3.1 Risk factors
This chapter takes account of the requirements of Regulation (EU) 2017/1129 (“Prospectus 3”), insofar as the Group refers to its Universal Registration Document when issuing securities to the public.
In accordance with these new requirements, the descriptions provided below are limited to risks that are specific and material to the Lagardère group as a whole.
To improve consistency and readability, a table is provided at the end of this chapter summarising changes in risk factors compared to 2018. Justification is provided for each change, along with a reference to the relevant section of this chapter.
A qualitative assessment of criticality (net of risk control measures deployed by the Group) is presented for all risks. The most significant risk within each category is presented first. The section on operational risks includes a specific description of the impacts of Covid-19.
Risk management procedures are described in section 3.2.8 – Risk management procedures.
3.1.1 RISKS ASSOCIATED WITH THE GROUP’S BUSINESS ACTIVITY
3.1.1.1 RISKS ASSOCIATED WITH MAJOR CONTRACTS
Some contracts in the form of concession agreements managed by Lagardère Travel Retail provide for the payment of guaranteed minimum amounts to the concession grantor. This can entail financial commitments for the Group representing several hundred millions of euros over a number of years.
The profitability of these contracts may prove lower than that expected by Lagardère Travel Retail over the long term, for example if passenger traffic or spend per passenger are lower than forecast at the time the concession was awarded, meaning that the Group is unable to satisfactorily fund the guaranteed minimum amounts due to the concession grantor.
When these concession agreements expire, they are mostly put up for tender by the concession grantor, and there is no guarantee that Lagardère will be awarded the contract again. Several adverse situations may arise, for example the Group may lose the tender to a competitor, or the concession grantor may split the contract into several distinct parts, leading to a reduction in the share of the concession awarded.
These challenges exist at a time of increasing competition and business growth for the Group in the Travel Retail segment, which represented 59% of Group revenue and 40% of Group operating profit in 2019.
The risks described here also concern, on a smaller scale, certain contracts that Lagardère Publishing has entered into with authors and rights holders, or for the distribution of third-party publishers. In light of the above, the Lagardère group considers that the risk associated with major contracts is high.
3.1.1.2 IMPACT OF CHANGING CONSUMPTION PATTERNS ON THE GROUP’S BUSINESS MODELS
The Group is faced with changes in its customers’ consumption habits as digital and mobile technologies develop, and this also has a significant effect on its commercial positions.
New ways of purchasing and distributing books (paper, e-book, audio book) bypassing traditional bookstore networks have led to a concentration in the book distribution industry. This situation affects the profitability of traditional book sales networks, which could result in the decline of these networks and therefore in lower sales for the Group. In parallel with greater industry concentration, publishers’ margins are also coming under increasing pressure, and can only be protected through regular negotiations by Lagardère Publishing teams with the distributors concerned. Trends in the education market are sensitive to the pace and scale of curriculum reform, as well as the gradual transfer of content to digital formats. A reduction in the pace of curriculum reform or in State education budgets, especially in France and Spain, could reduce Lagardère Publishing’s profitability in this segment, which represented around 5% of Group revenue in 2019.
For Lagardère Travel Retail, online products facilitate price comparisons and the emergence of new commercial offerings outside airports. By intensifying competition, this could adversely impact the Duty Free and Travel Essentials businesses, which represented approximately 46% of Group revenue in 2019. Significant changes in the consumption habits of certain large customer categories, linked to a change in their travel destinations or to a decline in their purchasing power (e.g., adverse exchange rate fluctuations), could lead to a loss of revenue for Lagardère Travel Retail at certain airports.
Lagardère Travel Retail’s business more generally is extremely sensitive to all events affecting regional or global air traffic. Its revenue could also be impacted by an economic crisis that affects leisure or business travel.
For the media assets retained by the Group, which represented around 3% of consolidated revenue in 2019, digital media exercise strong competitive pressure on print media, impacting both sales and advertising revenue. Across the French market, for example, paid circulation decreased by 3.6% in 2019, while the written press advertising market declined by 4.1% over the first nine months of the year. The profitability of media businesses also depends on maintaining a wide audience. The rally in audience numbers for the Europe 1 radio station is important for the Group, since the station’s revenues are directly related to its audience figures.
