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The business approach of ProSiebenSat.1 focuses on detecting and actively managing
risks. There has been no fundamental change in the overall risk situation compared to
December 31, 2011. The overall risk assessment is determined by assessing the individual
risks across all risk categories in the different business areas and segments (external
risks, sales risks, content risks, technological risks, organizational risks, financial risks,
compliance risks). Currently no risks are evident which, individually or in combination
with other risks, would have a material adverse effect on the ProSiebenSat.1 Group’s financial
performance and position. These do not present a threat in the foreseeable future.
Over the course of the year, the potential risks from the advertising market environment increased slightly compared to December 31, 2011. However, in contrast to the declining economic performance in the euro zone, the German economy — the most important revenues market for ProSiebenSat.1 — is stable. With our 2015 growth strategy, we paved the way for future revenues growth. Driven by systematic diversification in related areas, we will further reduce the dependency of our business on the cyclical fluctuations of the advertising market. With the sale of the Northern European TV and radio portfolio, we are adapting ourselves to the increasing digitalization of the media landscape and its opportunities for growth. At the same time, the disposal widens our financial scope for investments in business operations. The ProSiebenSat.1 Group has a solid basis financially and in terms of its balance sheet. As of the date of the preparation of the management report, in this context the Executive Board considers that the overall risk situation remains limited and manageable.
As an internationally operating media group, ProSiebenSat.1 is exposed to many changes and a range of uncertainties. The Group deploys effective management and control systems to detect the resulting risks, to assess them and minimize them where possible. We have combined them in a risk management system deployed throughout the Group.
The business approach also means recognizing opportunities at an early stage and leveraging them rigorously. Business opportunities are not recorded by Risk Management at ProSiebenSat.1, but are part of budget planning. They are tracked as part of regular reporting. At the Strategy Meeting, long-term growth potential is determined and measures to drive it agreed.
Clear decision structures, a methodical approach and standardized management are indispensable components for secure risk handling across the Group. At ProSiebenSat.1, these essential factors are ensured by way of consistent guidelines, internal organizational directives and an unambiguous allocation of duties and areas of responsibility for risk management parameters. In this way, all relevant business units and subsidiaries are integrated into the process. In simplified terms, the system implemented across the Group for dealing with risk can be characterized as follows:
The risk management process itself consists of the following complementary steps:
|Risk identification and risk classification:||Risk identification and classification are founded on risk management reviews that are held regularly for each important subsidiary or division, at dates close to the planning process. The risks identified are allocated to defined risk categories so as to permit a logical aggregation of individual risks. Risk identification is subject to an ongoing updating process due to constantly changing conditions and is incorporated in the decision-making process as part of quarterly risk reporting.|
|Risk assessment:||The potential probability of risk and the potential impact of each identified risk on ProSiebenSat.1 Group’s operating business performance and strategic planning is evaluated. The impact is generally assessed with an eye on how risks could impact recurring EBITDA, liquidity and net debt. Risk assessment also includes analyzing causes and interactions with other risks. In addition to quantitative methods, some of which are based on early warning indicators, risks are also assessed using qualitative approaches. Mitigating factors and measures are taken into account in the assessment. However, opportunities are not offset.|
|Risk management and risk monitoring:||Risk management is based on a uniform system of early identification. Early warning indicators
were determined for all material categories of risk. They include performance data
of the ProSiebenSat.1 Group in terms of audience share and the advertising market, the
ongoing value of the program inventory and the development of human resources. In terms
of financial risk, early warning indicators have been defined specifically for liquidity and net
debt with a key focus being adherence to the covenants stipulated in financing contracts.
The monthly Group Controlling reports provide the information required for monitoring the overall risk situation. A target-actual comparison shows if there is a risk. The key value thresholds are determined by the Executive Board. The responsible management initiates suitable measures to counter each identified risk that is deemed to be relevant. These measures are documented and monitored as a part of the reporting system. The Executive Board discusses and decides on the necessary risk minimization measures, and reports to the responsible Audit and Finance Committee of the Supervisory Board. When new risks arise, or individual indicators change significantly, the Executive Board and Supervisory Board are notified at once, irrespective of the quarterly reporting intervals.
The assessment of the overall risk situation is based on a valuation of the most significant individual risks and an aggregate analysis of the Group’s three principal risk groups: Operating risks, financial risks, and compliance risks. The following diagram presents an overview of the material individual risks in comparison to December 31, 2011:
The following sections show the current perspective on the risks which could materially impact our earnings, financial position and performance. In addition, we assess the probability of occurrence of the risks and the level of their potential financial impact. We are not aware of or consider immaterial any additional risks which could impact our business activities.
