Operationally, Lagardere offered few surprises in its fullyear update, since management had already disclosed expected sales figures in the sales call last month. Overall, sales and profitability trends remained sluggish in most of Lagardere’s media operations, due to weak macro conditions in Europe and structural headwinds in its oldmedia businesses.

On a like-for-like basis, full-year net sales and recurring EBIT from media activities were roughly flat with the prior year, coming in at EUR 7.66 billion and EUR 358 million, respectively. Management expects 2013 recurring EBIT will increase 0%-5%, which assumes a consolidated 5% advertising sales decline.

It looks as if the Canal+ initial public offering will be delayed, since Lagardere is suing Vivendi, the 80% owner of Canal+, over its management of the subsidiary’s cash and it is uncertain when this matter will be resolved. However, investors are encouraged that management finished negotiations with the relevant parties for the divestiture of EADS, which is expected to be completed by the end of July. Management announced that the proceeds will be used for an “exceptional cash return to shareholders” and deleveraging, which is significant since the proceeds could represent more than half of Lagardere’s total enterprise value.

Organic publishing revenue declined 1.2% from the prioryear period to EUR 2.0 billion (up 1.2% on a reported basis), and the segment earned EUR 223 million in income. Analysts still view publishing as a valuable asset that continues to generate more than half of the firm’s total recurring media profits, but investors remain skeptical that the segment will be able to generate any meaningful organic growth.

After excluding the divestitures of PMI and Russian Radio, active revenue declined 3.9% (down 29.6% on a reported basis), and profits declined 17% from the prior-year period (to EUR 64 million). While investors are positive on active’s television assets, magazines continue to represent the largest component of active, and many are concerned that this division will face significant structural headwinds, despite its relatively strong position in domestic markets. Services revenue increased 2.2% (up 2.3% on a reported basis) and profitability was roughly flat (at EUR 104 million), as growth in travel retail (up 8.2%) offset the decline of the distribution business (down 4.5%).

Travel retail is one of the few core businesses within Lagardere that is sustaining meaningful organic growth, and investors are optimistic that this segment will grow to become a larger component of the firm. Finally, the unlimited division continued to report weak revenue (down 5.9%) and profits (EUR 33 million operating loss). The poor performance of this division underlies our concern about Lagardere’s capital allocation risks, since the conglomerate has spent more than EUR 1 billion to build up this business inorganically, with few signs that the segment will generate any meaningful economic profit.


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