Nielsen Holdings (NLSN) Expanding TV, Online and Mobile Audiences Driving Growth; Recommend Purchase

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1 Business Services Nielsen Holdings (NLSN) Expanding TV, Online and Mobile Audiences Driving Growth; Recommend Purchase We are initiating coverage of Nielsen Holdings (NYSE-NLSN) with a Buy rating and a $37 price target reflecting a well protected, dominant industry position and steady growth prospects. We project improving financials in 2012 and believe Nielsen represents an attractive opportunity trading at 10x 2012E EBITDA and 16x EPS. We consider Nielsen a unique investment opportunity as the Company is a major provider of television, online and mobile media audience measurement data. Nielsen has the leading position in the US and about 100 markets around the world in providing audience measurement data, media and marketing information services, consumer behavior analytics and intelligence. No single competitor in any market can match Nielsen s comprehensive service offerings. Nielsen has a high degree of revenue visibility with nearly 70% of annual revenues being committed before the start of each year. Revenue is driven by the increasing demand for Nielsen ratings and media and market analytics covering a broad range of consumer products, with particular strength in developing markets, including China, India, and Africa. Developing markets accounted for about 20% of total revenues in 2011 and are growing about 15% per year. The Company showed economic resilience in 2009, reporting flat revenues with higher adjusted EBITDA and EPS despite the economic and financial crisis, followed by renewed growth in Q11 results exceeded expectations. Total revenues increased 9.6% y/y to $1.41 billion, exceeding consensus of $1.38 billion. Adjusted EBITDA was $408 million, up 10% y/y with margin flat at 29%. Adjusted net income was $181 million or $0.48 per share, above prior Street consensus of $0.42. Total revenues for 2011 could be $5.6 billion, up 9% on a reported basis. Adjusted EBITDA for 2011 is expected to be $1.5 billion, up 10%, with adjusted EPS of $1.59 vs. $0.95 in 2010, up 67%. For 2012, revenue could increase 6% to $5.9 billion with adjusted EBITDA of $1.8 billion up 14% and EPS of $1.85, up 17%. Nielsen has a leveraged balance sheet with net debt of $6.3 billion. This puts the leverage ratio at 3.6x 2012E EBITDA. Nielsen s shares are valued at 11x and 10x 2011E and 2012E adjusted EBITDA and 19x and 16x 2011E and 2012E adjusted EPS. Based on a projected multiple of 12x 2012E EBITDA and 20x 2012E EPS, roughly the same as the multiples on 2011, we arrive at a target price of $37 per share and recommend purchase. FY Dec Q1 Q2 Q3 Q4 Total P/E EPS 2010A $0.06A $0.24A $0.30A $0.35A $0.95A 2011E $0.19A $0.41A $0.48A $0.50E $1.59E E $0.33E $0.45E $0.51E $0.56E $1.85E 16 Revenue (m) 2010A $1,196A $1,270A $1,289A $1,371A $5,126A 2011E $1,302A $1,396A $1,413A $1,464E $5,575E 2012E $1,381E $1,475E $1,483E $1,547E $5,887E Rating: Initiation of Coverage Buy Current Price $29.24 Price Target $ Wk Range $ $33.00 Shares Outst (mm) 367 Market Cap (mm) $10,504 Enterprise Value (mm) $17,526 Average Volume 571,453 Net Debt $6,319 Net Cash/Share $1.46 Sector Weight Overweight Edward J. Atorino, CFA eatorino@benchmarkcap.com James T. Dobson jdobson@benchmarkcap.com For important disclosures, see Page 14

