See page 7 for Analyst Certification and Important Disclosures

10 November 2003

BUY (1)
Mediaset (MS.MI) Medium Risk (M)
3Q03 Results On Tuesday
Rogan Angelini-Hurll +44-20-7986-3906 rogan.angelinihurll@citigroup.com
Patrick Wellington +44-20-7986-4263** patrick.wellington@citigroup.com
Edward Hill-Wood +44-20-7986-4051 edward.hillwood@citigroup.com
Roberto Odierna +39-02-864-84-714 roberto.odierna@citigroup.com
Neil Shelton (Specialist Sales) +44-20-7986-4201 neil.shelton@citigroup.com
Robert Garlick (Global Sales) +44-20-7986-3547 robert.j.garlick@citigroup.com

Year to Revenues PBT EPS EPS (Old) P/E P/E EV/ Operating EV/ Net
Dec (€m) (€m) (€) (€) Multiple Relative Revenue Margin (%) EBITDA Div (€)
2001A 2,351.1 581.0 0.35 0.35 25.2 1.75 4.6 25.0 16.0 0.2
2002A 2,316.1 562.5 0.36 0.36 24.3 1.50 4.6 24.1 16.4 0.2
2003E 2,974.0 732.0 0.35 0.33 25.3 1.88 3.6 25.6 12.0 0.2
2004E 3,093.0 805.0 0.38 0.37 23.1 2.02 3.5 26.6 11.1 0.2
2005E 3,255.0 890.0 0.42 0.41 21.0 2.07 3.3 27.5 10.2 0.3
52W Price Range: €8.84 to 6.14 Price Performance (%) Ytd -1m -3m -12m
Expected Share Price Return 13.4% Shares Outstanding 1,176.1m Absolute 25.00 8.20 13.70 28.70

Europe
Expected Dividend Yield 2.4% Market Capitalisation €10,373.2m Relative to Local 7.55 2.76 5.31 10.37
Expected Total Return 15.8% Relative to DJ STOXX 8.75 2.00 3.33 17.62
Sources: Company reports and Smith Barney estimates.

Price: EUR8.82 Target: EUR10.00 Rating: Unchanged EPS: Changed

Summary
➤ Mediaset is reporting nine-month results on Tuesday 11 November

➤ The company has recently issued on advertising trends into October, indicating a
strong third quarter and double-digit growth in October

➤ The focus is therefore likely to be primarily on the cost side — whether existing cost
control targets still apply and are achievable or whether some of the better than
expected revenues are to be reinvested

➤ Other perennial areas of interest include progress of the proposed media ownership
regulations (Gasparri law) and Albacom — we do not expect any change in view
➤ While our earnings forecasts were already towards the top-end of the range, the
company’s indications of full-year advertising progress are ahead of our expectations
and we raise our forecasts — at the earnings level by 5.6% in 2003 and 2.7% in 2004-05
➤ We continue to view Mediaset as one of our preferred free-TV plays, given its strong
operational performance and our view on its stronger long-term revenue growth
potential. Rated Buy/ Medium Risk (1M) with a €10 target price

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Opinion
Mediaset is reporting nine-month results on Tuesday 11 November after the market closes with a web conference call
at 6.30pm Central European Time. Reported revenue and operating profit growth will be skewed by the first-time full
consolidation of Telecinco. We look for the following:

➤ Revenues to have grown by 26.5% to €2,110m. There should be few surprises since the company has already
indicated the likely scale of advertising growth at both the Spanish and Italian channels. In the first nine months
the Italian channels have grown around 2% while Telecinco has seen double-digit growth. On this basis the
advertising trend has strengthened further in the third quarter relative to the second quarter.
Figure 1. Mediaset and Telecinco Advertising Growth Trends, 1Q02-3Q03E (Percentage)
1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03E
Italian Channels (2.8%) (2.4%) +2.1% +6.0% 0.0% +1.4% +6.5%
Telecinco (21.4%) (0.5%) +1.1% +10.2% +28.2% (1.5%) +11.0%
Source: Company accounts and Smith Barney forecasts

