Mondadori. A new Mondadori. 21 June 2006 Media Update. Price: 7.1 Target price: 9.43 Outperform

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1 21 June 2006 Media Update Price: 7.1 Target price: 9.43 Outperform /6/ E 2007E EPS Adj. ( ) DPS ( ) BVPS ( ) J J A S O N D J F M A M J MONDADORI ED MILAN MIBTEL - PRICE INDEX Source: DATASTREAM Market Data Market Cap ( m) 1,842 Shares Out. (m) 259 Main Shareholder (%) Fininvest (50.2%) Free Float (%) week range ( ) Rel Perf vs Mibtel (%) -1m -3.8% -3m -3.8% -12m -18.5% 21dd Avg. Vol. ('000) 1,168 Reuters/Bloomberg MNDI.MI/MNDI IM Key Financial Data ( m) Turnover 1,657 EBITDA 224 EBIT 187 Net Profit 115 Shareholders' Funds 506 Net Debt (-) Cash (+) 32 Gearing % 0.0% EV/Ebitda (x) P/E adj (x) Div.Yield (%) FCF Yield (%) Source: Mediobanca Securities. Note: figures before Emap acquisition A new Mondadori Acquisition of Emap France Mondadori announced on Monday the acquisition of Emap France, an Emap group company operating in the French magazine market, for 545m. Emap France is the third-largest magazine group in France (the biggest European magazine market) with a 12% market share in terms of circulation and 10% in terms of advertising sales. In fiscal 2006 (year ended 31 March) Emap France posted revenues of 440m, EBITDA of 59m and EBIT of 56m. With an EBITDA margin of 13.4%, the profitability of the group is in line with the estimated profitability of its main French competitors, despite its smaller size. A stronger platform to exploit new growth opportunities We believe that the transaction significantly changes Mondadori s profile from both an industrial and a financial point of view. The industrial rationale behind the deal is clearly the increase in the size of Mondadori s magazine activities and international presence. With the acquisition, Mondadori s magazine platform offers more opportunities for further expansion of titles and know-how in other countries. In addition, the merging of the two companies offers scope to exploit industrial synergies. From a financial point of view, the deal (entirely financed through debt) represents an opportunity to optimise Mondadori s financial structure, without compromising its historically generous dividend policy. Outperform rating confirmed. Target price to 9.43 from 8.12 The deal implies an acquisition multiple of 9.2x 2005 EV/EBITDA. This figure does not seem excessive if compared with the multiples paid for previous transactions. The transaction is EPS accretive according to our estimates by 9% based on pro-forma 2005 figures. Our pre-deal valuation of Mondadori was We believe that the improvement of the financial structure offers upside potential of 0.96 per share and that NPV of synergies can be estimated in 0.35 per share. As a consequence, we obtain a new fair value for Mondadori of 9.43, with upside potential of 32%. We reiterate our OUTPERFORM rating with target price of Giuseppe Marsella Sales desk mailto:giuseppe.marsella@mediobanca.it

2 A new Mondadori Mondadori announced on Monday the acquisition of the entire share capital of Emap France, an Emap group company operating in the French magazine market, for 545m. We believe that the transaction significantly changes Mondadori s profile from both an industrial and a financial point of view: The industrial rationale behind the deal is clearly the increase in the size of Mondadori s magazine activities and international presence. With the acquisition, Mondadori s magazine platform offers more opportunities for further expansion of titles and know-how in other countries. This is perfectly in line with the strategy that the group has been implementing for the last few years. In addition, the merging of the two companies offers scope to exploit industrial synergies; From a financial point of view, the deal (entirely financed through debt) represents an opportunity to optimise Mondadori s financial structure, without compromising its historically generous dividend policy. In the following pages, we will give a more detailed analysis of: Emap France; The transaction; The combined entity. Emap France Emap is the third-largest magazine group in France (the biggest European magazine market) with a 12% market share in terms of circulation and 10% in terms of advertising sales. The two leaders, Lagardère s Hachette and Bertelsmann s Prisma Presse, enjoy a market share of 13% each in terms of circulation and 17% and 11% respectively in terms of advertising sales. French magazine market Circulation market shares ( m) Hachette 13% French magazine market Advertising market shares ( m) Hachette 17% Prisma 13% Prisma 11% Others 62% Emap France 12% Others 62% Emap France 10% Source: OJD, Secodip 2005 Emap France s portfolio of magazines contains more than 40 titles, with TV magazines representing 33% of the total in terms of circulation. The portfolio also includes women s titles, male lifestyle titles, a title for seniors and a range of specialised titles. 21 June