2 Investment Thesis Nielsen Holdings through its ownership of The Nielsen Company has a leading position in the US and about 100 markets around the world in providing audience measurement data, media and marketing information services, consumer behavior analytics and intelligence. The media types of focus for Nielsen are television, online services and mobile media. No single competitor in any market can match Nielsen s comprehensive service offerings. The Company has a high degree of revenue visibility from these operations due in-part to its global client base across multiple industries including consumer packaged goods, broadcast and cable television, advertising, online media, telecommunications, retail and automotive. Client relationships are long-term with multi-year contracts and high contract renewal rates, resulting in nearly 70% of Nielsen s annual revenues being committed before the start of each year. Revenues are driven by the increasing demand for Nielsen ratings, media and marketing information, and analytics and industry expertise. Nielsen s offerings cover a broad range of consumer products, with particular strength in developing markets, including China, India, and Africa, reflecting growing television, Internet and mobile usage, and an expanding middle class population boosted by rapidly rising consumer spending. Developing markets accounted for about 20% of total revenues in 2011 and are growing about 15% per year. The growing availability of increased viewing options and the proliferation of new outlets and formats have made it difficult to measure and analyze an increasingly fragmented consumer base. Nielsen s ability to provide metrics and information across television, online and mobile platforms has resulted in increasing demand for and improving growth in Nielsen s information services, analytics and insights, which supplement its ratings services. The growth of the middle class and the rapid development of the consumer market in many developing countries are also aiding demand for Nielsen s information services analytics and insights. Nielsen reported better than expected results thus far in Q11 results exceeded expectations, as growth accelerated from the first half of Total revenues increased 9.6% y/y (5.8% constant currency) to $1.41 billion, exceeding consensus of $1.38 billion. Adjusted EBITDA was $408 million, up 10% y/y (7% constant currency) with margin flat at 29%. Adjusted net income was $181 million or $0.48 per share, above Street consensus of $0.42, reflecting higher revenue and lower interest expense. For 2012, revenue could increase 6% to $5.9 billion with adjusted EBITDA of $1.8 billion up 14% and EPS of $1.85, up 17%. Based on the favorable secular trends driving Nielsen s revenues and the Company s performance over the past four years, we believe management s long-term financial objectives on a constant currency basis of mid-single digit percent revenue growth, including double-digit growth in developing markets, with 5-10% growth in adjusted EBITDA and 10-15% growth in adjusted net income are achievable. Nielsen plans to deleverage the Company s balance sheet through the application of free cash flow, which is expected to contribute 0.5% per year to growth in adjusted net income. Nielsen s shares are valued at 11x and 10x 2011E and 2012E adjusted EBITDA and 19x and 16x 2011E and 2012E adjusted EPS. Based on a projected multiple of 12x 2012E EBITDA and 20x 2012E EPS, which are roughly the same as the multiples on 2011, we arrive at a target price of $37 per share. In view of Nielsen s strong industry position, favorable growth prospects, improving financial condition and attractive valuation we recommend purchase of Nielsen stock. Company Description Nielsen Holdings through its ownership of The Nielsen Company has a leading position in the US and about 100 markets around the world in providing audience measurement data, media and marketing information services, and consumer behavior analytics and intelligence. The media types Page 2

3 of focus for Nielsen are television, online services and mobile media. No single competitor in any market can match Nielsen s comprehensive service offerings. Reflecting its global operations, international revenues could account for an estimated 50% of total revenues in The Company has a high degree of revenue visibility from these operations as a result of its global client base, across multiple industries including consumer packaged goods, broadcast and cable television, advertising, online media, telecommunications, retail and automotive. Client relationships are long-term with multi-year contracts and high contract renewal rates, resulting in nearly 70% of Nielsen s annual revenues being committed before the start of each year. Revenues are driven by the increasing demand for Nielsen ratings, media and marketing information, and analytics and industry expertise. Nielsen s offerings cover a broad range of consumer products, with particular strength in developing markets, including China, India, and Africa, reflecting growing television, Internet and mobile usage, and an expanding middle class population boosted by rapidly rising consumer spending. Nielsen is expanding coverage in Africa adding new markets and services. Developing markets account for an estimate 20% of total revenues in 2011, or about $1 billion with growth of 15% y/y, and have doubled in the past five years. Buy revenues from developing markets were up 22% (16% in constant currency) in the first three quarters of The driving forces behind this growth are the rapid growth in the middle class population around the world, along with expanding purchasing power and demand for consumer products. China alone a presents a significant growth opportunity for Nielsen as does India, and Africa is in the relatively early stages of becoming another area for expansion for Nielsen s information services and insights. Nielsen s business structure is aligned into three segments: Buy, Watch and Expositions. Figure 1: 2011E Revenue Segments 3% 32% Buy Watch Expositions 65% Source: The Benchmark Company, LLC The Buy segment accounted for 64% of revenue and 49% of adjusted EBITDA in It provides retail transactional measurement data, consumer behavior information and analytics primarily to businesses in the consumer packaged goods industry. The raw data for retail transactional measurement is provided by retailers in each market. Nielsen s Information services are based on its internal technology and vast database providing retail transactional measurement data, consumer behavior information, surveys, proprietary market analysis, retail audits, demographic data and other information regarding consumer products, markets, audiences and advertising around the world. In July 2011, Nielsen signed a cooperation agreement with Wal-Mart to receive and analyze sales information from Wal-Mart s Page 3

4 US stores adding to Nielsen s retail market information and enhancing its industry database and analysis of consumer purchase activity. The organization and analysis of retail data into market shares by product, category and channel is proprietary along with the analytics and insights provided to clients by tracking billions of sales transactions per year in retail outlets around the world. Nielsen is the only company offering such extensive global coverage of this information for consumer packaged goods. Buy clients use Nielsen data in an effort to manage their brands, uncover new sources of demand, launch and grow new products, improve their marketing mix and establish more effective consumer relationships. Nielsen data is used by clients as a method for measuring their sales and market share in the consumer packaged goods industry. In 2009, Nielsen launched a comprehensive service entitled Advertiser Solutions linking media consumption data across three screens with consumer purchasing data to better understand how media exposure drives purchase behavior. At the beginning of each year, approximately 60% of Buy revenues are committed under existing multi-year contacts which have a high degree of renewal rates. The top five clients accounted for 22% of Buy revenue in 2010 and with the average length of relationships extending back more than 30 years. Figure 2: 2011E Adjusted EBITDA Concentration 6% 46% 48% Buy Watch Expositions Source: The Benchmark Company, LLC The Watch segment represented 33% of total revenues and 46% of adjusted EBITDA in It provides viewership data, principally ratings, and analytics primarily to the media and advertising industries as well as directly to marketers across television, online and mobile devices. Nielsen s ratings estimate an entire viewing audience through a proprietary process involving sampling from a representative audience. Nielsen s ratings are the product of data it acquires and collects through exclusive panel and measurement processes. Nielsen s ratings services are the standard for measuring audiences for television programming as well as for online surfing and mobile phone activity in the US. In addition, Nielsen measures television viewing in 29 countries outside the US, giving it coverage of 35% of global television viewing. It also measures markets that account for approximately 80% of global Internet users and offers mobile measurement services in nine countries, in addition to the United States. In July 2011, Nielsen added set top box data from an agreement with Kantar Media for use in local television audience measurement. Nielsen has developed a proprietary, hybrid methodology for Page 4

