset 1

CFA Institute Research Challenge Business Description

Figure 1: Activities snapshot with % of sales 28% PUBLISHING


Still in transformation from an Aerospace and Publishing company to a more diversified group,

Lagardère SCA was established in 1992 from the merger between Matra Hachette and Lagardère group

Lagardère is listed on Euronext Paris since June,


Focus on the Media industry

Lagardère Publishing (28% of group sales),

with its unavoidable Hachette division,

is clearly a core-business division for Lagardère (largest EBITDA contribution with 41%)

A segment in which Lagardère is a worldwide leader among mature and cyclical business

Lagardère Active (13% of group sales) includes the press business,

the audiovisual (radio/TV) and digital activities as well as the advertising sales and is built on iconic brands such as Elle,

Paris Match,

Europe 1 and Gulli among declining activities with digital transformation


Source: Company data Figure 2: 2014 Revenues & EBITDA by division (%) Revenues contribution

50% 40%

Publishing 30% 20%

Sports and Entertainment

January 11th 2016

With strong interests in Travel Retail and Sports

The Travel Retail (TR) segment (53% of group sales) is the largest division by sales and is a truly global player as it employs over 12,800 people and maintains a network of 4,161 stores in 30 countries,

Duty Free & Luxury (41%) and Food Services (13%)

Since its strategic focus is TR,

Lagardère initiated a process in 2013 to find investors to buy its distribution business which is currently part of the TR division

Lagardère Sports and Entertainment (5% of group sales),

the smallest division of the Group,

is a globally integrated full service sports marketing agency as well as events and venue manager

A significant change of the business mix is on track to further focus on emerging markets

EBITDA contribution

Source: Company data

researching and developing planes,

transport systems and satellites

Figure 3: Lagardère in 6 dates

Lagardère’s history in 6 dates

A diversified geographical exposure

Restructuring in Western Europe and Invest more in emerging markets

To offset a weak economy in Europe,

the Lagardère’s operating activities have been reshaped

On the other hand the group continues to foster its presence in Asia and Eastern Europe with sales outlets openings in the TR segment to capture highly increasing spent per passenger (PAX) and air traffic

Source: Company data Figure 5: Evolution of print revenues as % of total sales 67%

61% 49%

Source: Company data

An external growth strategy

For many years,

Lagardère has acquired several companies such as SportFive (2006),

Doctissimo (2008),

Les Editions Albert-René (2008) and more recently Paradies (2015) to adapt to a new environment


as part of its business operations,

Lagardère manages certain Travel Retail contracts in the form of 50-50 joint ventures with its partners like SNCF or Aéroport de Paris

Non-strategic businesses to divest

Departing with the “old media” businesses like the declining press distribution business and advertising mainly established in Western Europe to focus on core activities like TR

Figure 4: Geographical footprint

A reduced dependency on Print businesses Facing weak growth in the publishing and printed press market,

Lagardère has reduced its work force in paper-related businesses and will continue its cost-cutting plan in the publishing segment,

yet operating in a quite different market environment

(Figure 5) Sustained investment in digital technologies Lagardère Publishing,

generating roughly half of total EBIT has seen its model being called into question by structural changes that took place throughout the value chain of the cultural industry

Initially exposed at 2/3 of sales under the Publishing paper market,

the group suffered from the rapid digital shift in the industry

After huge and costly efforts,

the company reversed the paper market exposure to 1/3 of total sales and continues to develop and adapt digitally its broadcasting and magazines businesses to be well-positioned if market opportunities appear

CFA Institute Research Challenge Figure 6: Share ownership structure Float

Qatar Invest


Arnaud Lagardère

January 11th 2016

Corporate management Lagardère is a partnership limited by shares

Lagardère’s general management is in charge of the Managing Partners

One Managing Partner and three Co-Managing Partners: Arnaud Lagardère,

Pierre Leroy,

Dominique D’Hinnin,

Thierry Funck-Brentano,

engage their responsibility of drawing up the strategy,

ensuring the implementation of decisions and controlling the Group

The entire general management has more than 25 years of experience with Lagardère

As a conglomerate,

Lagardère’s operating activites are conducted by legally independent companies grouped together in the 4 business divisions,

under the Managing Partners’ control,

each divisions has its own organization,

each of the 4 divisional CEOs have more than 10 years of experience at Lagardère or in the related industries

(Appendix 17) Shareholder structure Via Lagardère Capital & Management (LC&M),

Arnaud Lagardère controls 8

The Qatar Investment Authority holds 12

(Appendix 18) The shareholders are highly dispersed,

but mainly held by institutional investors (Figure 6)