|Key management measures||External risks: Ongoing analysis of economic and industry trends combined with continuous investments in programming and market research, efficient cost management
Sales risks: Regular and systematic assessment of the order volume
Content risks: Long-term relationships with licensors and close contact to producers, development on an inhouse production unit
Technology risks: Regular investments in the technological infrastructure, IT updates, back-up systems to minimize risk of possible failure in studio and broadcasting equipment
Organizational risks: Monitoring HR figures, strategic human resources recruitment and development programs, employee motivation on the basis of variable remuneration systems
|Overall probability of
Impact (strength): High
|Effective risk management is very important for the ProSiebenSat.1 Group, not least due to the low visibility of the advertising market typical for the industry and the short-term nature of booking TV advertising. Our experience in the TV advertising market and our expertise in the media sector, together with clear organizational structures and highly qualified staff, enable us to deal with operating risks appropriately and implement effective measures for risk reduction. We address challenges posed by the economy — the largest potential external risk factor — with systematic cost and efficiency management. At the same time, we optimize our risk and opportunity profile by successively diversifying our dependency on individual markets and leverage additional growth potential on the basis of innovative business models such as media-for-revenues-share. This aim is also pursued by the expansion of our digital business and the international expansion of our program production business.|
Macroeconomic risks. After a short economic revival at the start of the year, global economic
growth weakened over the course of 2012. The global economy was negatively affected in particular
by the sovereign debt crisis in Europe, the declining growth momentum in China and important
emerging economies, as well as uncertainty in US financial policy. In the euro zone, the recessive
trend intensified over the course of the year. As a result, the climate cooled somewhat in the
German economy as well, since companies invested with increasing restraint. In comparison to
the declining economic performance in the euro zone, the German economy showed moderate
growth. Various economic indicators also show that the German economy remains robust. The
employment market is developing in stable fashion, while for private consumption the outlook
is positive. However, the German economy’s growth prospects depend on further easing of the
European debt crisis as well as positive stimulus for growth from the USA and China.
Due to their close link to the economic environment, TV advertising markets often react in a procyclical manner to macroeconomic developments. When the economic outlook is positive, companies are more willing to invest and advertising expenditure increases. In 2011, the comparatively dynamic German economic growth (+3.0%) was accompanied by solid growth in advertising investments (ZAW: +1.0% net). Conversely, in a period when the economy slows, companies react at relatively short notice by reducing their advertising budget. For this reason, any considerable cooling down of the economy represents a considerable risk for the ProSiebenSat.1 Group. In 2012, gross domestic product grew further by 0.7%, even though this growth was considerably weaker than that of the previous year. Therefore, in 2012, the potential risks from the advertising market environment increased slightly. In view of the current economic uncertainties, an adverse impact on our advertising business cannot be ruled out. However, on the basis of the current state of knowledge, we assess the overall risk as limited. We are currently not perceiving any material impact on our business. By developing new business models beyond TV advertising, the Group has optimized its risk profile and will continue to pursue its diversification strategy rigorously in the future.
Risks from changed media usage behavior. With the emergence of new media at the end of the 1990s, the assumption spread that traditional media such as television could experience a significant loss of importance. While print media are indeed exposed to heavy pressure of being replaced, television remains the most important form of mass media, with a use time of 205 minutes per day in Germany. The use of digital media is now at 107 minutes, thus claiming approximately half the time devoted to television. In addition, the internet is frequently used as a functional medium for working, shopping, and online banking. Hence, television is not negatively affected by the range of new media. For this reason, the ProSiebenSat.1 Group views the risk of a structural change in TV use as low.
Due to the diversification of screens, video content can be downloaded on an increasing number of devices, such as laptops, smartphones, and tablet PCs. However, there is currently no sign of migration to competing media. Instead, what can be observed is an additive use of such media as TV and the Internet. This is also shown by the current “Navigator Mediennutzung” study by ProSiebenSat.1 advertising sales company SevenOne Media. Over the past 10 years, media use in Germany has increased by one sixth to 9.75 hours per day. TV and the internet complement each other intensively. Approximately 70% of content accessed online is related to TV. Television provides the initial stimulus to browse additional content, advertising messages, products, and services online. ProSiebenSat.1 is very well positioned to utilize the change in media use as an opportunity for growth for the traditional TV business and the digital activities. We thus react to new viewing habits such as the desire for interaction and media use independent of time with cross-media television offerings utilizing online, mobile, and video-on-demand. The success of show-accompanying social TV offerings such as The Voice of Germany Connect and Germany’s Next Topmodel — by Heidi Klum Connect demonstrate the variety of opportunities opened up by the cross-media linking of media content and advertising messages. Owing to technological innovations such as HD and 3D, we anticipate that television will be the main form of screen-based media in future as well. Television is the No. 1 medium, with an extension into the internet providing a deepening of content. TV is also the most effective medium with regard to advertising impact. TV campaigns have been proved to have the highest impact on revenues and earnings. At the same time, TV had the highest share on the German advertising market among all media types in 2012, with 43.3%.
On the internet, a trend towards the professionalization of content can be observed that the ProSiebenSat.1 Group, as a TV company, can handle very well. In 2012, the Group expanded its internet platform MyVideo into an online station, also opening several studios for the production of exclusive web shows. In addition, MyVideo showed various US series as “online first” premieres, before the TV broadcast. With measures such as these, the Group strengthens its market position, securing its competitive advantage also against new suppliers such as Google, which increasingly offer video content on the internet. In recent years, ProSiebenSat.1 has developed maxdome as Germany’s leading online video library and thus has another attractive offering in the area of on-demand services independent of time. maxdome is funded by subscriptions and pay-per-viewPay-per-view Pay TV where the viewer pays only for the shows they actually watch. downloads and is not only an additional way to distribute program content, but also offers new methods of generating revenues beyond selling advertising space. We also have an attractive portfolio in the area of pay TV, which we expanded in 2012 with the station ProSieben FUN.
To meet the competitive challenges in the future, ProSiebenSat.1 maintains ongoing market research and promotes a strategic brand positioning. Along with the quality of content, strong brands are an important unique selling point. Therefore, we consider potential risks from changed media use behavior to be low — both with a view to their probability of occurrence and with regard to the potential impact.