5 the US market that combines Nielsen s National People Meter panel data with set top box and other sources of data. Nielsen continues to explore the use of this methodology in local markets that currently rely on diary-based measurement. At the beginning of each year, approximately 90% of Watch revenues are typically committed under existing under multi-year contacts, which have a high degree of renewal rates. The top five clients accounted for 27% of Watch revenues in 2010 and with the average length of relationships extending back more than 30 years. Watch media clients use Nielsen data, principally ratings, to price their advertising inventory and maximize the value of their content. Watch advertising clients use Nielsen Watch data to plan and optimize their advertising spending and to better ensure their advertisements reach the intended audience. Nielsen s measurement techniques are constantly upgraded and adjusted to account for new television viewing behavior, increased fragmentation and new media technologies. To help advertisers and programmers understand time-shifted behavior, Nielsen introduced its C3 ratings in 1995 measuring how many people watch programming and commercials during live and time shifter viewing up to three days after the original broadcast of the program. The C3 rating has become the primary metric for buying and selling advertising on national broadcast television. In August 2011, Nielsen introduced Nielsen Online Campaign Ratings (NOCR) which gives a highly accurate method of identifying and measuring audiences exposed to online ad campaigns. NOCR accurately identifies audience demographics from a pane of 175 million users and evaluates unique reach and frequency across campaigns within each online publisher in terms of Gross Ratings Points similar to Nielsen TV ratings. This service is expected to become an important new revenue stream over the next few years enhancing overall growth. In September 2011, NOCR became the first online campaign measurement system to be approved by the Media Rating Council. Nielsen is testing a new system to measure viewing on ipads that will allow ipad ratings to be incorporated into its C3 multiplatform ratings service which provides ratings for TV, DVR, VOD, and Internet viewing. The ipad ratings may be available in In December 2011, Nielsen and comscore, which also provides digital viewing measurement and marketing intelligence, settled patent disputes. comscore will acquire ownership of four Nielsen families of patents asserted in litigation, and comscore will grant Nielsen worldwide licenses for the families of the four patents asserted in the litigation. Through its third segment, Expositions, Nielsen produces approximately 40 business to business trade shows each year connecting 270,000 buyers and sellers across 20 industries. Revenue varies year to year depending on the number and type of trade shows. The business requires minimal investment and produces positive cash flow. Expositions account for 3% of revenues and 6% of adjusted cash flow. Corporate History A.C. Nielsen was founded in 1923 by Arthur C. Nielsen Sr. who invented an approach to measuring competitive sales results that made the concept of "market share" a practical management tool. Mr. Nielsen later developed methods for measuring radio and television listening audiences, i.e. ratings. After a long period of growth and expansion Nielsen was acquired by Dun & Bradstreet in In January 1996, D&B split into three companies, D&B, Cognizant which included Nielsen Media Research, and A.C. Nielsen. In 1999, VNU N.V., a Dutch company, acquired Nielsen Media and in 2001 VNU acquired A.C. Nielsen, reuniting it with Nielsen Media. VNU changed its name to The Nielsen Company in The present company, incorporated in the Netherlands and owned by Nielsen Holdings N.V. was purchased in May 2006 by Valcon Acquisition Holding B.V. a holding company formed by a private equity group (AlpInvest Partners, The Blackstone Group, The Carlyle Group, Hellman & Friedman, Kohlberg Kravis Roberts & Co. and Thomas H. Lee Partners). In January 2011, Nielsen Holdings B.V. (formerly Valcon) changed its name to Nielsen Holdings N.V. and completed an initial public Page 5