Insiders Source: Company data

Industry Overview and Competitive Positioning Over the last few years,

the media industry has been disrupted by the Internet and is struggling to find a new path

To succeed in this new environment,

companies need to drive both innovation and efficiency to embrace the changing face of the media industry

Figure 7: Global media industry category segmentation: % share

Traditional model still dominates but a shift to an online model is the main challenge to tackle The media and entertainment sector is in disruptive moment where existing business models continue to thrive at the same time that new models are emerging

The landscape for media consumer is substantially different to what it was few years ago

(Figure 9) The rapidly growing amount of content available via the Internet and the proliferation of devices such as tablets and smartphones accelerates the translation

The growth reflects the public’s rising demand for content anywhere,

Movies & Entertainment 9% Advertising 11% Broadcasting & Cable TV 48% Publishing 32%

Consumers are no longer satisfied to enjoy print,

or other forms of entertainment passively

With spending turning away from the traditional paid media domains of TV and print towards electronic devices,

advertisers dedicate more resources to digital,

event marketing and place-based media

Source: Médiamétrie

This changing dynamic poses challenges but also offers opportunities for entertainment content companies: the Internet channel offers the possibility for these companies to connect with and Figure 8: Media sources of revenue: % share market directly to consumers

As the smartphone becomes the central device,

consumers are forced to make more complex choices between traditional and new media formats,

all of which are available through the handset

Telecommunication services

Different sources of revenue for media companies Major revenue sources in Media are telecommunications services (c45%),

traditional publishing including books,

and software (c20%) and radio and TV content distribution including broadcasting,

and other pay TV subscription services (10%)

Additional products and services include movie production and distribution

Internet publishing and Web portals

Additional products and services Traditional publishing

Radio & TV content 0%

Source: Médiamétrie Figure 9: Media consumption: hours spent per day,

The sixth continent Travel Retail has undergone a major shift over the past few years that has turned airports and train stations into shopping destinations

The opportunity to buy goods when travelling is not a new thing but the concept has changed over time: the range of products on offer and the different types of shopping opportunities available at airports have become much more diverse

With sales reaching €88 bn in 2014,

the worldwide industry of travel commerce is a market that is dynamic and strategic as it is an important source of revenue for many brands and the primary source of income for many airports (4% growth CAGR 2015-19e)

Key Industry Trends

A new media experience A transformation of advertising budget is underway as we spent more time on mobiles,

(Figure 9) This shift requires media companies to increase their focus on innovation

It also creates opportunities to connect with customers through all devices in real time and create campaigns across social media

The division Lagardère Active is grappling with these issue as c40% of revenues of this division stem from advertising

Source: Médiamétrie 3

CFA Institute Research Challenge

Figure 10: User penetration in the ebooks segment

A wave of consolidation Consolidation is hitting all segments of media,

which promise to have a broad impact on the future of the industry and competition

There is clearly an appetite for consolidation of audience share and hence than advertising market in each media segment (TV,

Political and cultural concerns for ebooks The ebook faces an environment in France that is characterized by various factors from politics and culture

France remains the main market (31% of sales) for Lagardère Publishing

With a rate of 8

the user penetration in the ebooks segment is low in France,

compared to top countries such as the United States (36

In France,

the ebook price-fixing law and the reduced from the book VAT rate decided in 2012 have negative effects on this sector

Global distribution platforms like Amazon or Apple have brought the globalization of publishing to a new dimension preventing Lagardère from gaining market share outside of France

A system of tender offer for retail operations There are different ways to grow in the TR: acquire new businesses or through concessions which can be won in a tender process launched by airport authorities

Concession agreement is for the design,

operation and maintenance of passenger terminal

A contract will be awarded to the highest and most qualified bidder who meets the bid requirements

Airports select the best partner as in-terminal concessions provide an important passenger service

A well-implemented concession program can also provide financial benefits to the airport’s operating budget

TR not as strong as in the past Decline in Eastern European travel volumes is responsible for a downturn in the European travel retail business

The collapse of the Russian Ruble and the Chinese Government’s crackdown on corruption and extravagant spending have led to a marked reduction in spending of the most important nationalities of travelling shopper


the weakening currencies of other developing market economies such as Brazil,

as well as lacklustre growth in Europe and the Americas,

have also put the sector under strain

Top Countries United States

United Kingdom


January 11th 2016

Source: Syndicat National de l’Edition

Competitive landscape Demand is driven by discretionary consumer spending and leisure time

The profitability depends on effective marketing and creative capital

Large companies have advantage because they can reach mass audiences through multiple channels

Small companies can compete effectively by targeting narrow audience segments with niche products