The ProSiebenSat.1 Group generates the biggest share of its revenues from the sale of advertising
space, especially of TV advertising time. Due to the fact that they have a potentially huge impact
on financial success, the active control of possible risks from the sale of TV advertising time is the
focus of the management of operating risks. As part of risk control, actual and forecast values of
advertising revenues and advertising market share are regularly compared against the previous-
year figures and analyzed. This allows deviations from budget to be recognized at an early
stage and countermeasures to be implemented at short notice. This could include cost adjustments
or changes in program planning and price policy.
Audience share reflects how the programming offer meets the taste of the audience and the reach of the TV programs and advertising spots. To minimize sales risks, audience shares are analyzed with data of the Working Group of Television Research (AGF) on a daily basis. In this way, we are able to monitor the success of our TV stations extremely closely and if necessary to take countermeasures at short notice. Daily audience shares are an important performance indicator for our advertising customers. However, short-term fluctuations of market share ratings do not influence recognition. Besides quantitative analyses, qualitative studies are also an important control instrument. In 2012, program research at ProSiebenSat.1 again cooperated closely with various institutes on this. In Germany ProSiebenSat.1 commissioned them to carry out numerous telephone and online interviews with viewers as well as group discussions. In this way, stations obtain direct feedback from their audience and thus can optimize and further develop their programs on an ongoing basis.
As well as ratings success, a high-quality environment in which to place their advertising spots is of crucial importance to advertising customers. The ProSiebenSat.1 Group has numerous flagship programs, such as “The Voice of Germany” and “Schlag den Raab”. The Group receives licenses to show blockbusters and series from almost all major Hollywood studios and also commissions the production of successful programs itself. Thus, the ProSiebenSat.1 Group offers customers a high-quality advertising environment. Numerous program awards in 2012 and in the years before testify to this.
In order to minimize risks, the Group has also developed a complementary, coordinated station portfolio in Germany, Austria, and Switzerland. This allows possible market share weaknesses on the part of an individual station to be compensated for. In addition, the TV channels focus on various core target groups and are demarcated systematically from each in terms of content. In this way, the ProSiebenSat.1 Group offers advertising customers a wide range of target groups covering all commercially relevant social groups. In addition, the Group has established four new free TV stations in Germany, Austria, and Switzerland in the last six years. For example, the women’s channel sixx was launched successfully in Germany in 2010 and doubled its market share in 2012. In June 2012, sixx also went on air in Austria, while the channel was launched on the Swiss TV market at the start of 2013. In this way, the ProSiebenSat.1 Group increases its audience shares and opens the way to new target groups for its advertising customers. Before designing a station, the company conducts comprehensive analyses of demand and potential in the audience and advertising market. It was thus established that purchase decisions are made mainly by women and that in Germany approximately 90% of those managing the household are female. In view of this, sixx is particularly attractive for the advertising market because of the female core target group. In January 2013, a further channel, SAT.1 Gold, was added to the ProSiebenSat.1 portfolio, a station aimed mainly at the older female target group between the ages of 49 and 64.
Due to the measures taken to limit risk and the strengthening of our leading market position in 2012, we consider the probability of occurrence of the sales risks to be limited overall. In the last few months, the Group has implemented moderate price increases in Germany. Thus, SevenOne Media, the advertising sales house of the ProSiebenSat.1 Group, expanded its leading position further in 2012, with its gross market share rising to 42.8% for the full year (previous year: 42.3%). We also succeeded in marketing free advertising time according to the media-for-revenues- share model. In this way the Group not only achieves better utilization of its program capacity, but also gains new customers for TV as a medium. The medium-term objective is to increase the share of TV advertising in the overall advertising market. For this reason, the Company is working hard to develop individual and cross-media advertising concepts in order to further increase the effectiveness of TV advertising.
An attractive and varied programming inventory is the decisive criterion for the ProSiebenSat.1
Group in the competition for audiences, internet users, and advertising customers. For this reason,
ensuring a continuous and long-term supply of high-quality content is the basis of our company’s
success. While the financial impact of inadequate program supply is potentially high, due to our
comprehensive measures aimed at limiting risk we assess the probability of our competitive
position being adversely impacted by content risk as low.
ProSiebenSat.1 secures attractive programs through three different procurement channels — by purchasing licensed formats, through commissioned productions and through inhouse formats that are based on the development and implementation of own ideas.
License purchases. The Group acquires many of its feature films, TV films, and series as licensed content from third parties. ProSiebenSat.1 has long-term contracts with virtually every major Hollywood studio, including Twentieth Century Fox Television, Sony Pictures International, Paramount, CBS, Disney, Warner, and Dreamworks. These contracts secure the Group’s long-term programming supply. In addition, the Group maintains close ties with domestic and international film studios, as well as film and TV producers.
Generally, ProSiebenSat.1 secures programming rights through multi-year license agreements, so-called output deals. Here, the Group acquires the broadcasting rights for all future productions of a film producer or studio that are produced in a certain period. Hence, programming contracts are often signed on a script basis and thus several years ahead of the broadcast date. Programming rights (Notes page 192) are capitalized at the amount of their contractual acquisition cost including acquisition- related costs. Since neither the quality nor the success of programming produced in the future can be predicted with absolute certainty, signing programming contracts early harbors the potential risk of low visibility. We counteract this risk by signing programming contracts exclusively with renowned film studios and production companies which have a corresponding track record of success. We minimize programming inventory risks by reviewing contractually secured broadcasting rights systematically and on a regular basis for potential risks which could result in reduced revenues potential.