3 Emap France: portfolio of main magazine titles and breakdown by segment Segment Title Frequency Circulation TV Tèlè Star Weekly 1,399,307 TV Tèlè Poche Weekly 733,898 TV Tèlè Star Jeux Monthly 197,504 Women Plenie Vie Monthly 967,812 Women Modes & Travaux Monthly 456,255 Women Top Santé Monthly 432,017 Women Closer Weekly 420,378 Women Nous Deux Weekly 369,098 Women Biba Monthly 219,816 Women 20 ans Monthly 110,635 Men Science & Vie Monthly 347,854 Men Auto Plus Weekly 323,288 Men FHM Monthly 169,430 Men Science & Vie Junior Monthly 166,515 Men L'Auto Journal Fortnightly 129,646 Men ADDX Monthly 103,191 Specialized Le Chasseur Francais Monthly 494,514 Specialized L'Ami des Jardins Monthly 179,004 Source: OJD, Secodip 2005 Men 25% Specialized 13% Women 29% TV 33% In fiscal 2006 (year ended 31 March) Emap France posted revenues of 440m, EBITDA of 59m and EBIT of 56m. With an EBITDA margin of 13.4%, the profitability of the group is in line with the estimated profitability of its main French competitors, despite its smaller size. We would stress that profitability has declined in the past few years (the EBITDA margin was 18.5% in fiscal 2004), due to: Increasing competition in the TV magazine business from At that time there was a structural change in the French magazine market, when television advertising of magazine titles was allowed for the first time. This initially had a negative effect on Emap France, because its two main competitors launched new titles in the TV segment, which represented around 38% of Emap France s revenues at that time. The launch costs (more than 10m in fiscal year 2006) of a major new magazine (Closer). The transaction Mondadori will pay 545m for the acquisition of the entire share capital of Emap France (debt free). The transaction, which will be financed entirely through debt, was signed on June 19. The antitrust authorities are expected to approve the transaction by the end of August, and it should be completed by the end of September. The deal implies an acquisition multiple of 9.2x historical EV/EBITDA (calculated for the fiscal year ended March 31). This figure does not seem excessive if compared with the multiples paid for previous transactions, as shown in the table below. 21 June

4 Recent transactions: EV/EBITDA implied multiples Condé Mast/Modern Bride Mondadori/Emap France 8.6x 9.2x Matra-Hachette/Elle Meredith/Gruner+Jahr Reader's Digest/Reiman Publications Emap PLC/Excelsior American Media/Weider Publ. Meredith/American Baby Tribune/Chicago Magazine Hearst/Seventeen 10.6x 10.8x 10.9x 11.2x 11.7x 12.8x 14.0x 14.7x 0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x 16.0x Source: Mondadori We would stress that the implied multiple is calculated without stripping out the effects of the launch costs of Closer. Assuming launch costs of 12m for Closer in fiscal 2006, the adjusted EV/EBITDA acquisition multiple would be only 7.7x. In addition, Emap France posted its lowest EBITDA of the last few years in The combined entity We believe that the acquisition of Emap France implies three major effects on Mondadori: increased company size; scope to exploit synergies; optimisation of financial leverage. Increased group size With the acquisition, Mondadori has probably exploited an unrepeatable opportunity to boost its size. The combined entity will have pro-forma revenues of 2,097m, compared with Mondadori s stand-alone sales of 1,657m in The group s new magazine platform offers more opportunities for further expansion of titles and know-how in other countries and this is perfectly compatible with the strategy that the group has been implementing for the last few years. 21 June