The TR industry is competitive but fragmented

More than 40% of the market share is held by 6 main companies,

but each of them develop their activities through different sectors

Actors in Sports & Entertainment tend to offer sport and entertainment altogether (sport competition with concerts) to address wider public,

offer longer events at an increasing price

This trend answers the desire of fans to be part of the live experience and of a global entertainment

Main competitors by business units

Book publishing Travel Retail Radio TV Magazine Audiovisual production Digital Sport rights

Source: Team research

CFA Institute Research Challenge Porter’s 5 forces

Figure 11: Porter’s 5 forces Threat of Substitutes (3

Threat of New Entrants (1

Rivalry (4)

Bargaining Power of Customers (4)

January 11th 2016

Bargaining Power of Suppliers (2

Source: Team estimates

Rivalry: Players are large,

These large companies tend to exacerbate rivalry,

as they are formidable rivals and able to exploit economies of scale

companies compete fiercely as the ability to win and renew concessions contract is important

Bargaining power of customers: The very diverse range of services and products on offer to buyers results in a decrease in buyer power

Lagardère has some airport retailing monopolies which reduces customer power

Bargaining power of suppliers: For media,

one factor is that suppliers may be indispensable to players due to a lack of alternative inputs

Threat of substitutes: The largest threat is online piracy


substitutes are many due to the broad scope of the industry

Threat of new entrants: Quite low because of the high fixed costs associated with media

A further barrier to entry would be the degree of regulation

In sport,

the threat is quite high because of the high ability of small agencies to enter the market and graze market share of large groups

Lagardère’s competitive advantage relies on: Strong market presence in the TR Lagardère TR is a global leader in TR with operations in 30 countries on four continents

It has the largest international network of convenience stores and stores dedicated to cultural leisure products

Lagardère TR operates a total of 4,161 stores,

Middle East and Africa,

With the Relay and Hubiz stores and local store names such as Newslink,

Lagardère currently runs the world’s largest international network of stores located in travel areas


Lagardère TR operates 337 food service outlets in nine countries

This market presence helps Lagardère drive business growth which in turn assists in delivering financial performance

Despite this network,

we are still worry that the company strategy largely executed through acquisition may not generate attractive returns

Figure 12: Monte Carlo Analysis 200 180 160 140 120 100 80

Well-established publishing business The group has well-established publishing business

According to industry estimates,

Lagardère Publishing is the world’s third-largest book publisher for the general public and educational markets


Spanish and French languages and holds leading positions in several of its markets

In addition,

the company’s strong publishing business provides access to a large customer base and established distribution channels which can be leveraged to further enhance the growth prospects

But the decline of the market as well as selfpublishing,

development of Internet retailers are examples that illustrates the risks weighing on the future of this division

60 40 20 0

Source: Team estimates

Investment Summary We initiate coverage of Lagardère SCA (MMB) with a SELL recommendation and a target price of €21 suggesting 17% downside potential

Dividend Yield (%)

Figure 13: Dividend and FCF yield in the industry 7

Our SELL recommendation is based on three key points: (1) an unattractive risk/reward profile,(2) a diversified but mostly low organic growth activities operating in a highly competitive environment and (3) a weak corporate strategy with serious issues on business sustainability

Our SELL recommendation relies on…

A lack of advantages relative to peers Despite asset cleaning,

we think the group lack of advantages relative to leaders on each industries where Lagardère operates

With c80% sale exposure on Europe,

the group is too much dependent on low organic growth activities,

with industries experiencing challenging shift in consumer habits (Digital,

Advertising on Magazine,

Publishing) and among high consolidation movement which prouve the real difficulties actors meet to create long term value for shareholders

FCF Yield (%) 11Peers Source: Factset


Not attractive risk/reward profile We believe at current valuation the risk/reward profile of the group is not attractive because business exposure is highly cyclical on sales and low Capex raise question about future growth dynamics

We believe at current valuation multiple the fundamental risk profile of the group requires higher return which are clearly out of access by our view with such valuation level

(Figure 13) Complete home-made corporate governance raise issue The home made management lacks expertise on setting adequate price for acquisitions,

and implies huge impairment losses that reduce net income

We do not see signs ahead that could attest the management decision wisdom


Lagardère evolves in very competitive environment where acquisition activity is huge (strong consolidation),

the weak corporate governance profile is clearly for us a weakness to compete

CFA Institute Research Challenge

January 11th 2016

Figure 14: Lagardère SOTP (EV/EBITDA and P/E multiple)

Publishing Media Travel Retail Target Price

Weight 51% 18% 31%

EV/EBITDA Implied EV (M€) Price per Share 7

79 €23

Implied EPS (€) Price per Share 0

89 €11

31 €4

54 €8

9 €24

SOTP (EV/EBITDA Multiple ) segment bridge

SOTP (P/E Multiple ) segment bridge

Valuation Figure 15: DCF assumptions Risk-free Rate

Beta (unlevered)