Since a considerable amount of the programming rights are acquired from production studios in the USA, the Group is exposed to exchange rate fluctuations between the euro and the US dollar, but also between other “non-reporting currencies” and the US dollar. In addition, the Group is also generally confronted with the risk of potential price increases. In 2012, pressure was exerted on prices for licenses, particularly in Germany. In addition to competition from private stations, this is mainly due to the negotiating position of the public stations, which have higher budgets than in any other European market due to their being funded though license fees. The ProSiebenSat.1 Group’s new, smaller stations are increasingly finding themselves in competition with the digital offshoots of the public stations, such as ZDFneo, for the acquisition of programming rights. However, with our strong position as a licensee, we view the probability of occurrence of the risk from price increases as low. Our negotiating position is secured by our close business relationships with the licensors – which have been in place for many years – as well as our high purchasing volume.
As a result of the continuous dialog between our central license purchasing department and international and national licensors, the Group is always informed about new productions and trends at an early stage. However, to ensure the exclusivity of our program, we deploy not only our contacts, but in legal terms also secure our programs against the competition. Blocking periods, so-called hold-back clauses, protect our rights against other licensees and program licensing forms. Furthermore, so-called “qualifiers” — i.e. contractually determined reference figures such as minimum requirements with regard to box office success – guarantee the quality of the program content we acquire. Depending on the contract, the ProSiebenSat.1 Group can broadcast the programs acquired not only on its free TV stations, but also on digital platforms. ProSiebenSat.1’s objective is to cover the chain of application as widely as possible with a comprehensive acquisition of rights and thus also to minimize risks in other areas of application, such as video-on-demand and pay TV.
Commissioned and own productions. With its stations, the ProSiebenSat.1 Group focuses on an individual and generally balanced mix of licensed programs as well as commissioned and own productions. Productions and formats produced locally are designed especially for individual stations. They strengthen the recognition value of a TV station and in some cases can even be created more economically. Because reference figures are sometimes unavailable and there are limited options for advance communication, the prospects for the success of inhouse and commissioned productions tend to be less certain than for purchased format or programming licenses which have already been successful in other countries or in the movie theaters.
With the establishment of its own production unit for the development, production, and sale of TV content – the Red Arrow Entertainment Group – in 2010, an even wider basis was formed for the programming supply of the ProSiebenSat.1 Group. In addition to business advantages resulting from bundling content expertise across the Group in one central unit, the founding is an important strategic step to expand the Group’s value chain. Red Arrow Entertainment develops and produces TV content not only for Group stations, but also offers its expertise to external customers. In 2012, the Red Arrow Entertainment Group expanded its portfolio further through acquisitions of TV production companies, considerably strengthening its presence particularly in Great Britain and the USA, the world’s most important TV markets.
In order to assess the appeal of its inhouse productions as reliably as possible, ProSiebenSat.1 conducts intensive market research. Program research work starts long before the program goes on air. Researchers accompany the development of new programs for ProSiebenSat.1 stations using a wide range of different methods, in many cases as early as the concept or screenplay stage. So-called Real-Time-Response tests (RTR) are a frequently used instrument. They are deployed when initial sequences or a pilot episode are available for new TV programs. When programs are screened, test persons document their response and reactions using a type of remote control, with accuracy down to the second and in real time. This makes it possible to measure intuitive and spontaneous reactions without the participants first having to verbalize their impressions. Verbalization is the second step — in the context of an intensive conversation with a professional interviewer. Another measure to limit risk is “format management” for the German station family. This involves an improvement to the program approval process, which has two key aims. Firstly to design customized program ideas for specific slots. Secondly, to establish uniform development and production processes by clear meeting and decision-making structures, without restricting creative scope.
A fundamental requirement for the success of the ProSiebenSat.1 stations with their advertising
customers is high viewer ratings. For these to be achieved, uninterrupted transmission is particularly
crucial, as well as an attractive range of programming. ProSiebenSat.1 has a highly modern
technical infrastructure that is consistent with the highest standards of security. To minimize risks
that could result from a defective technological infrastructure, ProSiebenSat.1 implements
systematic risk assessments. In addition, our systems are secured by comprehensive back-up
Broadcasting equipment and studio operations. Interference to studio and broadcasting equipment could result in program changes at short notice and could cause a failure of our stations. This could lead to guarantee and goodwill claims on the part of our advertising customers. Also, an infrastructure inadequately aligned with the current needs of the market or current security requirements could impact on our financial success. A high level of security for our systems is therefore just as important as their ongoing maintenance and improving infrastructure, if required. For this reason, back-up systems are installed for all relevant business processes, thus ensuring a broadcasting process without interruptions as well as a smooth process of all material components of studio and post-production equipment, even in case of disruption. These redundant systems are at separate locations and their functioning was also further optimized in 2012.
With the commissioning of a new broadcasting center in 2009, the so-called Playout Center, ProSiebenSat.1 completely digitalized its transmission operations, transferring the contents of all German-speaking stations and online platforms to a common platform. The new infrastructure secured the Group’s technological edge, allowing the parallel use of contents across all media. With this digital pool of materials, the Group has not only set the benchmark in the media industry, but has also leveraged time and quality advantages. Introducing efficient media management with standardized processes reduces dependency on manual flows. Since 2011, the work of the production units and the Playout Center has been completely file-based and focused on HD operations. We thus implement technical developments and reduce costs through the use of tapeless devices.