➤ Operating profit to have grown by 27.9% to €527m. We expect flat margins at the Italian business and a
significant margin increase at Telecinco (mirroring the performance at the first half). Our forecasts in the first
nine-months put the company on track to at least meet its cost control targets for the year, namely between 1%-
2% growth in Italian TV costs and less than 1% growth in Telecinco costs. In the first nine months we expect
Italian cost inflation of 1.4% and flat costs at Telecinco.
➤ Reported PBT, after adjusting for the Telecinco minority of €54.7m, up some 20% against the similar period in
2002. This includes a forecast €3.9m of net financial charges, €23.3m of losses from Albacom and a Telecinco
goodwill amortisation charge of €32.4m.
Figure 2. Mediaset Nine-Month Performance, 2002-03E (Euro in Millions)
Nine-Mo 2002 Nine-Mo 2003E Change (%)
Italian business revenues 1,668.4 1,689.3 +1.3%
Telecinco revenues - 421.1
Total revenues 1,668.4 2,110.4 +26.5%
Italian business operating profit 412.2 414.8 +0.6%
Telecinco operating profit - 112.5
Total operating profit 412.2 527.3 +27.9%
Finance charges (23.1) (3.9)
Albacom (18.6) (23.3)
Other income/ (expenses) (36.2) (13.5)
Telecinco goodwill amortisation (15.0) (32.4)
PBT (reported) 331.8 454.2 +36.9%
Minority charge - (54.7)
Adjusted PBT (reported) 331.8 399.5 +20.4%
Adjusted PBT (pre goodwill amortisation and exceptionals) 383.0 445.4 +16.3%
Source: Company accounts and Smith Barney estimates.

Focus points
➤ Advertising outlook — Mediaset has already outlined its full year expectations in light of the first ten months
performance at the Italian channels. In a press release on 3 November, the company indicated that the Italian
channels had grown by 3.5% in the first ten months of the year and that, based on the indications of November, it
anticipated stronger growth than this for the full year. Two things were evident from this statement. First,
October was clearly a very strong month, growing by clear double digits. Second, the company is clearly ahead
of schedule relative to our 2% growth forecast in the full year. At Telecinco, the company hosted a meeting for
analysts in October, and on current progress the channel should see advertising growth at the 7%+ level for the
full year. Again this is ahead of our forecast of +6%. As we discuss below, ahead of 3Q03 results we are raising
our full-year forecasts to reflect increased advertising expectations at both the Italian and Spanish businesses.

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➤ Cost controls — We expect the cost base in the first nine-months to be on track to meet the company’s full year
targets. Specifically the company plans to limit cost inflation in the Italian TV business to 1%-2% and at
Telecinco to below 1%. Within the Italian businesses, Mediaset anticipates personnel costs to rise by 3%, TV
amortisation to rise by 2%-2.5% (lower than previously expected due to the cheaper Champions’ League contract
in the second half) and other TV costs to decline by €10m. In the first half, Mediaset was ahead of schedule on
these targets and although the comparables are slightly more difficult in the second half, we anticipate the
company reiterating its targets. The key will be whether, with revenues growing ahead of original expectations,
the company plans to reinvest in 2004 and beyond.
➤ Potential regulatory changes — The market continues to monitor the situation with the proposed Gasparri
Media Bill, although there is little that the company can add to what is already known. The Bill has passed
through the Upper House and the Lower House, each time with amendments and is currently awaiting approval
again from the Upper House. Our view on the key proposal with regards to Mediaset is the extension of the
market place to a single integrated media market including all TV and radio advertising revenues, circulation
revenues and pay-TV subscriptions, Internet publishing, movie production and distribution, music records and
book production and distribution, a market size estimated by Mediaset at €25-27bn. Companies will be limited to
controlling 20% of this market. There are two benefits for Mediaset, in our opinion.
1 Once enacted the Bill should essentially remove the threat that Rete 4 will have to be removed from the
analogue terrestrial network (Mediaset’s ownership of three analogue terrestrial channels is in breach of
current limits). Progress on the alternative solution (namely establishing two DTT multiplexes covering
50% of the country) is progressing with one multiplex up and running (at a cost of €30m out of a budget of
€100m in 2003).
2 Mediaset should be able to expand its media activities within its domestic market. Although the draft Bill
prohibits TV companies from acquiring newspaper assets until the end of 2008, we see opportunities in the
(fragmented) radio market or, as Mediaset has indicated in the past, to act as a sales house for smaller
companies (in the same way that the Carlton sales house sells SMG’s TV airtime in the UK). This latter
opportunity would likely be high margin (since Mediaset has the infrastructure in place already to serve its
existing requirements) and, we believe, would prove attractive to those companies who may lack the critical
mass to justify their own sales house.