Market Risk Premium

Cost of Equity

Tax rate

Cost of debt

Cost of debt after-tax

Weight of Equity

Weight of Debt

Terminal Growth Rate

Sources: Factset,

Damodaran & Team estimates

Figure 16: Share of enterprise value 19%

DCF Valuation

A stable perpetual Growth Rate Lagardère’s nominal perpetual growth rate is based on: (1) The global economic growth: stabilization of World GDP growth rate at 3% from 2017 (Source: World Bank) and low inflation forecast,

emerging countries and (3) lower growth in EU and North America

We obtained a long-term growth rate of 2%

Sales and EBITDA forecasts We forecast sales separately for each division based on global growth and company strategy

For the TR division we estimate a sales growth of 4

We estimate the publishing division to experience a sales and EBITDA 1

The EBITDA should grow by 0

CAGR in the same period

The active division should see its sales decrease by 1


we estimate the sport division to see its sales and EBITDA grow by 1

Defining the WACC To calculate the cost of capital,

Fama & French model did not show significance for the size and the book-to-market ratios

We calculated Lagardère’s beta as the average of beta in Retail,

Media and Publishing & Newspaper

We used France 10-Year OAT as the risk-free rate

Note: For further information,

PV of Terminal Value PV of OFCF

Lagardère currently trades at 8

We believe such a premium is unjustified

We valued Lagardère using an equal blend between a sum-of-the-parts (SOTP) valuation and a DCF model,

and derived a target price of €21,

which is 17% below the current share price

DCF Target Price The DCF model captures (1) slowly improving Lagardère’s FCF (2015-2019e CAGR of 1%),

Our model points to a target value of €23

We ran several sensitivity analysis to analyze the impact of the inputs on the target price

(Appendix 25) We did not used a Dividend Discount Model,

because our fundamental analysis demonstrates the non sustainability of such dividend yield relative to peers

Sum-of-the-parts Valuation We applied a discount of 25% to our blend of relative,

which is based on historical discount to peers

The blend of relative is made of peers multiples (EV/EBITDA,

P/FCF and P/Earnings) and multiple factor regression,

which gives us a derived target price of €18

(Appendix 26,

Appendix 28) 6

CFA Institute Research Challenge

January 11th 2016

Sum-of-the-parts using peers multiples

Figure 17: EPS consensus vs team estimates

Choice of Peers Direct comparable conglomerates are not available

Therefore we selected 3 peer groups based on Lagardère’s divisions: (Appendix 21) EPS Growth 2015E 2016E 2017E 15-17 • Book Publishing,

the Lagardère’ historical activity facing low growth and consolidation (Pearson,

News Corporation,


Scholastic and Bertelsmann)

Consensus 1

with mostly French companies focusing on TV broadcasting,

radio or event management Team 1

RTL Group,

GL Events,

Highlight Communication,

NRJ Group)

Estimates • Travel Retail,

in which companies deal with food & beverage,

WH Smith,

EPS VS Consensus


Why We Choose These Three Multiples We treat EV/EBITDA,

P/FCF and P/E equally in our valuation as they represent the company value at different stage of the financial statements

Source: Team estimates Figure 18: Valuation Target Weight price (€)

Valuation method DCF Valuation SOTP Multiple factor regression Average target price

Source: Team estimates

EV/EBITDA Our Sum-Of-The-Parts analysis shows that TR is the only Lagardère activity trading at a discount compare to peers when taking EBITDA as drivers while the two others trade at a premium

We derived a target price before discount of €23

(Appendix 29) P/Earnings The P/E method brings almost the same conclusion except for Media which trades at a discount to peers

We forecast EPS to be multiplied by 4 between 2014 and 2015 mainly thanks to (1) the new bond issue which lowered the group leverage and (2) a decrease in restructuring costs

We derived a target price before discount of €24

(Appendix 30) P/FCF We derived a target price before discount of €19 from the P/FCF valuation

Multiple Factor Regression A broad sample of 240 firms (153 in Retail,

EPS long-term growth rate (g),

market capitalization (logarithm),

default spread for cost of debt

We obtained a target price before discount of €28

Financial Analysis Figure 19: Sales and EBITDA margin 8,000

2% 2013

Sales (LHS)

EBITDA Margin (Rhs)

Sources: Company data & Team estimates

Figure 20: EBITDA margin by units 15

Despite the strategic plan announced in 2008 with the aim to boost organic growth,

the group succeeded to deliver

with a divestment and FX impact of

We may see a brighter trend in 2015e with the increasing exposure to TR for example,

as the group recently announced its intention to divest all of its historically lagging Distribution activity (c20% of group sales)