In light of the above, the Lagardère group considers this risk to be high overall.
Items appearing in the Annual Financial Report are cross‑referenced with the following symbol AFR
3.1.1.3 RISKS ASSOCIATED WITH STRATEGY IMPLEMENTATION
The Group’s strategy evolved in 2018 to focus on two major business divisions, Lagardère Publishing and Lagardère Travel Retail, while retaining certain media businesses. The Group’s planned disposals of its Lagardère Active and Lagardère Sports and Entertainment divisions are mostly underway and pending completion.
To meet its strategic goals, the Group also regularly carries out acquisitions and enters into partnerships in its Publishing and Travel Retail businesses. Two major acquisitions recently took place in Travel Retail: Hojeij Branded Foods (HBF), acquired for USD 330 million in 2018, and International Duty Free (IDF), acquired for €250 million in 2019.
The success of these acquisitions and disposals depends on the Group’s ability to identify attractive opportunities, effectively negotiate and smoothly integrate any new businesses into its portfolio. Failure to do so could have a negative impact on the return on investment and ultimately on the Group’s net worth.
Given the advanced progress of the disposals and the Group’s experience in acquisitions in the publishing and travel retail businesses, the Lagardère group considers this risk to be moderate overall.
3.1.2 LEGAL AND REGULATORY RISKS
3.1.2.1 ADVERSE CHANGES IN REGULATIONS APPLICABLE TO THE GROUP
The Group is bound by strict and complex regulations put in place by various national and international authorities and organisations. Any major change in these laws and regulations could impact Group revenue and/or the profitability of the businesses concerned. This is particularly relevant in the cases described below.
The World Health Organization’s Framework Convention on Tobacco Control recommends various measures to reduce the supply and demand of tobacco, in particular, banning or restricting Duty Free and tax-free sales of tobacco products to international travellers. In response to this Framework Convention as well as to other measures, stricter regulations are being put in place regarding the sale of tobacco. The introduction of new local regulations aimed at reducing tobacco consumption could lead to a decline in profitability for certain Lagardère Travel Retail concessions.
Some countries have also introduced environmental protection measures (e.g., product recycling) that may affect Lagardère Travel Retail points of sale by limiting sales of certain products. For example, since August 2019, no water can be sold in plastic bottles at San Francisco airport. These types of measures reflect the public’s growing concern for the environment and could become increasingly widespread in the next few years.
The Directive on Copyright in the Digital Single Market adopted in April 2019 by the European Commission aims at providing consumers with greater choice and access to online goods and services. The Directive encourages Member States, for example, to make compulsory certain exceptions to copyright, especially where the content is for teaching, research (text and data searches, as already envisaged in the French Loi Lemaire) or cultural purposes.
Although the Directive does not call into question the situation of rights holders like Lagardère Publishing, there is uncertainty about how it will be transposed into French law in the next two years. It could weaken the position of rights holders and hence give rise to a decline in profitability at Lagardère Publishing in France.
The Lagardère group considers this risk to be moderate overall.
3.1.2.2 RISKS ASSOCIATED WITH LITIGATION IN PROCESS
In the normal course of their business, Lagardère and/or its subsidiaries are involved in a number of disputes. The Group has set aside the provisions it deems necessary to cover any risks that may arise from general or specific disputes. The total amount of provisions for litigation is disclosed in note 28 to the 2019 consolidated financial statements.
The main litigation cases involving the Group are presented in note 35
to the 2019 consolidated financial statements (see chapter 5). To the best of the Group’s knowledge, in the 12 months immediately preceding publication of this Universal Registration Document, there were no other governmental, legal or arbitration proceedings (including pending or threatened proceedings, of which the Group is aware) which may have or have had a significant impact on its financial position or profitability.
The Lagardère group considers this risk to be low overall.