Changes to forecasts
In anticipation of its nine-month results, Mediaset has already indicated stronger than expected advertising growth at
both its Italian channels and Telecinco. While our forecasts had already been towards the top-end of the range, the
full-year progress suggested by Mediaset is ahead of our expectations. We are therefore raising our forecasts to
reflect 3.5% advertising growth at the Italian channels and 7.3% growth at Telecinco in 2003.

➤ Based on our nine-month forecasts, our new full year growth rates require fourth quarter growth of 7.6% at the
Italian channels (achievable given the strength already indicated in October) and just 1.9% growth at Telecinco
(against by far the most challenging comparable in 2002).
➤ We raise our total revenue forecasts by 1.2% in 2003E and by 0.6% in 2004E and 2005E. Implicitly this suggests
a slight reduction in our annual growth rates in 2004, which is explained by the tougher comparable that we now
forecast in 2003. In effect we are attributing some of the 2003 upgrade to a pull-though of revenues from 2004.
Nevertheless we still forecast 4% growth in revenues in 2004, accelerating to 5.2% in 2005.
➤ At this stage we have fed the revenue upgrade through to the profit level, although as we highlight above we will
closely monitor Mediaset’s reinvestment plans. This has the effect of raising our earnings forecasts in 2003E by
5.6% and by 2.7% in 2004-05E. We show a summary profit & loss and cash flow below.

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Figure 3. Mediaset Profit & Loss Forecasts, 2001-05E (Euros in Millions)
2001A 2002A 2003E 2004E 2005E
Italian TV revenues 2,234.4 2,222.7 2,279.6 2,362.1 2,477.6
Italian Multimedia revenues 37.0 36.9 37.0 38.2 38.8
Other Italian revenues 50.3 56.5 42.4 43.6 45.0
Spanish revenues - - 615.0 649.1 693.6
Epsilon revenues 29.4 - - - -
Total revenues 2,351.1 2,316.1 2,974.0 3,093.0 3,255.0

Italian purchases, services and other 721.7 662.3 (642.2) (661.3) (690.1)
Italian personnel costs 284.5 300.2 (309.4) (320.7) (335.2)
Italian Amortisation & Depreciation 729.3 795.1 (822.5) (823.2) (840.3)
Telecinco cash costs - - (282.9) (297.1) (311.9)
Telecinco TV D&A - - (125.6) (135.0) (145.1)
Telecinco Other D&A - - (31.4) (33.8) (36.3)
Epsilon costs 28.4 - - - -
Total operating costs 1,763.9 1,757.6 (2,214.0) (2,271.0) (2,358.9)

Operating profit 587.2 558.5 760.0 822.0 896.0

Operating margin (%) 25.0% 24.1% 25.6% 26.6% 27.5%
Financing cost (14.8) (5.7) (3.9) (6.6) (3.0)
Goodwill amortisation (20.0) (20.0) (43.2) (43.2) (43.2)
Share of Albacom (34.1) (24.6) (24.1) (10.4) (3.0)
Other income/ (expenses) (145.0) (45.4) (13.5) - -
Share of Telecinco profits 44.8 34.3 - - -
PBT (reported) 418.1 497.1 675.3 761.8 846.8
PBT (pre goodwill and exceptionals) 581.0 562.5 732.0 805.0 890.0
Tax (169.6) (135.0) (263.4) (293.3) (326.0)
Minority Interests (0.1) (0.1) (59.4) (63.2) (69.5)
Net income (reported) 248.4 362.0 352.6 405.3 451.3
Net Income (pre goodwill and exceptionals) 411.3 427.4 409.3 448.5 494.5
Source: Company accounts and Smith Barney estimates