We see 2015e and 2016e as exceptional,

thanks to good momentum in Sport Events and Publishing,

further supported by higher exposure to TR


low margin activities with such high volatility,

issues with the sustainability of dividends,

lower Capex and higher debt give the group an unattractive risk/reward profile

Publishing (28% of group sales): a mature and cyclical story Representing c28% of media sales and c41% of media EBITDA,

the publishing business is a cash machine as c90% of the group’s annual DPS is covered by its FCF

(Appendix 13a) We see positive momentum in 2016e as an education reform is expected in France,

boosting sales in this highly mature industry by 250bps (3% growth in 2016e,

The impact is a one shot item and will be short in time in our view (over 12 months) is a one shot item

Besides this one-off item,

we expect flat underlying growth in this highly mature industry as reflected by historical average annual growth in 2008-14 of 0%)

Please refer to the Appendix 12

Margin squeezed like a lemon Despite a good business mix contribution (Publishing is ranked #2 after Sport by EBITDA profitability) (Figure 19) we expect margin pressure on both supply and demand side for three reasons: (1) a dispute with Amazon reflects the important challenge the industry faces with bargaining power of retailers,

price-fixing law in France) and (3) increasing author royalties that now account for more than 12

Sources: Company data & Team estimates

We do not see any improvement in EBITDA margin due to this challenging situation and a serious lack of exposure to e-books which could enhance margins (Publishing generates on average 40% of its sales in France and only 30% of them are in general literature,

the only segment really concerned by digital revolution so far)

Our research indicates potential EBITDA margin in digital of c25%

On average,

peers generate c20% of sales in digital vs

CFA Institute Research Challenge

TR (53% of group sales): Game over for the double digit growth game

? Despite long term exposure to the TR business,

organic growth at Lagardère did not skyrocket,

(Figure 21) We believe this low growth trend is due to the diversification of activities between the 3 sub segments as pure players such as DFS company (LVMH) pulled out of the game

The group has embarked on a new strategic trajectory,

as Distribution is being divested in exchange of a more dynamic growth industry (TR)

With the Paradies acquisition in 2015,

we expect the group (1) to add €0

The inclusion of Paradies with the announced 12% EBITDA margin would add c1

Figure 21: Travel Retail growth,

Majors 25% 20% 15% 10% 5% 0%

Source: Companies data Figure 22: ROCE analysis 9%

ROCE (lhs) Indexed NOPAT (rhs) Indexed Capital Employed (rhs)

Sources: Company data & Team estimates Figure 23: Net earning margin/volatility

AVG Net earning margin

12% 10%

RTL Pearson


Dufry Autogril l

Sources: Company data & Team estimates


Sport & Entertainment (5% of group sales): Too many promises,

pure players lack growth and profitability During the investor day held in May 2014,

management described the activity as strong and with growth potential ahead,

supported by a PWC analysis which was referred to

Despite the bullish expectations of industry specialists,

we do not share the same view as historical organic growth has been lagging in this segment (c5% average in 2008-14),

and there are no events that would change the trend

We expect however EBIT margin improvement,

thanks to a efficient cost cutting efforts (-0

6% 2016e)

The depreciation strategy of the group appears to be quite aggressive,

as depreciation/sales ratio decreased strongly while sales has been relatively less volatile

Our research on IMG (sport pure player and direct competitor) revealed a low growth industry with pressure on profitability

We do not think this segment to grow more than 5% as announced by the industry experts

Our forecast stands at 1

The fall of ROCE at group level,

volatility of ROE Due to the exceptional dividends and non-recurring items,

the tax rate of the firm is quite volatile

Return on capital employed over the 2008-14 period experienced a sharp drop (from 8

7% to 7

NOPAT margin was divided by two due to the unprofitable Sport activity and the severe margin pressure in TR (Figure 22)


the ROCE-WACC spread is slightly negative which proves the mature stage of the Lagardère businesses

JV’S and non-recurring items have a significant impact on the period 2008-14 (positive impact of c60bps and negative impact c110 bps respectively)

We forecast further ROE dilution,

as the strategy is clearly to decrease exposure to minorities but where the management track record remain very lo

Due to lack of information,

we cannot correctly value minorities

(Appendix 38) High volatility and low earning margin… The Risk/Reward profile of the company does not seem attractive

On average between 2008-14,

Lagardère’s net earning margin stood at 3

the group has the lower net earning unit per point of risk among our selection of peers