3.1.3 OPERATIONAL RISKS
3.1.3.1 PANDEMIC (COVID-19)(1)
The Covid-19 epidemic which first emerged in China at the beginning of 2020 is having a significant impact on Lagardère Travel Retail’s business. At the time of publishing its 2019 annual results on 27 February 2020, these impacts were mainly being felt in the Asia-Pacific region. They have since spread to affect the division’s other businesses, particular in Europe and North America. Drawing on its experience of these types of events, Lagardère Travel Retail has taken clear-cut action in four areas to mitigate the financial consequences of the virus: (i) adapting sales and prices as far as possible, (ii) reducing overheads (e.g., by adjusting opening hours and rental terms in agreement with concession grantors, and optimizing operating costs), (iii) reviewing investments and (iv) scaling back working capital requirements.
The Covid-19 epidemic is also impacting the Group’s other businesses, albeit to a lesser extent as of the date of this Universal Registration Document, owing to the closures and containment measures imposed by many of the countries in which the Group operates.The containment measures in place in France are impacting Lagardère Publishing’s sales, and the first steps have been taken to reduce overheads.
Similarly, the Group’s other businesses – primarily conducted in France – are affected by measures aimed at reducing travel and mobility among the public and at avoiding gatherings, as well as by cost savings measures introduced by advertisers in certain sectors. Against this backdrop, the Group is currently considering postponing certain investments with the aim of striking the right balance between protecting its earnings and cash flows, and maintaining its business growth outlook.
Also due to the Covid-19 epidemic, certain short-term funding markets commonly used by the Group (e.g., commercial paper, or NEU CP) are no longer functioning. Combined with the impacts on the business activities of the Group’s entities, this automatically reduces cash inflows, and in turn gives rise to a cyclical liquidity risk for the Group. Taking the situation at 31 December 2019, a substantial portion of the Group’s €913 million in cash and cash equivalents (see note 26 to the 2019 consolidated financial statements) would be mobilised to pay down commercial paper in an amount of €449 million (Neu CP, see note 29.2 to the 2019 consolidated financial statements) falling due by 30 July 2020. As of the date of filing of this document, this risk remains moderate however, notably due to the currently undrawn €1,250 million syndicated credit line (see note 30.1 to the 2019 consolidated financial statements).
As mentioned in chapter 6, as of the date of this Universal Registration Document, it is too early to precisely determine how the epidemic will evolve across the globe over the next few months, and what its impacts on the Group’s businesses will be. The Group will provide up-to-date reports of these impacts in press releases available on www.lagardere.fr.
In light of the above, the Lagardère group considers this risk to be high overall in terms of its financial impacts on the Group’s business activities, and moderate in terms of its impacts on liquidity.
(1) Section 3.1.3.1 does not form part of the Annual Financial Report.
3.1.3.2 BUSINESS INTERRUPTION
One-off events can disrupt the effective operation of the Group’s businesses, by making certain production facilities temporarily unavailable. Incidents with the greatest potential impact are those that could result in the prolonged unavailability of Lagardère Publishing and Lagardère Travel Retail warehouses, or of cash tills at a series of stores, or radio studios.
There are many different potential causes of the above. Information systems failure would be the most common cause, as IT is critical to the Group’s ability to conduct its business and is increasingly exposed to the risk of hacking (see the following risk). Other possible causes of business interruption include, for example, fires, flooding (e.g., century-high water levels in Paris), sabotage and terrorist attacks.
Lagardère Travel Retail’s business relies on the effective operation of airports, railway stations and other means of transport. Weather-related events, accidents, strikes and more generally, any event that could restrict or even interrupt passenger traffic in the Group’s stores could affect its revenue (see the previous “pandemic” risk).
For some of its business activities in France, the Group relies on its partner Presstalis, which is currently subject to financial safeguard proceedings. If Presstalis were to default, this could have an impact on sales of written press, magazines and partworks, and on the revenue earned by Lagardère Travel Retail’s stores selling press titles in France.
