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16-06-2024 : Privatizing France Télévisions?

In 2023, the France Télévisions group generated sales of €3 bn, including €2.4 bn in public subsidies (the licence fee was abolished in 2022), and €432 m in advertising revenue, taken from a TV advertising market declining by 1.4% a year and totaling €3.5 bn. France Télévisions has €429 m in equity, and negative free cash flow of €67 m in 2023, the same as in 2022. Net income in 2023 was €14 m, compared with a loss of €48 m in 2022.

As the Rassemblement National plans to return to the French citizens the €2.4 bn in annual subsidies paid out, an additional €2.4 bn in advertising revenue is needed to break even, representing 69% of the market volume, giving France Télévisions an 80% share of the TV advertising market, with only 29% of the audience. 

Even if this feat were achieved, which would mean depriving TF1 and M6 of 90% of their advertising revenues, France Télévisions would still only break even. To justify the €3 bn figure given by Sébastien Chenu as the proceeds from the privatization of France Télévisions, and taking into account the M6 and TF1 P/E of around 8, France Télévisions would have to generate net income of €375 m, which is about the same as the combined net income of TF1 and M6 (€429 m). This is quite coherent, given that €3 bn, the proceeds from the privatization of France Télévisions according to Sébastien Chenu, is roughly the sum of the market capitalization of M6 and TF1. 

To reach these €375 m, it would be sufficient to generate €500 m in additional advertising revenue, leading to a 96% share of the TV advertising market, with 29% of the audience. Alternatively, lay off half of France Télévisions' 8,950 employees (salaries of € 1030 m in 2023).

As for a takeover of France Télévisions by M6 or TF1 mentioned by Philippe Ballard, spokesman for the Rassemblement National, apart from the fact that it could only be partial and would involve dismantling the company to comply with anti-trust rules (no more than 7 national TV programs for any one person), it does nothing to solve the problem of finding €2.4 bn a year to compensate for the loss of current public subsidies - equivalent to TF1's sales, or 185% of M6's sales.

If you find it hard to believe in the feasibility of these business plans, perhaps you're wondering how, in 1987, TF1 was able to be privatized, and survive the absence of licence fees?  Well, the TV advertising market was booming at the time, with annual growth rates of 10-15%, compared with the current 1.4%. This changes everything. 

29-05-2024 : Believe, an expert who outclasses the advisory banks

Here's the second thing that left us wondering when we read the offer notes, after the concept of a fair price, but not fair enough to allow expropriation as seen this Saturday.

While the consortium has made an offer of €15 to buy back the free float, the valuation of the 2 advisory banks is significantly lower, whereas there is usually little difference between this valuation and the offer price. Here, the opposite is true. The bank advisors arrive at a DCF of €10, where the independent expert is at €17; with the multiples it's a range of €5 to €10, where the independent expert is between €10 and €20... . With advisors valuing the target at €10 using a DCF and between €5 and €10 using multiples, one wonders how the consortium, which is not made up of financial choirboys, could put €15 on the table, and Warner Music articulate a price of €17 ... . 

When we look at the details of the banks' valuation, we are struck by the errors made: 

1/ The required rate of return estimated from the CAPM model is: risk-free rate + beta x (expected market rate of return - risk-free rate). The figure in brackets is the risk premium. But if we take one in bulk, we make sure that it has been calculated using the same risk-free rate that is also used in the formula, so that we don't have 2 different risk-free rates. In this case, the risk premium taken has no chance of having been calculated with the risk-free rate used (OAT 20 years), as required. 

2/ Use the 20-year OAT rate as the risk-free rate, whereas the usual practice is to use the 10-year OAT rate, in the absence of a short-term rate that is truly risk-free. This inflates the discount rate and reduces the value. 

3/ Adding consultancy costs not foreseen in the business plan prepared by management, which reduces the value. 

4/ Simply taking the multiples of two comparable companies, Warner Music and Universal Music (UMG), and lazily applying them to Believe, pretending to forget that the level of a multiple depends above all on the growth rate, and that by this yardstick, Believe is leaving these two groups behind: + 22% per year from 2019 compared with + 12% by UMG and 6% for Warner.  Just by comparing the multiple calculated by the banks for Warner (14) and UMG (22), the substantial difference between which is explained by the no less substantial difference between the growth rates of these two groups (6% and 12%), we can instantly see that these multiples cannot be applied to Believe, which is growing 2 or 4 times faster. This is exactly what the independent appraiser understood, having done some real thinking and managed to integrate, as she should, the impact of the growth rate into the multiple used to value Believe.

Strange. 



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The Vernimmen.com Letter

Number 156 of May 2024

News : Managing a company under LBO

Statistics : Yield curves

Research : The end of SPACs?

Q&A : What are the disadvantages of eliminating short selling?

COMMENTS : Comments posted on Facebook