(Figure 23) This high volatility is due to non-recurring items (Restructuring costs,

amortization of intangible related acquisition,

impairments) since 2003 and appear in our view,

quite recurring as the group is constantly in reorganization

Huge impairments and losses We analyzed the cumulative bottom line of the P&L and reach the conclusion that the cumulative exceptional dividend per share of (c€22) covered all the impairment and losses which the group has made (cumulative c€21 per share),

as a result of expensive acquisitions and weak market conditions

We see the management M&A activities as dangerous and most of time value dilutive,

which can transform the core coverage payout ratio far above 1,

which we believe is not a key ingredient to build leadership position in highly competitive industries

Dividend payout is not backed by fundamentals… Historically since 2008,

while the FCF covered only €0

Because the asset cleaning arrived at end,

we can be sure of non-exceptional dividends ahead


we adjusted the reported earnings to core earnings to come to the conclusion that the group distributes dividend which has been covered by the underlying core earnings,

but not from its cash flow as the conversion ratio falls below 1


due to the high amount of non-recurring items and of the other investment line in the cash flow statement,

we think the dividend is at risk if the historical shareholders value destruction continues

Figure 24: Capex/sales ratio


January 12th 2015

…Below industry average CAPEX could have impact on future sales growth : We used our SOTP peer list to compare Lagardère Capex with major actor by segment

We conclude that Lagardère has,

on average between 2008 and 2014,

below industry ratio Capex/Sales (Figure 24)

We believe the investment effort is a key in a high competitive industry in order to generate sufficient growth and shift to a leader position


Sources: Factset & Companies data 8

CFA Institute Research Challenge Figure 25: Net Debt/EBITDA

January 11th 2016

Above Industry Net Debt/EBITDA: Lagardère has on average between 2008-14,

We expect the ratio for Lagardère to reach 2

as the group increases its debt with the Paradies acquisition (EV of €475m)

Based on our forecast,

and with the 6% cash/sales requirement (our historical analysis highlights a cash/sales ratio of between 6-7%),

we do not expect the group to reduce its net debt/EBITDA below 2x


evolving in highly competitive industries with recent consolidation trends,

we think the group should make significant acquisitions to maintain market share

With a high payout ratio,

higher Capex requirement from TR (management indicated a figure above €100m pa) and no longer significant assets divestures,

we are confident with the further debt issuance assumptions

Figure 26: Cumulative cash analysis 2008-14


Industry Avg

Source: Company data

Source: Company data

Figure 27: Consolidated sales breakdown

Market Risk | Regional paper prices Lagardère Publishing (28% of group sales) and Lagardère Active (13% of group sales) are affected by paper price mainly in European,

North American and Asian Market

Although there is not a direct link to a single index,

according to company’s statistic,

these divisions’ operating profit are subject to have a negative impact up to €15m in case of a long-term 10% long-term rise in paper prices

Other 23%

GBP 6% CHF 5%

Investment Risks

Market Risk | Credit risks This risk mainly relates to trade receivables

In 2014,

the Group was unable to recover certain receivables in the areas of sports rights marketing and the organization of sporting events

Receivables amount to €1280m and represent a DSO of 61 days and weigh 17

EUR 58% USD 8%

Market Risk | Exchange rate risks Lagardère’s exposure to foreign exchange rate risks on transactions effects,

especially with the strategy to increase its market share in emerging markets

(Figure 27) The sensitivity is,

not very significant: a 1% rise of the EUR/USD would decrease the operating profit in €0

4m in 2014

The current trend in the forex market is favorable to Lagardère (euro depreciation) (Figure 28)

Source: Company data Figure 28: Currency fluctuation 1

Economic Risk | GDP Growth The sales per passengers in airports and train stations depends on economic climate which has an impact on the purchasing power of travelers

As 53% of Group sales are from the Travel Retail division,

a decline in GDP growth rate may lead to a decrease in Travel Retail


Source: Factset



Economic Risk | Effects of digital and mobile technologies A large portion of the Group’s revenues derives from businesses that are sensitive to digital and mobile technologies(digital transition)

Innovation in digital and mobile technologies may affect customers’ shopping habits,

which can have a huge impact on the amount of customers in the Group’s store locations and sales of traditional analogue products such as magazines and printed books

Transformation from TV to Internet may directly or indirectly create more uncertainty in revenues directly or indirectly associated with advertising and broadcasting

Ambiguity in various markets has a negative impact on the profitability for Lagardère

Strategic Risk | Acquisition risk Lagardère faces a poor track record regarding acquisitions and integration

The Group acquired many companies with high valuation multiples,

poor performances and high impairment loss

CFA Institute Research Challenge

January 11th 2016

Operational Risk | Terrorism As recent events have shown,

events and tourism that are open to public are increasing targeted by terrorists

The growth of the Group which is exposed to these events have increased this exposure to the impact of terrorist attacks

