Lagardere S.C.A.

Lagardere (ticker MMB FP on Bloomberg, listed on Euronext Paris, France) is a French conglomerate involved in publishing, magazines, airport and rail retail stores, and sports promotion and licensing.  MMB also owns 7.5% of EADS (EAD FP – publicly traded French/German owner of Airbus) and 20% of Canal+France, the dominant French pay-TV company which is 80% owned by Vivendi.

Like many European conglomerates, it is widely acknowledged that Lagardere trades at a significant discount to its SOTP (“sum of the parts”). It is possible to trade the ebb and flow of these discounts, but the discounts can persist for many years, may never be unlocked, and oftentimes widen out at the worst possible time: when hedge funds are in crisis and are deleveraging and unwinding their SOTP trades.

What is perhaps different here is there are short term (Canal+France) and medium term (EADS) catalysts to unlock the SOTP.  Lagardere plans to float its 20% of Canal+France after the summer 2011, and has plans to sell its EADS stake in late 2012/early 2013.  The Company has stated that taxes on the sale of both of these stakes will likely be minimal.  If one takes out the likely value of Canal+, and the public market value of the EADS stake, the rest of Lagardere trades at only 3x EBITD.

Lagardere had planned to float Canal+France in the spring of 2011, but pulled its registration statement at the time of the Japan tsunami, citing market conditions.  Prior to this, Lagardere had been in talks to sell its 20% stake to Vivendi, but talks reportedly faltered due to a wide E800mm/E1.35B bid/ask spread which could not be bridged (according to French newspaper Le Figaro).  Most analysts value the stake at E1B-1.2B.  It is on Lagardere’s books at E1.5B.  It is still possible that a sale to Vivendi will take place in lieu of public floation.

Canal+France is the dominant pay-TV business in France, with E3.95B in Revenues in 2010 and E616MM of EBITA.  The Company has 9.7mm pay TV subscribers in France, as well as 1.3mm in French overseas territories and Africa.  Earnings were E357mm in 2010 (308mm in 2009 and 262mm in 208). Valued at 14x earnings, that is E5B (which is 1.25x Revenues and 8.1x EBITA), 20% of this is E1B.  This is close to the midpoint of the reported bid/ask on the asset, and it seems like a reasonable valuation.

Lagardere owns 61mm shares of EADS (EAD FP).  61mm shares is .467 EAD per Lagardere; at current price of E23.93 for EADS, this is E1.47B.  One risk factor with respect to EADS is that in April 2006, Lagardere sold half of its 15% stake just 2 months prior to a significant production delay on the Airbus A380 which sent the stock from E25.42 to E18.73 (down 26%), although it recovered quickly into the low 20s. After a long investigation, the AMF (analogous in France to the SEC) cleared Daimler (which had also sold down its stake), Lagardere and individual executives at EADS who sold shares in the weeks and months prior to the June 2006 warning.  However, in January 2011, Paris judges Serge Tournaire and Xavier Blanc indicted Lagarder and Daimler for insider trading.  Both Daimler and Lagardere have stated that there is no new evidence, and they are both confident that they will be cleared.

Lagardere:

Shares out                        131.1mm

Price                                27.45

Equity Cap                      3,598MM

Long term debt               2,494           

Cash                                (722)

Sales international mags  (650) (pending)

TEV                                4,720

EADS stake                    (1,466)

Canal+France                 (1,000)

Core Lagardere TEV:       2,254MM after deducting value of EADS and Canal+France

Note that Lagardere agreed in March 2011 to sell its international (non French) magazine division to Hearst for E650mm.  The deal will close later in 2011. 

Projected 2011 Rev = E7.7B = 30% of Revenues

Projected 2011 EBITA E450MM = 5x EBITA

Projected 2011 EBITD E660MM = 3.4x EBITD

2010 Cap ex was E228mm and it is pretty stable. 

In terms of EBITA, the breakdown is 51% Publishing (about ½ of which is Education, Academic and Reference and ½ Literature and Illustrated), 13% Active (40% French Magazines, 33% Radio and 27% TV), 24% Services (virtually all from Retail stores with press distribution slightly above breakeven), and 11% Unlimited (sports media and marketing). 

Comps: Pearson trades 1.7x Rev and 9x EBITD

             Reed trades 5.2x EBITD

             Wolters Kluwer trades 1.8x Rev and 8x EBITD

             Axel Springer trades 1.2x Rev and 6.7x EBITD 

            McGraw Hill trades 2.1x Rev and 7x EBITD

Dufry (Duty free shops) trades 1.3x Rev and 10x EBITD

While none of these are perfect comps, it seems clear that 3.4x EBITD is very cheap.

If we simply look at the equity, the value of the two stakes is about E2.5B, or E19 per share, compared to a stock price of Lagardere of E27.45 – which shows the magnitude of these stakes relative to the valuation of Lagardere.