6 offering of common stock at $ The shares trade on the New York Stock Exchange under the symbol "NLSN". Management David L. Calhoun has been Chief Executive Officer of Nielsen since August Prior to joining Nielsen, David served as Vice Chairman of The General Electric Company and President and Chief Executive Officer of GE Infrastructure, the largest of six GE business units. David spent 26 years with General Electric serving as President and Chief Executive Officer of multiple business units, including GE Lighting, GE Employers Reinsurance Company, GE Aircraft Engines, GE Transportation (Aircraft and Rail) and ultimately GE Infrastructure. Brian J. West has served as Chief Financial Officer since February 2001 and also oversees Nielsen Expositions. Brian spent 16 years at The General Electric Company (GE), where he held a number of finance roles, including CFO of NBC's TV Stations Division, CFO of GE Engine Services, and CFO of GE Aviation. Mitch Barns was appointed President, U.S. Media Client Services in June 2011, leading the U.S. client teams supporting major media clients, local TV station groups, cable companies and agencies with Nielsen s audience measurement, ad effectiveness and social media solutions. Mitch served as President, Greater China for Nielsen from 2008 to 2011 with responsibility for mainland China, Hong Kong and Taiwan. Previously, he served as global President of Nielsen s Consumer Panel Services business in 2007 and global President of Nielsen s BASES and Analytic Consulting businesses in 2005 and Historical Financials Since the acquisition by Nielsen Holdings in 2006, revenue has posted a compound growth rate of 5% from 2007 to 2010 on a reported and constant currency basis. This includes flat revenue in 2009 during the economic and financial crisis when growth in Watch revenues offset declines in Buy revenues. From 2007 to 2010, Watch revenues increased at an 8% growth rate with Buy growing at 4%, including a 3% decline in 2009 due to the effect of the economic difficulties and the credit crisis. Expositions declined 23% over this period from 5% of total revenues in 2007 to 3% in From 2007 to 2010, adjusted EBITDA grew at a 10% compound growth rate on a reported and constant currency basis as the adjusted EBITDA margin rose from 24% in 2007 to 27% in The Watch segment margin rose from 19.2% in 2007 to 21.8% in 2010, with the Buy margin expanding from 33.8% to 38.3% and Expositions from 36.7% to 46.4% 2009 Results Total revenue was flat y/y at $4.8 billion in 2009 vs (up 4% on a constant currency basis) as declines in Buy and Expositions revenues offset growth in Watch revenues. Adjusted EBITDA was up 8.9% y/y to $1.3 billion vs. $1.2 billion, led by growth in Watch. The Adjusted EBITDA margin improved to 27% vs. 25% a year earlier. Adjusted EPS was $0.76 in 2009 vs. a $0.30 loss in Results Following the slowdown in 2009 due to the difficult economic conditions, Nielsen showed solid growth in 2010 as revenues rose 6.6% (6.1% constant currency) to $5.1 billion, led by growth in Buy revenues. Adjusted EBITDA was up 7.6% (6.8% constant currency) to $1.4 billion with adjusted EPS increasing 25% to $0.95. Buy segment revenues rose 8.9% to $3.3 billion, driven by a 20.6% increase in developing markets (16.7% constant currency) and 4.4% in developed markets (4.8% constant currency). Information Services increased 6.1% (5.4% constant currency) to $2.3 billion with 16.9% growth in developing markets (13.3% constant currency) from expansion of retail measurement and consumer panel services. Developed markets were up 2% (2.3% constant currency). Revenues from Insight Services rose 16.2% (15.2% constant currency) with growth in both developed and developing markets from Page 6

7 increases in new product forecasting as well as analytical services. Adjusted EBITDA rose 8.9% to $711 million vs. $644 million with the margin at 21.8% in 2010 vs. 21.5% in Watch revenue was up 3.9% (3.7% constant currency) to $1.7 billion on increased spending for television measurements, as well as a 9% increase in online and mobile services. Adjusted EBITDA was $649 million, up 4.2%, on a slight improvement in margin to 38.2% vs. 38.1% in Exposition revenues fell 6.6% (6.7% constant currency) to $168 million due to declines in building industry and retail sector trade shows with adjusted EBITDA up 22% to $78 million on lower costs. First Half 2011 Results Revenue and profit growth improved in Revenue increased 9.4% (6.1% constant currency) to $2.67 billion for the six months ended 6/30/11. Adjusted EBITDA was $706 million vs. $638 million up 10.7% (7.6% constant currency). Adjusted net income was $219 million or $0.61 per share, up 160%. Buy revenue increased 11.9% y/y (7.5% constant currency) to $1.7 billion for the six months ended 6/30/11 driven by a 23.6% increase in developing markets (17.4% constant currency) and a 7.1% increase in developed markets (3.4% constant currency), reflecting increased spending on analytical services. Adjusted EBITDA was up 8.6% to $328 million. Revenue from Information services increased 14.1% y/y (9.1% constant currency) to $1.25 billion from $1.1 billion. Revenue from developing markets increased 25.8% (19.2% constant currency) as a result of continued expansion of both retail measurement and consumer panel services to both new and existing customers and new markets. Revenue from developed markets increased 9.1% (4.8% constant currency) due to growth in retail measurement services in Western Europe and North America from new and existing customers. Revenue from Insights services increased 6.6% y/y (3.5% constant currency) to $469 million from $439 million driven by growth in developing markets. Watch revenue increased 4.9% y/y (3.1% constant currency) to $878 million from $837 million. Television measurement grew 5.1% driven mainly by increases in spending from existing customers. Adjusted EBITDA was $348 million vs. $309 million, up 12.6%, as the margin expanded to 39.6% from 36.9%. Exposition revenues increased 8% to $94 million from $87 million with half the increase from acquisitions net of show closures and the remaining growth from existing shows. Adjusted EBITDA was up 15% to $46 million on higher revenues. 3Q11 Recap 3Q11 results exceeded expectations. Total revenues increased 9.6% y/y (5.8% constant currency) to $1.41 billion, exceeding consensus of $1.38 billion. Adjusted EBITDA was $408 million vs. $371 million up 10% y/y (7% constant currency) with margin flat at 29%. Adjusted net income was $181 million or $0.48 per share, above Street consensus of $0.42, reflecting higher revenue and lower interest expense. Buy revenue increased 12.1% (7.1% constant currency) to $906 million from $808 million a year ago. Revenue from Information services increased 13.2% y/y (7.7% constant currency) to $643 million. Revenue from developing markets increased 23.6% (17.5% constant currency) as a result of continued expansion of both retail measurement and consumer panel services to both new and existing customers and new markets. Revenue from developed markets increased 8.9% (3.1% constant currency) due primarily to growth in retail measurement services in North America from new and existing customers. Insights services revenues increased 9.6% (5.6% constant currency) to $263 million from $240 million a year earlier, primarily driven by growth in developing markets. Buy adjusted EBITDA was $192 million vs. $169 million, up 14% (9% constant currency), on higher revenues offset by investment in developing markets and higher data acquisition costs. Watch revenue increased 6.0% (4.0% constant currency) to $443 million. Television measurement grew 8.4% (6.3% constant currency) driven by increases in spending from existing customers on a worldwide basis. Adjusted EBITDA was up 9% (8% constant currency) to $180 million. Page 7