IT risks. The increasing complexity of the Group’s systems means that the lack of an IT infrastructure may have serious consequences for business processes and in the worst case can have a direct financial impact for the Group. Possible potential risks are failures of systems, applications or networks, as well as violations of data integrity and data confidentiality. For this reason, the ProSiebenSat.1 Group invests on an ongoing basis in hardware and software, in firewall systems and virus scanners, and establishes various access authorizations and controls. The security standards are examined by the Internal Audit department for effectiveness and possible potential for improvement. IT security, access controls, the security of the pool of material and the firewalls are regularly evaluated in respect to sustainable risk minimization. To the extent necessary, IT is adjusted in line with the audit results and the measures implemented are monitored as part of risk reporting. The Group has multiple computer centers at separate locations, which assume each other’s tasks in the event of a system failure. In 2012, ProSiebenSat.1 commissioned a new, modularly structured container computer center that fulfills both the current and the future technological requirements in an optimal fashion. The innovative container concept superseded a previous computer center and due to its observance of the highest standards of safety and its energyefficient design it is already considered the most modern computer center in the German media industry.
Due to the aforementioned measures such as the establishment of back-up systems, we consider the probability of a defective technological infrastructure impacting on our financial success to be low. We assess the financial impact of a defective technological infrastructure as low to medium.
Personnel risks. In the course of digitalization, the need for qualified employees in our growth
areas has risen. To improve the appeal of ProSiebenSat.1 as an employer, the Group developed an
employer brand. From the beginning of 2011, this was implemented with the launch of the new
careers website at www.ProSiebenSat1.com. In 2012, the employer brand was expanded to include
a target-group-specific employer branding campaign with which we present ourselves on the
employment market as a digital entertainment and e-commerce powerhouse. With the campaign,
ProSiebenSat.1 appeals specifically and mainly to employees in key functions such as IT, as well as
to applicants for traditional positions. In addition, our close network of contacts within the digital
sector and close cooperation with universities benefit us in recruiting highly qualified specialists
and managers for our growth areas. Our measures in the area of recruiting pay off. Rankings of
the trendence Institute and Universum demonstrate that ProSiebenSat.1 is seen as a preferred
employer. In order to prevent a lack of specialist staff, the Group also trains young staff in commercial
and technical careers as well as offering internships in almost all corporate areas. We offer
trainees cross-media education in TV, online and PR, aligned specifically to the requirements of a
modern media group.
As well as digitalization, new challenges are posed to the Group by the expansion of our production arm Red Arrow into new markets such as the USA. In order to cover our short and long-term personnel requirements here and at the same time to do business efficiently, the management of personnel resources is of great importance. The aim is to use resources efficiently and thus reduce fixed costs by utilizing existing Group company structures. At the same time, knowledge transfer is to be ensured and synergy potential optimally utilized through the development of close ties between the individual companies. The Group has laid the foundation for this by bundling the subsidiaries under the umbrella of the Red Arrow Entertainment Group GmbH.
The second component of our successful personnel management is the targeted HR development of our staff. Our employees also benefit from the offers of the inhouse ProSiebenSat.1 Academy. ProSiebenSat.1 is continuously expanding the Academy’s range of specialist training. In addition, in the last two years it has developed a performance and potential management system (OTR) for executives and potential managers. The objective is to generate loyalty among employees and managers on a long-term basis, at the same time implementing successor planning for key positions in due time. An attractive performance-based remuneration structure is another criterion in competing for qualified staff and managers. Alongside our “TOP Targets” bonus plan, Performance Development is a bonus program for managers in which not only specialist performance but also individual managerial competency is assessed and remunerated. In addition, ProSiebenSat.1 has been investing in work-life-balance offerings for many years, allowing staff flexibility in both their careers and personal lives.
A variety of opportunities for specialist training and development as well as attractive remuneration generate long-term loyalty on our employees’ part and make us a preferred employer. Important HR figures for 2012 also show this is the case. For instance, the average rate of fluctuation decreased to 11.4% in 2012 (2011: 13.1%).
Highly qualified and committed employees form the basis for our success. For this reason, the loss of specialist and managerial staff in key positions as well as bottlenecks in recruiting staff also represent a potential risk for ProSiebenSat.1. As a result of our extensive measures, we further reduced the probability of occurrence of the risks in the HR department. We assess the financial impact of this risk category as medium.
Process risks from business operations. As an international media company, we must ensure smooth business operations at all times. Interruptions or threats to business operations can have serious consequences for business processes and in the worst case can have a direct financial impact for the Group. Particularly when an unforeseen event occurs (e.g. fire, water damage) that interrupts the continuity of normal business operations, it is of crucial importance that normal operations be restored as quickly as possible. In order to minimize risks from business operations, we have established an efficient crisis management organization for tackling emergencies. In 2012, ProSiebenSat.1 developed its crisis and emergency management further with the introduction of Group-wide safety guidelines. The comprehensive guidelines ensure that business processes can flow smoothly even in emergencies. They also ensure the quickest possible return to normal operations.
In its operating business and due to its borrowings, the ProSiebenSat.1 Group is exposed to
various financial risks. Overall, the probability of occurrence of these risks is assessed as low. The
Group Finance & Treasury unit is responsible for managing financial risks on a central basis.