In light of the above, and excluding the impacts of the Covid-19 pandemic discussed above, the Lagarèdre group considers this risk to be moderate.
3.1.3.3 RISKS ASSOCIATED WITH BUSINESS ETHICS
The Lagardère group does business in many different countries subject to anti-corruption regulations (e.g., Foreign Corrupt Practices in the US, Bribery Act in the UK, Sapin II law in France), as well as regulations in terms of international economic sanctions and anticompetitive behaviour.
Failure to comply with these regulations or with the ethical rules of conduct set by the Group could lead to substantial penalties, a deterioration in the Group’s image, the conviction of its senior executives, the termination of certain contracts and even a forced exit from certain markets. Corruption risk is higher for certain businesses, particularly those which involve contracts signed by public officials or calls for tenders. This is chiefly the case for sports rights management at Lagardère Sports and Entertainment and airport concessions at Lagardère Travel Retail.
Compliance with competition law is also an issue in the education sector at Lagardère Publishing. The Group could, for example, be (justly or unjustly) accused of having been awarded a contract due to anticompetitive behaviour (e.g., an alleged cartel). It could also be accused of having entered into a contract restricting competition on its market, potentially leading the scope of the contract to be revised. Several disputes described in note 35 to the consolidated financial statements involve alleged anticompetitive behaviour.
Some businesses are particularly exposed to the threat of international economic sanctions(1), for instance, the marketing and sale of football rights, the supply of Lagardère Travel Retail stores and licensing agreements (especially for the Elle brand). The Group considers these risks when conducting its business and has rolled out Compliance programmes as described in section 3.2.6.5 of this chapter.
However, there is growing pressure from the relevant supervisory authorities as to how these regulations are applied, and heavy sanctions have been imposed on businesses.
Despite its best efforts, the Group cannot rule out the possibility of facing proven or unproven allegations that it has failed to comply with ethical rules of conduct, and this could have a negative impact on its reputation, growth outlook and financial performance.
In light of the above, the Lagardère group considers this risk to be moderate.
(1) Governments and/or international bodies (e.g., the UN) can adopt restrictive financial or commercial measures against individuals or legal entities. These measures take the form of bans or restrictions on the trade of specific goods, technologies or services with certain countries, frozen funds and financial resources, and sometimes restricted access to financial services.
3.1.3.4 RISK ASSOCIATED WITH PRODUCTS DISTRIBUTED
Within the scope of the Foodservice business line of Lagardère Travel Retail, the Group could be faced with an incident involving the quality of its food products. In such a situation, it could be declared liable, which would impact its reputation with concession grantors and the brands concerned. This risk is set to grow as Lagardère Travel Retail develops its business in this sector, for example, with the acquisition of Hojeij Branded Foods in the United States in 2018. The Foodservice business generated around €960 million in revenue in 2019, representing over 13% of total Group revenue.
To a lesser extent, this risk also covers physical products delivered
with books and partworks sold by Lagardère Publishing subsidiaries (accessories, games, etc.), where failure to comply with applicable standards and regulations may cause harm to consumers and to the image of Lagardère Publishing.
In light of the above, the Lagardère group considers this risk to be moderate.
3.1.3.5 RISKS ASSOCIATED WITH DATA SECURITY
The Group’s information systems contain confidential data related to how its businesses are run, notably details of major contracts (see above). They also contain personal data on Group employees and third parties, including for example magazine and partworks subscribers, the travelling public (Duty Free) and website visitors (Media, Education). In the event of challenges to the confidentiality, integrity or availability of this data, the Group could be exposed to various risks in terms of image, loss of revenue, third party disputes and fines. These challenges are growing as systems become increasingly complex, computer hacking more prevalent and regulatory requirements weigh more heavily on the Group, in particular, the General Data Protection Regulation (GDPR) which entered into force on 25 May 2018.
In light of the above, the Lagardère group considers this risk to be moderate.