8 Exposition revenue increased 1.6% y/y to $64 million reflecting growth in existing shows partially offset by certain show closures. Adjusted EBITDA was $37 million vs. $36 million a year earlier. Financial Outlook Figure 3: Nielsen - Earnings Expectations 4Q11E, 2011E & 2012E ($ in millions, except per share data) (company guidance is based on mid-point) Benchmark 4Q11E Street Consensus Revenue $1,464 $1,460 EBITDA $431 $438 EPS $0.50 $ E Revenue $5,575 $5,571 EBITDA $1,545 $1,551 EPS $1.59 $1.59 4Q11 and 2011 Outlook 2012E Revenue $5,887 $5,871 EBITDA $1,762 $1,655 EPS $1.85 $1.84 Source: The Benchmark Company and Thomson ONE Analytics Estimates. We look for continued revenue growth in 4Q11 reflecting trends seen throughout 2011, though currency effects may be less favorable than earlier in the year. 4Q11 total revenues are expected to be $1.46 billion, up 7% y/y on a reported basis. Buy revenue (Information and Insight services) are expected to be up 8% on a reported basis to $980 million, led by continued expansion of revenues from developing markets. Watch revenues (audience measurement) may be up 5% to $465 million. Expositions revenues may be $19 million. 4Q11 adjusted EBITDA is expected to be up 7% to $431 million, with adjusted EPS of $0.50 vs. $0.35 in 4Q10, up 42% due in large-part to lower interest payments. Total revenue for 2011 could be $5.6 billion, up 9% on a reported basis. Buy revenue is expected to be up 11% to $3.6 billion with Information services up 12% to $2.6 billion and Insights up 8% to $1.1 billion. Watch revenue may increase to $1.8 billion up 5%. Adjusted EBITDA for 2011 is expected to be $1.5 billion, up 10%, with adjusted EPS of $1.59 vs. $0.95 in 2010, up 67% due primarily to lower interest payments Outlook Nielsen s long-term financial objectives project mid-single digit percent revenue growth, including double-digit growth in developing markets, with 5-10% growth in adjusted EBITDA and 10-15% growth in adjusted net income. For 2012, revenues could increase 6% to $5.9 billion with adjusted EBITDA of $1.8 billion up 14% and EPS of $1.85, up 17%. In 2012, we estimate Buy revenue up about 6% to $3.8 billion driven by continued solid demand for Information and Insight services from consumer packaged goods in the US, other developed markets and particularly in developing markets, especially China and India. We project Watch revenue up 5% to $1.9 billion with potential upside due to continued demand for audience measurement services. The integration of set top box data into Nielsen s local television Page 8