Figure 4. Mediaset Cash Flow Forecasts, 2001-05E (Euros in Millions)

2001A 2002A 2003E 2004E 2005E
Operating Profit 587.2 558.5 760.0 822.0 896.0
Amortisation & Depreciation 729.3 795.1 979.5 991.9 1,021.7
Minority Interests 184.5 56.2 (59.4) (63.2) (69.5)
Operating sources of cash 1,501.0 1,409.8 1,680.1 1,750.7 1,848.3
Disposal of assets 72.6 102.4 - - -
Gain/ (Loss) on FX (0.4) 6.9 6.6 2.0 -
Other income/ (expense) (154.3) (55.7) (80.8) (53.6) (46.2)
Non-operating sources of cash (82.1) 53.6 (74.2) (51.6) (46.2)
Interest received 26.3 15.9 9.9 8.7 10.2
Interest paid (40.7) (28.5) (20.5) (17.3) (13.2)
Net cash flow relating to servicing of debt (14.4) (12.5) (10.5) (8.6) (3.0)
Capital expenditure on television rights (776.0) (648.6) (876.0) (819.0) (860.0)
Other capital expenditure (110.5) (79.0) (102.7) (113.0) (124.3)
Tax paid (169.6) (135.0) (263.4) (293.3) (326.0)
Dividends (283.2) (247.8) (247.0) (247.0) (270.5)
Change in working capital (253.9) (141.7) (15.0) (105.0) (115.0)
Acquisitions/ investment in associates (392.6) (121.7) (306.0) - -
Other 207.7 - - - -
Uses of cash (1,778.1) (1,373.8) (1,810.1) (1,577.3) (1,695.8)
Net change in cash before financing (373.6) 77.0 (214.7) 113.2 103.2
Share issue 0.5 - - - -
Net cash (open) 125.5 (247.6) (170.6) (385.3) (272.1)
Change (373.1) 77.0 (214.7) 113.2 103.2
Net cash (close) (247.6) (170.6) (385.3) (272.1) (168.9)
Source: Company accounts and Smith Barney estimates

Page - 4 -
Investment Thesis
We rate Mediaset Buy/ Medium Risk (1M) with a target price of €10. Despite a decent run in the shares in recent
weeks, our forecast upgrade keeps multiples below the peer group average. On our new forecasts, Mediaset trades at
25.3x earnings (pre goodwill amortisation) in 2003E, dropping to 23.1x in 2004E. While admittedly high in the
context of the market and the overall sector, we see the capacity for some multiple expansion on numbers in which
we have increasing confidence.

➤ Historically Mediaset has commanded a premium valuation relative to the free-TV average and we believe that
this relationship can be returned to. The company is currently trading on a 4.5% discount to TF1, which
compares to the 15% average premium that Mediaset has enjoyed historically.
➤ In the short-term, Mediaset is outperforming its peer group, seemingly coming out of the advertising recession
faster and sooner than the peer group. This despite the fact that Mediaset has not seen a year on year decline in
advertising revenues at its Italian channels. In 3Q03, we look for 6.5% growth at the Italian channels and 11%
growth at Telecinco, which compares to 3.6% growth already reported at TF1 and 4.2% growth already reported
at M6 in 3Q03.
➤ We believe that Mediaset is one of the best positioned among the European broadcasters for longer-term revenue
growth. (1) Overall advertising spend as a percentage of GDP in Italy can grow as deregulation continues and the
number of international advertisers increases. (2) Prices at Mediaset’s channels remain low in the context of the
European market. (3) The company is making strong viewing share gains. (4) The threat of pay-TV is less
established than elsewhere in Europe notwithstanding the merger between Telepiu and Stream as Sky Italia. (5)
Mediaset continues to attract high levels of new clients. (6) Even prior to the Internet-fuelled advertising
‘bubble’, Mediaset was delivering consistent double-digit revenue growth.