The management measures are defined in close cooperation with the Executive Board. Guidelines
that apply across the Group regulate principles, tasks and responsibilities of financial risk management
on a uniform basis for all subsidiaries of ProSiebenSat.1 Media AG. As part of risk management,
the Finance and Treasury units are systematically audited by Internal Audit once a year.
The last audit again generated a positive result. For more information on the hedging instruments,
measurements and sensitivity analyses together with a detailed description of the risk
management system in reference to financial instruments, refer to the Notes to the consolidated
financial statements (Notes page 224).
In December 2012, the ProSiebenSat.1 Group sold its TV and radio activities in Northern Europe. The Group intends to use part of the sale proceeds for prepayment of parts of term loanTerm loan Loan in which the loan obligation is repaid at the end of the agreed duration (secured term loan). facilities under the syndicated facility agreement of the ProSiebenSat.1 Group. As a result the Group will further reduce its financing risk, which is potentially the highest financial risk for the Group. In 2011, the Group already prepaid a significant part of its term loans and extended the maturities of most of the remaining term loans. This improved the Group’s capital structure on a sustained basis. The ProSiebenSat.1 Group has a solid financial and operating basis. Nevertheless, due to the ongoing sovereign debt crisis in Europe, the ProSiebenSat.1 Group has intensified monitoring of its financial risk positions. As part of financial risk management, a regular assessment is made with a valuation of market information and the change of economic indicators.
Financing risk. A lack of available funding or impeded access to sufficient funding on an equity and debt capital basis on money and capital markets can have a high financial impact on ProSiebenSat.1. The availability of existing borrowing (Notes page 224) depends particularly on compliance with particular contractual conditions which are subject to strict and ongoing assessment. The covenants of the facilities agreements were complied with in 2012 as well. On the basis of our current corporate planning, a violation of the financial covenantsFinancial covenants Obligations in the context of loan contracts. These relate primarily to key financial indicators that the borrower has to comply with. can be ruled out, also in the future. Against this background risks from financing are manageable. We consider the probability of occurence as low. The Group monitors changes on the money and capital markets on an ongoing basis in order to identify risks early and to secure the availability and capital efficiency of financial instruments, also in the future.
Counterparty risks. The Group concludes finance and treasury transactions exclusively with business partners which meet high credit rating requirements. The conclusion of finance and treasury transactions is regulated in internal counterparty guidelines. Alongside a thorough assessment of the credit standing, ProSiebenSat.1 limits the probability of the occurrence of counterparty risks by a broad diversification of its lenders. In addition, the portfolios of receivables are monitored on a continuous basis.
Interest rate risks. Interest rate risks result from potential movements in market interest rates. As of the end of the year, the ProSiebenSat.1 Group had hedged approximately 68% of the variable-interest term loans using interest rate swaps (Notes page 190) in order to limit risks. A partial volume of EUR 750 million expired in 2012. In addition to the unhedged portion of the term loan, there is a residual variable interest rate risk from cash drawings the Group takes on its revolving credit facilityCredit facility Defined loan framework at one or more banks which can be utilized to cover credit requirements. (RCF). As of December 31, 2012, the cash drawing of the RCF was EUR 230.6 million. This compares to cash and cash equivalents of EUR 702.3 million as of December 31, 2012.
Currency risks. As an international company, the operating business of the ProSiebenSat.1 Group is exposed to currency risks due to changes in exchange rates. Currency risks occur primarily if revenues are generated in a currency different from the related costs (transaction risk). Since the ProSiebenSat.1 Group concludes a substantial number of its license agreements with production studios in the United States and generally fulfills the financial obligations resulting from these in US dollars, it is particularly when purchasing licensed programs that there are risks from changes in exchange rates. The Group manages this risk by the targeted use of derivative financial instruments, primarily currency forwards. Due to the high hedging rate over the next few years, the impact of currency fluctuations is assessed as manageable. In 2012, changes in exchange rates did not have a material impact on the revenues and earnings performance of the Group and its segments. For this reason, the Group has not hedged risk resulting from translating foreign currencies into the Group currency — the euro. The reporting currency of the ProSiebenSat.1 Group is the euro. The financial statements of companies with their registered office outside the euro zone are converted to euro for the consolidated financial statements. Since the Group generates the majority of its revenues in the euro zone, the related risk from currency fluctuations (translation risk) to the revenues and earnings performance of the ProSiebenSat.1 Group is low.
Liquidity risks. Liquidity risk is managed centrally through a cash management system. The most important early warning indicator is expected liquidity headroom. This is calculated and assessed regularly by comparing currently available funds and budgeted figures, taking into account seasonal influences We assess Group liquidity as good, and assume that the liquidity headroom will remain sufficient in the coming years.