9 audience measurement last July and the roll out of the Nielsen Online Campaign Ratings System introduced last August are expected to aid Watch revenues in Continued strong growth in television, online and mobile viewing in developing markets will drive demand for Nielsen s audience measurement services. For Expositions, we look for continued relative flat revenues at $177 million but with improved economic conditions revenues could show limited growth. Total company adjusted EBITDA is expected to be $1.5 billion up 9%. Interest expense may be down $182 million, down 28% y/y, due to benefits of debt repayment from the Nielsen IPO in January Adjusted EPS of $1.59 could increase 67% y/y due in large-part to lower interest payments Outlook Looking to 2013, we project top-line growth of 8% to $6.3 billion. Watch is expected to be up 5% to $2.0 billion with Buy up 9% to $4.2 billion. We project adjusted EBITDA of $1.9 billion up 8% leading to adjusted EPS of $2.29 up 24% including benefit of lower interest expense from further debt reduction. We anticipate the fundamentally favorable trends driving Nielsen s revenues could extend over the next several years especially in view of the social and economic changes influencing the viewing of television and the proliferation of online and mobile devices. Balance Sheet On January 31, 2011, Nielsen completed an initial public offering of 82 million shares of common stock at $23.00 per share resulting in net proceeds of $1.8 billion. It also issued $288 million in 6.25% Mandatory Convertible Bonds due 2/1/2013 with net proceeds amounting to $277 million. The bonds are convertible into 10.4 to 12.5 million common shares on 2/1/13 depending on the market price of Nielsen s common stock. Nielsen applied $1.96 billion of the combined proceeds to redeem a portion of its outstanding debt. At 9/30/11 total debt was $6.7 billion, excluding the mandatory convertible bonds, with cash of $404 million bringing net debt to $6.3 billion. Net debt leverage ratio is 3.6x 2012E EBITDA. We estimate free cash flow for 2011 will be $285 million after $333 million in capital expenditures. Approximately $2 billion of the Company s debt matures in 2013 including the mandatory convertible bonds and approximately $4.5 billion in 2016 and thereafter. Valuation Nielsen s shares are valued at 11x and 10x 2011E and 2012E adjusted EBITDA and 19x and 16x 2011E and 2012E adjusted EPS. In view of the Company s strong industry position, favorable growth prospects, improving financial condition and attractive valuation, we recommend purchase with a target price of $37 per share. We believe Nielsen s valuation compares favorably with comparable companies in the business services and information services sectors that have subscriber based revenues. Nielsen has one of the highest concentration levels of subscriber based revenues which are based on long-term contracts and long standing relationships. In addition, Nielsen is not dependent on any single industry sector such as financial services. Nielsen s revenues are driven by favorable long-term trends including expanding viewing of television and online and mobile devices. Nielsen s increasing exposure to growing developing markets, including China, India and Africa, is also differentiator. Financial services providers FactSet and Verisk Analytics trade at 15x and 12x 2012E EBITDA, respectively. Online analytics provider comscore trades at 12x. We believe Nielsen s dominant and defensible television service, leading CPG market intelligence and growing online analytics combine to create a unique investment opportunity. Page 9

10 Figure 4: Nielsen - Valuation Analysis, 2011E E ($ in millions, expect per share data) Fiscal Year Ending December E 2012E 2013E EPS (Adjusted) Stock Price $29.24 $29.24 $29.24 Earnings Per Share $1.59 $1.85 $2.29 Current Multiple 18x 16x 13x Target Multiple 20x 18x Implied Price $37 $41 EBITDA Diluted Shares Market Capitalization $10,731 $10,731 $10,731 Long-term debt (6,807) (6,807) (6,807) Working Capital Enterprise Value 17,526 17,526 17,526 EBITDA 1,545 1,762 1,902 Current Multiple 11x 10x 9x Target Multiple 12x 12x Implied Price $37 $44 Weighted Price Target $37 $42 Upside to Target 26% 45% Source: Company reports and The Benchmark Company Estimates. We believe the current valuation is somewhat conservative given attractive upside over the next 12 months. Based on a projected multiple of 12x 2012E EBITDA and 20x 2012E EPS, which are roughly the same as the multiples on 2011, we arrive at a target price of $37 per share and recommend purchase. Risks We believe Nielsen has a leading market position on a global basis in providing information analytics and services with seemingly limited competition and a high degree of recurring revenues from long standing customer relationships. As such, we believe there is above average stability to Nielsen s revenues but the Company s operations are not without risk. Adverse economic financial and market conditions, particularly in the consumer packaged goods, media, entertainment, telecommunications or technology industries, could effect revenue. Such a scenario played out in 2009 when the combination of significant economic deterioration and the tightening of liquidity in the credit and capital markets led to reduced advertising expenditures and purchases of discretionary analytical services. Consolidation in the consumer packaged goods, media, entertainment, telecommunications and technology industries could put pressure on demand and pricing of Nielsen s products and services, adversely affecting revenues and earnings. The loss of one or more major customers would adversely affect revenues and slow growth. Major customers could exert pressure on Nielsen s pricing of its product and services, restricting revenue growth. With its expanding global operations, Nielsen s international revenues are dependent on currency exchange rates and could be adversely affected by economic, political or social difficulties in various parts of the world, especially in increasingly important developing markets. Nielsen will have to keep up with changing technologies, either by developing and marketing new products and services or by enhancing existing products and services. Failure to successfully adapt its media measurement systems to new viewing trends and improve its data bases and information services could adversely demand for these services likely reducing revenues and profits. Page 10