3.1.4 FINANCIAL RISKS
Financial risks facing the Lagardère group arise from the usual conduct of its business. The Group does not engage in speculative trading:
- credit and counterparty risks arise on trade receivables and cash investments and are considered moderate risks;
- interest rate risk arises on the Group’s position as a net borrower with regard to banks and the market, and is considered a low risk;
- foreign exchange risk arising on commercial transactions is limited, since the Group’s activities are generally carried out locally; accordingly, foreign exchange risk is considered a low risk;
- a portion of the Group’s equity (around one-third) is denominated in pounds sterling owing to the historic earnings derived from its businesses in the United Kingdom. This gives rise to an asset value foreign exchange risk against the euro. This is considered a low risk;
- market risks arise on the Group holding treasury shares and pension plan assets invested in equities – albeit for a limited amount. This is considered a low risk.
All of the aforementioned risks are described in further detail in note 30, chapter 5 of the Universal Registration Document.
3.1.5 CHANGES IN RISK FACTORS COMPARED TO 2018
| Description used in 2018 | Comment | Reference |
|---|---|---|
| Risks and dependency associated with major contracts |
Name of risk unchanged | Maintained |
| Impact of digital and mobile technologies on the Group’s business models |
Risk renamed “Impact of changing consumption patterns on the Group’s business models”. |
Maintained |
| Risks associated with strategy implementation | Name of risk unchanged | Maintained |
| Cyclical risks specific to the Group's business lines |
This vaguely defined risk is no longer referred to; its content is now split among the risks maintained (exposure to advertising, changes in national education policies, impact of foreign exchange rates on traveller solvency). |
Deleted |
| Specific regulations applicable to the Group | Only elements related to the risk of adverse changes in regulations applicable to the Group continue to be reported on in this chapter. |
Maintained in part See also section 1.5. |
| Risks associated with litigation in process | Name of risk unchanged. Further details on disputes are provided in chapter 5, note 35. |
Maintained |
| Risks that have occurred by breach of contractual commitments |
Specific risks facing the Group are addressed in the “Financial risks” section (counterparty risk) and in note 30 to the consolidated financial statements. |
Section 3.1.4 and chapter 5.3, note 30 |
| Risks associated with brands and other intellectual property rights |
Following the Group’s strategic refocusing, this risk has been reduced and is no longer reported as a material and specific risk. |
Deleted |
| Governmental, economic, budgetary, monetary or political factors and strategies with a potentially significant influence on the Group’s operations |
For clarity, this paragraph has been renamed “Risk of adverse changes in regulations applicable to the Group”. |
Maintained |
| Liquidity, interest rate, exchange rate and equity risks |
Risks described in the “Financial risks” section. | Maintained |
| Credit and counterparty risks | ||
| Risk related to paper price | Following the Group’s strategic refocusing, this risk has been reduced and is no longer reported as a material and specific risk. |
Deleted |
| Risks associated with business ethics | Name of risk unchanged. | Maintained |
| Personal injury risk | Although this risk is specific to the Group and has a material human impact, it has a limited financial impact on the Group and is therefore not reported on in this chapter but in chapter 4 – Non-financial statement and duty of care plan. |
Section 4.3.3 |
| Risks associated with information systems and data security |
Risk renamed “Risk associated with data security”. | Maintained |
| Risks associated with the management of skills and key talent |
This risk can be considered to be moderate overall. It is not specific to the Lagardère group’s businesses and is therefore not reported on in this chapter. Risks relating to managing skills and key talent are described in chapter 4 – Non-financial statement and duty of care plan. |
Section 4.3.1 |
| Risks associated with supplier concentration | This risk particularly concerns Presstalis as discussed under “Business interruption risk”. |
Deleted |
| Risk associated with products distributed | Name of risk unchanged. | Maintained |
| Business interruption risk | ||
| Risks of errors and fraud | This risk can be considered to be low overall and is not specific to the Lagardère group’s businesses. |
Deleted |
| Industrial and environmental risks | These risks are not material to the Lagardère group, as described in chapter 4 - Non-financial statement and duty of care plan. |
Section 4.3.2 |