Lagardere has stated that the proceeds from these disposals will be used for acquisitions and return of capital.

Core Lagardere:

                        2010 Rev                        2009 Revenue           

Publishing            2,165                                    2,273                       

Active                  1,826                                    1,725

Active pro f.         1,074                                    1,026 (taking out International Magazine, sale pending)

Services               3,579                                    3,387           

Unlimited              396                                       507

                        2010 EBIT                        2009 EBIT           

Publishing               250                                      301                                               

Active                       85                                        15

Active pro f.              58                                        26                                        

Services                  105                                        91                                                                         

Unlimited                  28                                        56                       

Pro F EBIT              441                                      474

Lagardere projects that recurring EBIT will increase 10% in 2011.

Publishing

2010 Revenue of E2.16B was down 6.3% on a comparable basis. This business consists of Illustrated, Education, General Literature, Reference, Academic/Professional and Other. Lagardere (Hachette) is #2 in the world in publishing after Pearson, and ahead of Houghton Mifflin Harcourt, Random House and McGraw Hill.  It is geographically diversified, with 31% of Revenue in France, 9% Spain, 15% UK, and 22% US.  They are #1 in France, the UK, Australia and New Zealand, and #5 in the US, with particular strength in youth literature, illustrated books, and travel guides.             

Publishing EBIT margins fell from 13.2% in 2009 to 11.6% in 2010.  2010 Publishing results were hit by tough comps with Twilight, which peaked in 2009. 

As the book business moves to digital, there are certainly risks here.  But unlike book retailers, it seems certain that Publishing will continue to have a large role in the book business, although we are probably looking at lower revenues but higher margins.  The diversified nature of Lagardere’s publishing business, both in terms of geography and type of publication (since trade books are moving to digital much more rapidly than Illustrated, DIY books, Reference, Academic) should also help with the stability of this business. It is at best a low growth business, however. 

Active – This division had been 70% magazines, but after the sale of international (non-French) magazines to Hearst which will close later in 2011, consists of 55% magazines, 25% Radio and 20% Television stations.  Magazines will now be 100% France, Radio is 60% France, and TV is focused on channels geared towards music, children and women.  In thinking about valuation, note that the sale of International Magazines to Hearst is being done at 84% of Revenues at 13x EBIT.

Services

2010 Revenues of E3.579B were up 1.7% on a comparable basis.  The business consists of 3,800 press outlets and duty free shops under the names Relay and Virgin in travel locations, and local names such as Payot and Inmedio.  There are 1,100 Relay stores in 100 international airports and over 180 Aelia duty free outlets (mostly at 16 French airports).  The division also owns the largest newspaper distributor in the US, Belgium, Switzerland, Spain and Hungary.  Retail has E2.7B revenues and about 108mm EBITA, whereas Press Distribution is E1.0B revenues and slightly above breakeven EBITA.

Unlimited

Probably the most controversial business of Lagardere, Unlimited is the Sports business of Lagardere. 2010 Revenues of E396mm were down 23% on a comparable basis.  2010 poor results are described by the Company as being down due to a cyclical scarcity of 2010 sports events with rights owned by it.  The largest business is Sportfive (acquired in 2007) which mostly is a marketer of European football (soccer) rights.  It consists of the management and sale of broadcasting rights for sports events,  marketing of sports rights, sports sponsorships, and organization of sporting events, and agent representation of sports stars.  64% of 2010 Revenues were from Europe, and 72% of Revenues were football (soccer) related.  Lagardere has gotten into the sports management business through acquisition, paying approximately E1B, and clearly with only tens of millions of EBIT, this has not been a success. 

Risks

There are a number of risks here, but I think the low valuation (net of EADS and Canal+France) are compensating you for them. 

1)    Holding company discounts can persist for years

2)    If you fully hedge EADS, Lagardere may not participate in large EADS rally (holding co spread will likely widen)

3)    The IPO or sale of Canal+France could be delayed

4)    The sale of the EADS stake may be delayed, including due to insider trading investigation into the sale by Lagardere of half of its stake in 2006

5)    Insider trading investigation into EADS may result in a fine or sanctions

6)    Proceeds of sale of stakes may be “wasted” on foolish acquisition, especially in sports area. Lagardere has expressed interest in IMG (owned by Forstmann Little)

7)    Publishing business is vulnerable to digitalization, although opportunities also exist from digital books

8)    Lagardere is an “SCA structure”, (Societe en commandite par actions) which is basically a French limited partnership in which the shareholders are limited partners with limited ability to influence management

Conclusion

The key question is  - these are OK businesses at best – not great businesses – but if the near and medium term catalysts occur as I expect they will, the valuation is cheap enough that you should be able to profit as the holding company discount is reduced.