|Key management measures||Financing risks: Ongoing monitoring of financial covenants
Interest and currency risks: Targeted use of derivative financial instruments
Liquidity risks: Securing solvency with a central cash management system and ongoing monitoring of liquidity headroom
Counterparty risks: Broad basis of capital providers and strict credit rating checks
|Overall probability of
Potential impact (strength): High
|Interest and foreign exchange volatility or the default of lenders could considerably impair the financing situation and liquidity of the Group. We counter these risks with extensive measures, so we consider the overall probability of occurrence as limited. In view of current business performance and our solid balance sheet structure, we assess the probability of occurance of the financing risk — the potentially biggest financial risk for the ProSiebenSat.1 Group — as low.|
|The internal controlling and risk management system in relation to the (consolidated) reporting process is intended to ensure that transactions are appropriately reflected in the consolidated financial statements of ProSiebenSat.1 Media AG (prepared in line with the International Financial Reporting Standards, IFRS) and that assets and liabilities are recognized, measured and presented appropriately. This presupposes Group compliance to legal and company regulations. The scope and focus of the implemented||systems were defined by the Executive Board to meet the specific needs of the ProSiebenSat.1 Group. They are regularly reviewed and updated as necessary. Nevertheless, even appropriate and properly functioning systems cannot offer any absolute assurance that all risks will be identified and controlled. The company-specific principles and procedures to ensure that the Group’s single-entity and consolidated reporting is effective and correct are described below.|
|Goals of the risk management system in regard to financial reporting processes||The Executive Board of ProSiebenSat.1 Media AG views the internal controlling system with regard to the financial reporting process as an important component of the Groupwide risk management system. Controls are implemented in order to provide an adequate assurance that in spite of the identified risks inherent in recognition, measurement and presentation, the single-entity and consolidated financial statements will be in full compliance with regulations. The principal goals of a risk management system in regard to single-entity and consolidated reporting processes are:
> To identify risks that might jeopardize the goal of providing single-entity and consolidated financial statements that comply with regulations.
> To limit risks that are already known by identifying and implementing appropriate countermeasures.
> To analyze known risks as to their potential influence on the (consolidated) financial statements, and to take these risks duly into account.
|In addition, in the reporting year we updated our process descriptions and our risk control matrices. The focus here was on standardizing the descriptions and establishing effective control mechanisms. These updates combined with regular tests on the basis of samples were part of the PRIME project. Since then they have been an integrated||part of the internal controlling and risk management system in relation to the (consolidated) reporting process. On the basis of the test results there is an assessment of whether the controls are appropriate and effective. Any deficiencies in the controls are eliminated, taking into account their potential impact.|
|Structural organization||> The material single-entity financial statements that are incorporated in the consolidated financial statements are prepared using standardized software.
> The single-entity financial statements are then consolidated to form the consolidated financial statements using modern, highly-efficient standardized software.
> The financial statements of the main individual entities are prepared in compliance with both local financial reporting standards and the Group‘s accounting and reporting manual based on IFRS which is available via the Group intranet to all employees involved in the reporting process. The individual companies included in the consolidated financial statements provide their financial statements to Group Accounting in a defined format.
> The financial systems employed are protected with appropriate access authorizations and controls (authorization concepts).
> The entire Group has a standardized plan of accounting items, which must be followed in recording the various classes of transactions.
> Certain matters relevant to reporting (e.g. expert opinions with regard to pension provision, measurement of the stock option plan, impairment testing of intangible assets) are determined with the assistance of external experts.
> The principal functions of the reporting process — accounting and taxes, controlling, and finance and treasury — are clearly separated. Areas of responsibility are assigned without ambiguity.
> The departments and other units involved in the reporting process are adequately provided with resources in terms of both quantity and quality. Regular professional training sessions are held to ensure that financial statements are prepared at a consistent and reliable level of quality.
> An appropriate system of guidelines (e.g. accounting and reporting manual, intercompany transfer pricing guideline, purchasing guideline, travel expense guideline, etc.) has been set up and are updated to the extent necessary.
> The efficiency of the internal controlling system in regard to processes relevant to financial reporting is reviewed on a sample basis by the Internal Audit unit which is independent of the process.
> There is a user-friendly web-based tool for the process of planning, monitoring and optimizing the consolidated financial statements. It includes a detailed calendar containing all important activities, milestones and responsibilities. All activities and milestones have specific deadlines. Compliance with reporting requirements and deadlines is monitored centrally by Group Accounting.
> All reporting-related processes are subject to such controls as segregation of duties, the dual-control principle, procedures for approval and release and plausibility testing.
> There is a clear allocation of duties in preparing the consolidated financial statements (e.g. reconciliation of intra-Group balances, capital consolidation, monitoring reporting deadlines and reporting quality of the data reported by consolidated companies, etc.). For specialist matters and complex accounting matters, Group Accounting functions as the central contact.
> All major information included in the consolidated financial statements is subjected to extensive technical validations within the system to ensure that the data are complete and reliable.
> Risks relating to the single-entity and consolidated reporting process are continuously detected and monitored as part of the risk management process described in the risk report.
Our international business operations result not only in operating and financial risks, but also a
wide range of legal risks. Results of legal disputes and cases can considerably damage our
business, our reputation and our brand as well as cause considerable costs. Ways we limit legal
risks include cooperation with highly qualified legal experts and targeted staff training. The
Group establishes provisions for legal disputes (Notes page 222) if there is a present obligation arising from past
events, it is probable that settlement will require an outflow of resources embodying economic
benefits and the obligation can be measured reliably.
The objective of compliance is securing smooth management at all times and in all respects.
Possible violations of legal statutory regulations and reporting obligations, infringements against
the German Corporate Governance Code or insufficient transparency in corporate management
can jeopardize conformity to the rules. It is for this reason that the ProSiebenSat.1 Group has
established a Code of Compliance which applies across the whole group, which provides employees
specific rules of conduct for various professional situations. Another effective measure to
prevent possible compliance infringement is staff training on specific topics such as antitrust
issues or the correct way to deal with insider information.