5 Pro-forma 2005 figures ( m) Mondadori Emap France (**) New Group Sales 1, ,097 EBITDA (*) Margin 12.3% 13.4% 12.5% EBIT (*) Margin 10.1% 12.7% 10.6% Source: Mondadori (*) Excluding government paper contribution (**) Fiscal year 01/04/ /03/06 The transaction is EPS accretive according to our estimates. Assuming a tax rate of 35% for Emap France, we estimate EPS accretion of 9% based on pro-forma 2005 figures. Assuming that Emap France can increase profitability in its fiscal year ending March 2007 (simply minus the launch costs for Closer), we estimate EPS accretion in the range of 15%. Scope to exploit synergies We believe that the integration of the two groups will provide scope to exploit industrial revenue and cost synergies above our initial expectations. Revenue synergies could consist of: Export of magazines from Italy to France (Grazia could be the first example). Is this too ambitious, given the competitiveness and maturity of the French market? We would stress that Emap Plc has recently acquired the licence to publish Grazia in the UK and the launch of the new magazine has been highly successful despite the maturity and competitiveness of the UK market. Export of magazines from France to Italy. Add-on-sale ventures in France. Despite the fact that Mondadori has a very good track record in the business in Italy, we believe that the group will look carefully at this possibility, taking into account the different distribution structure of the French market. Cost synergies could involve: Acquisition of content (economies of scale); Acquisition of paper (economies of scale); Full exploitation of Mondadori s printing equipment. Emap France currently outsources the printing of its magazines and we believe that some of them could be printed in Italy by boosting the utilisation capacity of Mondadori s equipment. Optimisation of financial leverage The transaction enables Mondadori to exploit financial leverage (finally!). At the end of March 2006, Mondadori had net cash of 32m. After adjusting this figure to take into account 2006 dividends ( 144m), the combined entity will have net debt of 630m. This figure implies a net debt to EBITDA ratio for the combined entity of 2.4x. This figure is, however, still conservative since Mondadori could theoretically achieve a debt to EBITDA ratio of 3x. This means that the company will have the scope to maintain a generous dividend policy in the future. 21 June

6 Valuation Our pre-deal and post-2006 dividend valuation of Mondadori was We believe that the acquisition of Emap France offers to elements to upgrade the stock s fair value on the back of: Optimisation of the financial leverage; Industrial synergies. We have separately valued the two effects. We believe that the improvement of the financial structure offers upside potential of 0.96 per share and that NPV of synergies can be estimated in 0.35 per share. As a consequence, we obtain a new fair value for Mondadori of 9.43, with upside potential of 32%. Valuation of Mondadori pre and post transaction ( m) Mondadori "as is" Re-gearing effect NPV of synergies New Mondadori Current market price Source: Mediobanca Securities Optimisation of the financial leverage Mondadori has always maintained a very conservative (debt free) financial structure in the past. The deal implies the optimisation of financial leverage, as it will be entirely financed with debt. In the table below, we show our calculation of Mondadori s 2006 WACC under the current and the re-geared financial structure. Mondadori current and re-geared: 2006 WACC calculation Current Re-geared Free risk 4.25% 4.25% Beta Mkt risk premium 4.00% 4.00% Cost of Equity 8.85% 12.33% Shareholders funds/ce % 46.95% Cost of Debt (gross) 4.55% 4.55% Tax rate 33.00% 33.00% Cost of Debt (net) 3.05% 3.05% Net Debt/CE 0.00% 53.05% WACC 8.85% 7.41% Source: Mediobanca Securities 21 June

7 We have estimated the re-gearing effect as the difference between our DCF pre-deal fair value with a re-geared financial structure and our DCF pre-deal fair value of Mondadori. Under the two scenarios, we have used a rolling WACC as shown in the chart below. Our Mondadori WACC calculation pre and post re-gearing 9.0% 8.8% 8.6% 8.4% 8.2% 8.0% 7.8% 7.6% 7.4% 7.2% 7.0% Source: Mediobanca Securities WACC current WACC re-geared Our DCF pre-deal fair value with a re-geared financial structure is 9.08 versus our DCF pre-deal fair value of This implies a valuation of the re-gearing effect of 0.96 per share. Industrial synergies Mondadori s management did not provide a detailed assessment of the expected synergies. However, management declared that, according to a preliminary estimate, value of Emap France in 5 years should be 20%/30% higher than the price paid. At mid range, value creation in 5 years should be 136m. We have calculated the NPV of this amount assuming a discount rates consistent with the new financial structure and obtain a value of 93m ( 0.35 per share). We would stress that Mondadori s management is usually conservative in providing guidance. As a consequence, we would not be surprised to see a revision of the disclosed figure upward. 21 June

