Phenomedia AG

Market segment: Software /
Entertainment
Recommendation: Buy
Price target: € 60,00
Current share price: € 50,00
Market capitalisation: € 210,0 Million
IPO price on 22.11.1999: € 22,50
High / Low since IPO: € 96,65 / 20,00
Ticker: PNM
Analysts: Andreas Lambrou
Gerrit Rohleder
Katrin Andreas
Am Kronberger Hang 5 · 65824 Schwalbach/Ts.
Telefon +49 / 6196 / 88 00-290 · Telefax +49 / 6196 / 88 00-299
http://www.value-research.de · http://www.nmeurope.de
Phenomedia AG
Ongoing Research
09/12/2000
• To strengthen its position in Interactive-Entertainment, Phenomedia
AG acquired 51% of Entertainment Channel Network AG (ECN). ECN
administers the online activities of G.A.T. Produktionsgesellschaft, which
produces well-known shows such as ‘Stunde der Warheit’, ‘Lottoshow’,
and ‘Switch’. 49% of G.A.T. is held by Endemol.
• With Bullethead Playgrounds GmbH, a newly-formed joint venture
with Cyco Systems GmbH, Phenomedia enters the growing market of
3D-Online-Communities.
• In Mid-September, Phenomedia will bring to market its first, selfdeveloped
fullprice-game. In case Cultures is a success, Phenomedia
would advance in that area and raise its profile as well.
• With EBIT margins above 35%, Phenomedia is on the higher end of
Neuer Markt companies. Comparing Phenomedia internationally, its
EBIT margins are also above average. This conveys the firm’s high
profitability.
• Due to the enormous success of the Computer-Game Moorhuhnjagd,
we expect high growth rates in this area as well. One hundred requests for
the development of computer games have reached Phenomedia so far.
• Based on the positive development of the firm, we increased our
revenue and earnings estimates.
Selected financial data
Currency €
Revenues (in mil.)
Revenue growth rate
EBIT (in mil.)
EBIT-Margin
Net income (in mil.)
Number of shares (in ‘000)
Earnings per share (updated)
P/E
Earnings per share (old)
Change in earnings estimation
Performance
1999
4,864
104%
1,693
35%
870
4,200
0.21
0.32
-35%
2000e
14,827
205%
6,443
43%
3290
4,200
0.78
64
0.89
-12%
2001e
19,940
34%
9,086
46%
4460
4,200
1.06
47
0.94
13%
2002e
28,632
44%
12,514
44%
7570
4,200
1.80
28
1.34
34%
Quelle: Bloomberg

2
The Phenomedia AG, together with its subsidiaries, offers
products and services in the area of computer games
software. The company primarily develops entertainment
software. The three areas of business are Games &
Licensing, Service & Technology and Interactive
Entertainment. Within these areas, the firm develops and
produces promotional games as well as entertainment
software.
Since its Initial Public Offering, Phenomedia AG has been
expanding and by means of acquisitions attained access to a
broad range of products. The firm has shifted its focus from
producing and distributing 3-D Engines to developing new
technologies such as Content-Production Interactive and
Mobile Entertainment. The biggest success of the company is
the Moorhuhn game and its successor, Moorhuhn II.
Development of Phenomedia AG since the IPO
11/22/1999 Listing on Germany’s Neuer Markt at € 22,50; on
the upper end of the Bookbuilding Range of €
18,50 – 22,50. The first trade occurred at € 28,50.
02/22/2000 The Achterbahn AG issued a license to the
United Software AG for the development of a
PC-game. In co-operation with Phenomedia, the
game ‘Werner Fun Racer’ will be developed.
02/24/2000 Phenomedia planned to acquire 20% of
Morelegs Consulting GmbH, Essen. After closer
examination, these plans were not realised.
03/02/2000 Phenomedia and Hahn Film AG founded
”Daywalker Studios GmbH” to develop and
distribute Internet-, Film- and TV-Content.
04/10/2000 Phenomedia issues the ”Moorhuhn”-license to
RTV Family Entertainment AG. Within this
agreement of co-operation, RTV obtains the
world-wide TV-, Merchandising- and Videorights
for interactive game platforms. Phenomedia
keeps the online rights. For the TV-,
Merchandising and Computergames-Licenses,
Phenomedia obtained a guaranteed payment
of DM 5,75 Mio.
04/18/2000 Marketing campaign for the game ”Moorhuhn”,
through the first All-German Moorhuhn
championship with 250.000 participants.
04/27/2000 Phenomedia purchases 10% of Netrecord-z AG,
with an option to purchase an additional 14,9%.
04/27/2000 Acquisition of German-Rumanian game
developer Lunatech Informatics GmbH.
05/11/2000 Phenomedia purchases a 100% stake in heartline
GmbH. With this acquisition Phenomedia
strengthens its position in the Fullprice-games
market and in digital sports entertainment.
05/17/2000 Phenomedia takes a 51% stake in Funatics
Development GmbH. The remaining parts are
to be purchased gradually. The company
develops Fullprice-Games for international
distribution. Funatics became well-known
through the conversion of the board game ”Die
Siedler von Catan”.
05/17/2000 New formation of the German-Indian Company
”Shapre & Daywalker Studios India”.
Thereby, the firm wants to reduce the high
backlog of orders.
05/31/2000 Phenomedia acquires Swiss Black Pencil AG,
which operates in the Interactive Television (iTV)
market. With the combination of the Internet,
TV and Mobile Entertainment, this market will
inceasingly prominent.
08/20/2000 Launch of Moorhuhn 2 through the Internet in
co-operation with G+J Computer Channel
GmbH and Game-it! AG.
08/31/2000 Phenomedia increases its stake in the digital
music label Netrecord-z to 24,9% prior to the
firm’s Initial Public Offering, which is planned
for 2001.
09/08/2000 Launch of the strategy game ”Cultures-Die
Entdeckung Vinlands”. The game will be
distributed by THQ, one of the largest
publishers in the US.
09/12/2000 Phenomedia, together with Cyco Systems
GmbH, formed Bullethead Playgrounds GmbH,
which is active in the area of 3D-Online-
Technology.
Company Structure
Phenomedia AG is organised as a holding company.
Altogether, Phenomedia holds a stake in 11 development
companies. After its IPO, Phenomedia could complete five
acquisitions. The acquisitions will contribute € 3,0 Mio, almost
half of the estimated growth in revenue of € 6,5 Mio. The
company plans to generate 40% revenue growth through
acquisitions. A description of the firm’s post-IPO acquisitions
is provided below:
Lunatech (100%)
Lunatech Informatics GmbH, a German-Rumanian game
developer (Cologne/Bukarest), was acquired in April. Through
the acquisition, Phenomedia gained more than 30 highlyqualified
experts working in game software development.
Lunatech produces promotional games, lowprice games, onand
offline games with development horizons between 1
and 6 months and provides additional resources to
Phenomedia for the completion of projects for other client.
Funatics Development (100%)
Funatics produces innovative fullprice computer games,
that are geared towards a mass market. Currently the firm
only produces games for the PC-platform, but plans to develop
games for Playstation 2, Dreamcast and other next
generation platforms.
heart-line (100%)
In its production, heart-line focuses on digital sports
simulations. The firm’s developers conceived the successful
soccer manager ”Bundesliga-Manager” several years ago.