11 Smaller or new competitors could develop alternative audience measurement systems or industry information analytics products that put pressure in Nielsen s dominant market position. Nielsen s high level of debt could increase its vulnerability to adverse economic and industry conditions and limit its growth potential. As a company domiciled in The Netherlands, Nielsen is subject to and will be governed by the laws of and shareholder rights provisions of that country rather than those of the United States. Companies mentioned in this report: McGraw-Hill (MHP, Hold) Moody s (MCO, Hold) comscore (SCOR, not rated) FactSet (FDS, not rated) Verisk Analytics (VRSK, not rated) Wal-Mart (WMT, not rated) Page 11

12 Nielsen Holdings 1Q10 2Q10 3Q10 4Q Q11 2Q11 3Q11 4Q11E 2011E 1Q12E 2Q12E 3Q12E 4Q12E 2012E FY2013E Revenues 1,196 1,270 1,289 1,371 5,126 1,302 1,396 1,413 1,464 5,575 1,381 1,475 1,483 1,547 5,887 6,329 y/y growth 8.5% 7.4% 5.1% 5.7% 6.6% 8.9% 9.9% 9.6% 6.8% 8.8% 6.1% 5.7% 5.0% 5.7% 5.6% 7.5% Cost of revenues , , ,338 2,500 Gross Profit , , ,549 3,829 Gross margin 56.5% 58.4% 59.6% 59.2% 58.5% 57.8% 59.2% 60.8% 60.0% 59.5% 59.0% 60.0% 61.0% 61.0% 60.3% 60.5% SG&A Expenses , , ,854 1,994 % Of Revenues 33.4% 31.9% 32.1% 31.3% 32.1% 41.7% 32.2% 32.6% 31.8% 34.4% 32.0% 31.5% 31.5% 31.0% 31.5% 31.5% Depeciation & Amortization Operating Income ,205 1,355 % Of Revenues 11.3% 15.8% 16.4% 17.7% 15.4% 5.7% 17.3% 19.4% 19.7% 15.7% 18.0% 20.0% 21.4% 22.2% 20.5% 21.4% Restructuring Costs Net Operating Income ,205 1,355 y/y growth 17.9% 5.8% % 36.1% 529.3% -61.4% 19.8% 31.8% 21.1% 8.8% 386.2% 35.5% 19.8% 32.2% 51.7% 12.5% Interest expense-net Profit- Loss on derivatives Currency gains (losses) Other income (expense) Pretax income Taxes (Credit) Equity Income (Loss) Income -continuing operations y/y growth 433.3% % % -85.1% % % -10.4% 368.2% % -36.1% % 92.5% 39.1% 61.0% 450.4% 21.3% Discontinued Operations-net Net Income Noncontrolling interests Net Income-Nielsen y/y growth 950.0% % % -93.2% % % -6.8% 827.3% % -27.3% % 92.5% 40.4% 62.5% 473.7% 20.6% EPS Basic Adjusted EPS y/y growth -86.7% -11.4% % 7.9% 24.6% 199.2% 70.1% 59.9% 42.3% 67.2% 69.8% 9.9% 6.9% 10.4% 16.5% 14.9% Shares Outstanding (M) Basic Net Shares Outstanding Diluted Adjusted EBITDA , , ,762 1,840 y/y growth -34.8% -11.9% % 5.5% 7.5% 9.6% 10.9% 10.0% 7.3% 9.5% 20.9% 13.1% 11.6% 12.0% 14.0% 4.4% Source: The Benchmark Company and Company reports. Page 12

13 Business Services comscore Dun & Bradstreet Factset McGraw Hill Moody's Neilsen Verisk Analytics S&P 500 SCOR DNB FDS MHP MCO NLSN VRSK Average Stock Price Jan-9-12 $1,281 $21.61 $76.56 $86.39 $46.26 $35.83 $29.24 $39.38 High 1, Low 1, % Change: YTD 2% 2% 2% -1% 3% 6% -2% -2% 1% % Change Relative YTD 0% 0% -3% 1% 5% -3% -4% -1% Capitalization Fully Diluted Shares 32,493 49,000 48, , , , ,170 Market Cap. (Fully Diluted) $702,172 $3,751,440 $4,221,879 $14,016,780 $8,205,070 $10,731,080 $6,740,663 Long-term Debt and Pfd. (14,888) (972,000) 0 (1,198,000) (1,244,000) (6,807,000) (952,999) Working Capital (2,276) 77, , , ,100 12,000 (234,237) Value of Other Enterprise Value $719,336 $4,646,440 $3,997,147 $14,611,580 $8,923,970 $17,526,080 $7,927,899 Fiscal Year Ends Dec. Dec. Aug Dec. Dec. Dec. Dec. Earnings EPS P/E EPS (0.43) P/E EBITDA EBITDA , , ,885 2,008,600 1,066,300 1,762, ,930 Multiple EBITDA , , ,995 1,871, ,900 1,545, ,090 Multiple Valuation Target 2012 EPS Multiple Price Target $75.00 $43.00 $34.00 $37.00 Upside/Downside to Target -2% -7% -5% 27% Rating: NR HOLD NR HOLD HOLD BUY NR Source: Company financials, Benchmark Company estimates and Thomson Analytics consensus. Page 13