8 Profit & Loss account ( m) E 2007E Turnover 1,650 1,657 1,695 1,744 Turnover growth % EBITDA EBITDA margin (%) EBITDA growth (%) Depreciation & Amortization EBIT EBIT margin (%) EBIT growth (%) Net Fin.Income (charges) Non-Operating Items Extraordinary Items Pre-tax Profit Tax Tax rate (%) Minorities Net Profit Net Profit growth (%) Adjusted Net Profit Adjusted Net Profit growth (%) Balance Sheet ( m) E 2007E Working Capital Net Fixed Assets Total Capital Employed Shareholders' Funds Minorities Provisions Net Debt (-) Cash (+) Cash Flow Model ( m) E 2007E Cash Earnings Working Capital Needs Capex (-) Financial Investments (-) Dividends (-) Other Sources / Uses Ch. in Net Debt (-) Cash (+) Multiples E 2007E P/E Adj P/CEPS P/BV EV/ Sales EV/EBITDA EV/EBIT EV/Cap. Employed Yield (%) FCF Yield (%) Per Share Data ( ) E 2007E EPS EPS growth (%) EPS Adj EPS Adj. growth (%) CEPS BVPS DPS Ord Key Figures & Ratios E 2007E Avg. N of Shares (m) EoP N of Shares (m) Avg. Market Cap. ( m) 2,017 1,842 1,842 1,842 Enterprise Value ( m) 1,920 1,810 1,836 1,798 Labour Costs/Turnover (%) 16% 16% 16% 16% Depr.&Amort./Turnover (%) 4% 2% 2% 2% Prod. Ratio (Turn./Op.Costs) Gearing (Debt / Equity) (%) 0% 0% 0% 0% EBITDA / Fin. Charges >10 >10 nm nm Cap.Employed/Turnover (%) 39% 36% 35% 34% Capex / Turnover (%) 1% 7% 2% 2% Pay out (%) 82% 125% 0% 0% ROE (%) 18% 23% 23% 24% ROCE (%) (pre tax) 27% 32% 32% 35% ROCE (%) (after tax) 17% 20% 19% 21% Figures in this page do not include Emap France transaction THIS PUBLICATION IS ISSUED BY MEDIOBANCA. IT IS NOT INTENDED TO BE AN OFFER TO BUY OR SELL, OR A SOLICITATION OF AN OFFER TO BUY OR SELL, ANY SECURITIES. THE INFORMATION CONTAINED HEREIN, INCLUDING ANY EXPRESSION OF OPINION, HAS BEEN OBTAINED FROM OR IS BASED UPON SOURCES BELIEVED TO BE RELIABLE BUT IS NOT GUARANTEED AS TO ACCURACY OR COMPLETENESS ALTHOUGH MEDIOBANCA CONSIDERS IT TO BE FAIR AND NOT MISLEADING. THE OUTPERFORM RATING IN REGARD TO MONDADORI SPA WAS ISSUED FOR THE FIRST TIME ON 19/01/2004. MEDIOBANCA AND ITS AFFILIATED COMPANIES, OR INDIVIDUALS CONNECTED TO THEM ARE UNDER NO OBLIGATION TO DISCLOSE OR TAKE ACCOUNT OF THIS DOCUMENT WHEN ADVISING OR DEALING WITH OR FOR THEIR CUSTOMERS. FOR FURTHER INFORMATION REGARDING QUARTERLY RATING STATISTICS AND DESCRIPTIONS, CHINESE WALL MECHANISMS PUT IN PLACE BY MEDIOBANCA AND ANY OTHER DISCLAIMERS, PLEASE REFER TO THE MB SECURITIES SECTION OF THE MEDIOBANCA WEBSITE AT TO ACCESS PREVIOUS RESEARCH NOTES AND ESTABLISH TRENDS IN RATINGS ISSUED, PLEASE SEE THE RESTRICTED ACCESS PART OF THE MB SECURITIES SECTION OF THE MEDIOBANCA WEBSITE AT