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Can ad king Mediaset continue to defy the slump?

Lex is a premium daily commentary service from the Financial Times. It helps readers make better investment decisions by highlighting key emerging risks and opportunities.

Mediaset was always an investment for those with a strong stomach. Former prime minister Silvio Berlusconi controls the Italian broadcaster through his family's 40-per-cent stake. Now the company faces an advertising slump in Italy and Spain, its two markets. That made for unpalatable 2012 results – revenue fell 12 per cent while impairments and restructuring charges contributed to a loss of €235-million ($305-million), reversing the €225-million profit in 2011. Yet Mediaset's shares were up 8 per cent on Wednesday.

That is because, with or without Mr. Berlusconi in power, Mediaset still has a 60-per-cent share of Italy's advertising market, compared to a 9-per-cent share for Sky Italia, News Corp.'s pay-TV business. Italian advertising revenues fell by 18 per cent in December, but Mediaset's were down by only 9 per cent. The hope is that once Italy gets its politics in order, companies will resume marketing, which should soften the slump in advertising this year. The broadcaster is also ahead on cost cutting – the €310-million made in cash savings over the past year was well above the €250-million targeted.

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Mediaset is also cheap. It amortizes what it spends on buying programs differently to peers, leaving it with a nice gap between amortization and the cash that it spends. As a result, Mediaset generates good cash flow despite its poor bottom line. Yet its Italian broadcasting operations are valued at 2.4 times 2013 expected free cash flow, according to Berenberg, compared with 13 times for the U.K.'s ITV and France's TF1.

And don't forget the politics. The inconclusive outcome of Italy's general election in February may finally force Mr. Berlusconi to chose between politics and ownership. As a result, Mediaset's shares are cheap only for those investors prepared to swallow the political risk that invariably goes with Italian media.

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