14 Important Disclosures Analyst Certification The Benchmark Co., LLC analyst(s) whose name(s) appears on the front page of this research report certifies that the recommendations and opinions expressed herein accurately reflect the research analyst's personal views about any and all of the subject securities or issues discussed herein. Furthermore, no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst(s) in this research report. Equity Research Ratings System Firm-Wide Stock Ratings Distribution As of September 30, 2011 All Covered Companies Investment Banking Clients Buy 79 61% 3 2.3% Hold 47 36% 1.78% Sell 4 3% 0 0.0% *Effective April 18, 2011 Benchmark has terminated research coverage of AEC Company Ratings Buy: Stock is expected to outperform the analyst s defined Sector/Industry Index* over the following 6 to 12 months. Hold: Stock is expected to perform in-line with the analyst s defined Sector/Industry Index* over the following 6 to 12 months. Sell: Stock is expected to underperform the analyst s defined Sector/Industry Index* over the following 6 to 12 months. Industry Ratings Overweight: Analyst s defined Sector/Industry Index* is expected to outperform the S&P 500 over the following 6 to 12 months. Market Weight: Analyst s defined Sector/Industry Index* is expected to perform in-line with the S&P 500 over the following 6 to 12 months. Underweight: Analyst s defined Sector/Industry Index* is expected to underperform the S&P 500 over the following 6 to 12 months. Risk Qualifier Speculative: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental investing criteria. Investments in the stock may result in material loss. The Benchmark Company Disclosures as of January 10, 2012 Company Nielsen Holdings The Dun & Bradstreet Corp Moody's Corporation The McGraw-Hill Companies, Inc. Research Disclosure Legend Disclosure In the past 12 months, Benchmark or its affiliates have received compensation for investment banking services from the subject company. In the past 12 months, Benchmark or its affiliates have managed or co-managed a public offering of securities for the subject company. Benchmark and/or its affiliates expect to receive or intend to seek compensation for investment banking services from the subject company in the next three months. The research analyst, a member of the research analyst s household, any associate of the research analyst, or any individual directly involved in the preparation of this report has a long position in the shares or derivatives of the subject company. The research analyst, a member of the research analyst s household, any associate of the research analyst, or any individual directly involved in preparation of this report has a short position in the shares or derivatives of this subject company. A member of the research analyst s household serves as an officer, director or advisory board member of the subject company. As of the month end immediately preceding the date of publication of this report, or the prior month end if publication is within 10 days following a month end, Benchmark and its affiliates, in the aggregate, beneficially owned 1% or more of any class of equity securities of the subject company. A partner, director, officer, employee or agent of Benchmark, or a member of his/her household, is an officer, director or advisor, board member of the subject company and/or one of its subsidiaries. Benchmark makes a market in the securities of the subject company. 10. In the past 12 months, Benchmark, its partners, affiliates, officers or directors, or any analyst involved in the preparation of this report has provided services to the subject company for remuneration other than normal course investment advisory or trade execution services. Page 14

15 Price Charts Benchmark Company, LLC disclosure price charts are updated within the first fifteen days of each new calendar quarter per FINRA regulations. Price charts for companies initiated upon in the current quarter, and rating and target price changes occurring in the current quarter, will not be displayed until the following quarter. This is compendium investment research (covering six or more relevant issuers), and The Benchmark Company, LLC, may choose to provide specific disclosures of the subject companies by reference, as well as its policies and procedures regarding the dissemination of investment research. To access this material or for more information, please send a request to The Benchmark Company, LLC, 40 Fulton Street, New York, NY 10038, Additional information on recommended securities is available on request. General Disclosures This publication does not constitute an offer or solicitation of any transaction in any securities referred to herein. Any recommendation contained herein may not be suitable for all investors. The Benchmark Company, LLC makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when information in this report changes apart from when we intend to discontinue research coverage of a subject company. Although the information contained in the subject report has been obtained from sources we believe to be reliable, its accuracy and completeness cannot be guaranteed. This publication and any recommendation contained herein speak only as of the date hereof and are subject to change without notice. The Benchmark Company, LLC and its affiliated companies and employees shall have no obligation to update or amend any information herein. This publication is being furnished to you for informational purposes only and on the condition that it will not form a primary basis for any investment decision. Each investor must make its own determination of the appropriateness of an investment in any securities referred to herein based on the legal, tax and accounting considerations applicable to such investor and its own investment strategy. By virtue of this publication, none of The Benchmark Company, LLC or any of its employees shall be responsible for any investment decision. This report may discuss numerous securities, some of which may not be qualified for sale in certain states and may therefore not be offered to investors in such states. The Recent Price stated on the cover page reflects the nearest closing price prior to the date of publication. For additional disclosure information regarding the companies in this report, please contact The Benchmark Company, LLC, 40 Fulton Street, New York, NY 10038, This report may not be reproduced, distributed, or published without the prior consent of The Benchmark Company, LLC. Copyright All rights reserved by The Benchmark Company, LLC. Page 15