Figure 29: GDP Growth 8

Operational Risk | Geopolitical events Lagardère has activities in countries sensitive to the risk of credit or liquidity crisis,

the Group generated 4% of sales in countries rated Ba1 or lower by Moody’s

0% Bresil

China 2012

Operational Risk | Major contract Lagardère Sports & Entertainment (5% of group sales) and Lagardère TR (53% of group sales) submitted a bid in a call for tenders

These 2 divisions have large contracts for sports events or franchise in airports that are renewed every 3-10 years

There is,

no guarantee that these contracts will be renewed and there is a risk of losing contracts or revising pricing up,

which would negatively impact business volumes and margins

Governance Risk Lagardère meets the requirement of the AFEP/MEDEF code


the General Partner is also the Chairman of the board,

as well as largest shareholders and occupies many important positions in the group

We think this situation not only reduces other shareholders’ ability to oppose against the corporate strategy,

but also presents potential conflicts of interest between corporate and personal benefit

Source: World Bank

Regulatory Risk | Special regulations The group is subject to local specific regulations in the countries in which it operates,

including intellectual property rights,

legal copyright registration requirements,

rules governing the pricing of books,

and VAT rules in publishing activities

Limitations principally applicable to the sale of print media,

alcohol and duty-free products and transport operations in TR

Broadcasting service and audiovisual production in Active and Sports & Entertainment

Note: Please refer to Appendix 47 For Risk Matrix

Corporate Governance and Social Responsibility

Figure 30: Remuneration Compensation (in millions)

Fixed base salary and benefits in kind

Variable salary

Extraordinary compensation

Attendance fees

Source: Company data

Figure 31: Share ownership Stakeholders

Managing Partner

Co-Managing Partners

Supervisory Board

Source: Company data

Governance In accordance with AFEP/MEDEF code,

Lagardère meets the independence requirement of supervisory board,

all members are independent (Appendix 48),

the establishment of 2 committees and existence of code of conduct ensure the supervision of management and day-to-day activities

The compensation and benefits are publicly released (Figure 30 & 31)


rights and obligations of shareholders are limited

Double voting rights for share registered in the name of the same shareholder for at least four years reduce the volatility and interests for minority shareholders

Shareholders are represented by the Supervisory board to give consent to the appointment of the Managing Partners by the General Partners,

thus they don’t have direct vote right to change a board director unless there are any disagreements between Supervisory board and General Partners

Social Lagardère wants to play a role in improving the living condition and well-being of communities in the countries in which it operates,

in particular through educational,

cultural and sportive activities and initiatives

‘‘Jean-Luc Lagardère Foundation’’ and ‘‘Elle Foundation’’ have not only taken action in supporting people with talent in the fields of writing,

encouraging the sharing of expertise,

but have supported associations to grant access to education for all as well as women and children projection,

more than 240 young talented peoples beneficed from the Jean-Luc Lagardère Foundation grants to pursue their major projects since 1991


corporate efforts are taken to advance workforce diversity and social transformation,

as well as other measures to focus on the growth of employees and offer guidance for young people

Environment Lagardère shows best practice to improve its environmental performance by trying to use certified and recycled paper,

managing waste electrical and electronic equipment,

creating an innovative website that allows educators to view all new publications and specimen copied on line to reduce the carbon footprint of distribution relating to this field of publishing