Valuation
We use market-based multiples to value Mediaset, comparing the company with its European free television peer
group as well as with its historical trading multiples. In arriving at our valuation we also take account of Mediaset’s
19.5% stake in Albacom, which is currently loss-making. In our view Mediaset’s strong longer-term revenue growth
potential justifies a premium multiple relative to its peers. Our target price of €10 is based on Mediaset (adjusting for
Albacom losses) regaining its historical average 15% premium to TF1, which traded at 25-26x prospective earnings
coming out of the last recession.

On an EV/ EBITDA basis, Mediaset trades on 12.0x our new forecasts in 2003E, dropping to 11.1x in 2004E. Again
this represents a discount to TF1, of about 10%. At our target price of €10, the shares would trade at what we view as
a more appropriate premium of 10%.

Risks
We view Mediaset as Medium Risk. The risk rating on the stock is derived after consideration of a number of factors.
These factors include an assessment of industry-specific risks, financial risk and management risk. In addition, we
consider historical share price volatility, based upon the input of the Smith Barney quantitative research team, as a
possible indicator of future stock-specific risk. With regards to Mediaset, we particularly highlight its strong balance
sheet and cash generation, as well as its leading competitive position in an attractive market. At the same time, the
shares have proved volatile in the past.

The major areas of risk for Mediaset, which could impede the share price from achieving our target valuation, are: (1)
the outlook for advertising markets in both Italy and Spain. (2) Programme investment has been high in recent years,
reflecting both content inflation and the potential threat of new competition (La Sette). (3) The digital terrestrial
television (DTT) framework has yet to be established, leading to uncertainty over potential future costs and
competition. (4) The regulatory environment may change, with proposals made in the past to move one of Mediaset’s

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three channels to cable and satellite and ongoing concerns over the potential conflict of interest with Mr Berlusconi
(Prime Minister and owner of Fininvest, which holds 48% of Mediaset). (5) It is unclear how Mediaset will unlock
any value from its stake in Albacom. (6) Pay-TV competition may become more robust now that the market has
consolidated under Sky Italia.

** Us investors please contact Rogan Angelini-Hurll (+44-20-7986-3906)

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ANALYST CERTIFICATION Appendix A-1
We, Rogan Angelini-Hurll, Patrick Wellington, Edward Hill-Wood, Roberto Odierna, Neil Shelton (Specialist Sales) and Robert Garlick
(Global Sales), hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and
all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to
the specific recommendation(s) or view(s) in this report.

IMPORTANT DISCLOSURES

Mediaset (MS.MI)
Ratings and Target Price History Target Closing
Analyst: Rogan Angelini-Hurll EUR # Date Rating Price Price
1: 15 Nov 00 *3M *16.00 16.22

Chart current as of 27 September 2003

2: 24 Apr 01 3M *13.00 11.83
3: 11 Sep 01 3M *8.00 6.76
4: 17 Oct 01 *4M *6.00 7.09
15 5: 25 Mar 02 4M *8.50 9.79
1 6: 28 Mar 02 *3M *10.00 9.85
7: 13 Jun 02 *2M 10.00 8.30
6 8: 6 Sep 02 Stock rating system changed
2 9: 6 Sep 02 *1M 10.00 7.09
5 11 10 10: 12 Sep 03 Stock rating system changed
3 7 9 10 11: 12 Sep 03 1M 10.00 8.23
4 8 *Indicates change.

0
ON D J FMAM J J A SO N D J FMAM J J A SO ND J FMAM J J A S
2001 2002 2003
Covered See "Important Disclosures" at the end of this report for
Not covered a description of the firm’s current and former rating systems

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Smith Barney Equity Research Ratings Distribution
Data current as of 30 September 2003 Buy Hold Sell
Smith Barney Global Equity Research Coverage (2249) 31% 45% 24%
% of companies in each rating category that are investment banking clients 47% 42% 37%
Media--General -- Europe (29) 34% 55% 10%
% of companies in each rating category that are investment banking clients 40% 31% 67%
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Page - 7 -
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