In order to prevent possible infringements, the ProSiebenSat.1 Group also implemented a Compliance Board constituted of legal experts, Internal Audit staff and employees of operating units. The task of the Compliance Board is to identify possible illegal actions at an early stage and initiate appropriate countermeasures. Another function of the Compliance Board is to introduce safeguards against possible external threats such as acts of sabotage. For a television group with a high level of public awareness, the issue of company protection is extremely important. For this reason, the ProSiebenSat.1 Group has taken various measures in order to realize comprehensive security of operating equipment. This includes state-of-the-art access control technology and qualified security staff.
The work of the Compliance Board is coordinated centrally by the Group Risk and Compliance Officer. His task is to keep abreast of legal developments and any changes in international legislation so as to be able to initiate suitable measures in due time. To bolster the Compliance organization, additional decentralized structures were implemented, with local Compliance managers being determined for the most important locations. Regular exchange of experience and information about current trends in different corporate areas have reduced the level of risk. The processes were analyzed by an independent consultant. The result of this external risk assessment demonstrated that the Compliance processes in place are effective. In respect to implementing current antitrust law, ProSiebenSat.1 was certified as “best in class.”
Consensual agreement and conclusion of the antitrust proceedings. In the Annual Report 2011, the ProSiebenSat.1 Group declared a potential risk from an alleged infringement of antitrust law through agreements between the ProSiebenSat.1 Group and the RTL Group about their TV encryption practice. In July 2012, ProSiebenSat.1 Group and the Federal Cartel Office agreed in principle to a consensual termination of the proceedings related to this allegation. Taking into account the state of negotiations and using its best estimate, the ProSiebenSat.1 Group recognized a provision of EUR 27.5 million as of June 30, 2012. The amount provided corresponds to the notification of the Federal Cartel Office received at the end of December 2012 as was shown under other liabilities as of December 31, 2012. The settlement was approved by the Supervisory Board. The Federal Cartel Office’s final administrative order imposing the fine was issued on December 28, 2012. The fine of EUR 27.7 million was paid on January 24, 2013.
Moreover, as part of the agreement with the Federal Cartel Office, the ProSiebenSat.1 Group committed to unencrypted broadcast of the stations SAT.1, ProSieben, and kabel eins in SD quality for a period of 10 years from January 1, 2013. The decision is currently being implemented. The transmission of broadcast signals in HD quality is not affected by this.
Requirements for disclosure and action for damages. Claims for disclosure and action for damages by RTL 2 Fernsehen GmbH & Co. KG and El Cartel Media GmbH & Co. KG against ProSiebenSat.1 Media AG, SevenOne Media GmbH and the stations SAT.1 Satelliten Fernsehen GmbH, ProSieben Television GmbH, kabel eins Fernsehen GmbH and N24 Gesellschaft für Nachrichten und Zeitgeschehen mbH (no longer part of the Group) are pending at the Düsseldorf Regional Court since November 10, 2008. The plaintiff is asserting disclosure and damages claims in connection with marketing advertising time by SevenOne Media GmbH. On April 13, 2012, the Regional Court resolved to obtain an expert appraisal on the probability of loss. However, an expert has not yet been appointed. The outcome of the case cannot currently be predicted. As a consequence, no provision was recognized as of the reporting date.
Furthermore, TM-TV GmbH and MTV Networks Germany GmbH brought corresponding charges with the same objective. The Munich Regional Court dismissed both cases in their entirety on November 22, 2011 and May 8, 2012 respectively. The plaintiffs each appealed at the Munich Higher Regional Court. On February 21, 2013, the Munich Higher Regional Court dismissed the appeal of TM-TV GmbH in its entirety and confirmed the dismissal of action through the Regional Court. A date has not yet been decided for hearing the MTV case. The outcome of this appeal case cannot currently be predicted. For this reason, no provisions have been established as of the reporting date.
Tax risks from media-for-equity transactions. The ProSiebenSat.1 Group also provides advertising services in the context of barter deals or media-for-equity transactions. The tax treatment of these transactions has not yet been definitively clarified. For this reason, no final assessment can be made whether and to what extent they many result in an impact on future tax payments.
Section 32a German Copyright Act (“bestseller”). On July 19, 2011, the Berlin District Court ordered SAT.1 to pay further remuneration to the author of a screenplay on the basis of Section 32a of the German Copyright Act (Link: „Bestseller“ (Notes page 223)) The ruling was appealed against and a court settlement for dealing with this was reached on December 12, 2012. On the basis of Section 32a of the German Copyright Act, other authors have made similar claims, in and out of court, against ProSiebenSat.1 Group companies. For this range of topics, a provision of EUR 6.1 million was recognized, which is based on a best estimate with regard to the status of the negotiations.
|Key management measures||General compliance risks: Group compliance structures and targeted training of
Other legal risks: Close cooperation with legal experts
|Overall probability of
Potential impact (strength): Low to high
|We see different levels of impact for the potential financial consequences of individual legal and media policy changes as well as legal initiatives. Due to the great differences in compliance risks, we assess the overall potential impact as low to high. Overall, we consider the probability of occurance as low.|
We see different levels of impact for the potential financial consequences of individual legal and media policy changes as well as legal initiatives. Due to the great differences in compliance risks, we assess the overall potential impact as low to high. For example, antitrust violations could entail severe financial consequences for the ProSiebenSat.1 Group. Overall, we consider the probability of occurence as low.