CFA Institute Research Challenge

January 11th 2016

Appendix – Table of Contents Appendix 1

Income Statement Appendix 2

Margin Contribution by Division Appendix 3

Balance Sheet Appendix 4

Strategic Balance Sheet Appendix 5

Vertical Balance Sheet Appendix 6

Cash Flow Statement Appendix 7

Free Cash Flow Restatement Business Description Appendix 8

Description of activities Appendix 9

Acquisitions & Disposals Appendix 10

GDP Zones and Forecasts Appendix 11

Major Currency Snapshot Appendix 12

Publishing Snapshot Appendix 13

Publishing Industry Profitability Erosion Appendix 14

Major Zone PAX and Forecast with GDP Appendix 15

Europe PAX and Forecast with GDP Appendix 16

Europe PAX and Forecast with Oil Price Appendix 17

Management Structure Appendix 18

Share Ownership Structure Industry Overview Appendix 19

World’s busiest airports (by passenger trafic) Appendix 20

SWOT Analysis Valuation Appendix 21

Peers Summary Appendix 22

GDP growth forecasts Appendix 23

Target capital structure Appendix 24

WACC components Appendix 25

Scenario Analysis Appendix 26

Multiples summary Appendix 27

Team Estimates vs Consensus Appendix 28

Valuation Summary Appendix 29

SOTP Valuation (EV/EBITDA Multiple) Appendix 30

SOTP(P/E Multiple) Appendix 31

FCF per share Valuation Appendix 32

P/Earnings Regression Appendix 33

P/Earnings Regression Bridge by Segment Appendix 34

Forecast of EPS Growth of Peers Appendix 35

Scenario Analysis Financial Analysis Appendix 36

Discount to peers Appendix 37

Extended Dupont Analysis Appendix 38

Jv’s and Recurring Impact on Net Margin Appendix 39

Degree of Operating Leverage Appendix 40

Non Recurring Items,

Profitability and Credit Analysis Snapshot Appendix 42

Synthetic Credit Rating Appendix 43

Capex Analysis Appendix 44

Capex/Sales History with Peers Appendix 45

Debt breakdown and Interest Rate Forecast Appendix 46

Financial Interest Forecast based on Historical Data Investment risk Appendix 47

Risk Matrix Corporate governance & social responsibility Appendix 48

Supervisory Board 11

CFA Institute Research Challenge

January 11th 2016

Appendix 1

Income Statement 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E Net Sales Media Publishing Active Travel&Retail Sport Other Sales Group

Reported Sales Growth

EBITDA Media EBITDA from control structure EBITDA Group EBITDA Burden effect from structure EBITDA MARGIN

667 4 670

662 6 668

EBIT Media EBIT Group

587 577

397 394

434 428

331 319

323 304

347 302

330 293

375 338

430 393

419 382

429 392

434 397

Non Recurring Income (expenses) Jv's and Associates

-150 65

-919 111

-181 105

Financial income Financial expenses Net Financial Expenses Tax Shield

PreTax earnings Income tax expense

Tax Rate Net Earnings Minorities Share out EPS Payout Ratio

-11 559

-37 516

-28 516

-28 542

-28 581

-28 579

-28 591

-28 603

CAGR 08-14 15-19

Appendix 2

Margin Contribution by Division

EBITDA Margin (%) Publishing Active Travel&Retail Sport Weight(%) Publishing Active Travel&Retail Sport

CFA Institute Research Challenge

January 11th 2016

Appendix 3

Balance Sheet

Cash and Equivalents Short term bank loans and overdrafts Net Cash Short-Terms Investments Account Receivables Inventory Other Current Assets Derivative financial instruments Loans Current Assets

Net Property Plant,

and Equipment Goodwill Intangible Assets Deferred Tax Assets Investments in non consolidated companies Loans and receivables Investments in Associates Non-Current Assets Assets held for sale Total Assets

Long-Term Debt Deferred Tax Liabilities Provisions for pensions Non-current provisions for contingencies and losses Other non-current liabilities: Non Current Liabilities Liabilities associated with assets held for sales Total liabilities

Share Capital Reserves Retained Earnings(Deficit) Shareholder's Equity

Minority Interest Total Equity

91 4,446

Accounts Payable Short-Term Debt Other Payable Derivative financial instruments Accrued taxes and employee benefit expense Sundry payables Current provisions for contingencies and losses Current Liabilities

Total Equity and Liabilities Total Assets

800 2,008

800 2,058

800 2,100

800 2,149

800 2,202

132 4,018

75 3,024

82 2,991

78 2,927

99 2,081

99 2,107

99 2,157

99 2,199

99 2,248

99 2,301

CFA Institute Research Challenge

January 11th 2016

Appendix 4

Strategic Balance Sheet

Current Operating Assets Current Operating Liabilities Net Working Capital Variation NWC/sales

Fixed Assets Goodwill Intangible Investment in Joint Venture and Associates Total Non Current Operating Assets

Total Capital Employed Total Capital Employed Without GoodWill

Cash and Equivalent Gross Debt Net debt/(cash) Other Financial Assets Other financial Liabilities Net Financial Assets (Liabilities)

Other Operating Assets Other Operating Liabilities Net Operating Assets (Liabilities)

Provisions Shareholders funds Minorities Equity capital

Total Assets Total Liabilities

Current Operating Assets

(=) Account receivables + Inventory + Other Current Assets (excluding loans and derivatives instruments)

Current Operating Liabilities Total Capital Employed Other Financial Assets Other Operating Assets Other Operating Liabilities

(=) Accounts Payable + Accrued Taxes and employee benefit expense + Sundry payable + Other Payable (=) Net working capital + Total non Current operating assets (=) Short and Long term Loans + Derivatives + Short Term Investments (=) Deferred tax assets + Assets held for sales (=) Deferred tax liabilities + Other non Current lia