Black Pencil (100%)
Black Pencil was founded in Switzerland in 1991. In 1993, the
firm developed the first fully interactive telephony computer
game for Swiss TV. Ever since, Black Pencil is market leader in
that area with clients such as Swissair, ORF, TV3, the Interkantonale
Landeslotterie ILL, SF DRS1 and SF DRS2. We believe
this acquisition to be very viable and important because it
constitutes the basis of entering the Interactive Entertainment
market.
Daywalker Studios (50%)
Berlin-based Daywalker Studios GmbH is a joint-venture
between Phenomedia and Hahn Film AG, that produced the
movies ”Werner” and ”Asterix”. The company has planed the
film production of ”Gnarf” and ”Moorhuhn”, both as cartoons.
This step will enable Phenomedia to integrate film and TV
with game software from the outset of game development.
Shapre & Daywalker Studios India (50%)
Shapre & Daywalker Studios India was founded by Daywalker
Studios and an Indian firm, Shapre, in order to develop 2-D
and 3-D animation programs as well as flash animation for
online applications. Shapre is a large IT-company with
subsidiaries in the US and Great Britain.
Netrecord-z AG (25%)
Netrecord-z AG is an Internet-Music-Label, that produces
trend-oriented music content and then sells it via download
though the Internet. Deutsche Venture Capital Gesellschaft
DVCG also hold a stake in Netrecord-z AG. It remains to be
seen whether the goals of this holding will be realised.
Revenues by segment
The three fields of business of the Phenomedia AG contribute
to the turnover as shown in the graph. Above all, the
company’s Interactive Entertainment division should grow
disproportionately in future.
Games & licensing
The company division of games & licensing is responsible for
the conception and development of game software and
consequently represents the main field of activity of
Phenomedia AG. Currently, the entire entertainment market
is changing. Through the Internet, computers and television
sets coalesce, and make possible the interaction of media for
pictures, sound, music, text and conversation. This form of
leisure time activity is increasingly accepted by the population
and meanwhile holds a status that is comparable with that
of television, board-games and books.
Chief area of occupation is the development of new games
and concepts. The business field is subdivided into the fields
of full-, mid- and lowprice-games, advertisement games, as
well as Internet games. The licensing of game content, like
ideas, concepts, characters and music, enables to generate
revenues from different media channels. Predestined for this
type of commercial exploitation are primarily characters
created by Phenomedia, like the Moorhuhn or the Gnarf.
Phenomedia sees the areas of on-line and off-line games,
television and merchandising as commercial exploitation
channels. The turnover proceeds from the business-field
games & licensing shall in future be generated by
approximately one third each, through the order-business,
the fullprice-segment as well as the license-business.
Particularly in the area of on-line-games, new billing
possibilities emerge, which can comprise the brand name,
downloads as well as the preparation of Internet pages.
Full-, mid - and lowprice-games
Fullprice-games represent the technologically most demanding
segment of the games market. In this area, the possibilities
that PCs and consoles offer, are fully exhausted. On average, a
new generation of appliances, which shows considerable
advances in the underlying technology, originates every five
years. New system-generations, such as Sony Playstation 2
and Sega Dreamcast, demonstrate that we are currently at
the beginning of such a system change. This change is usually
followed by an upswing of the entire video game market and
makes completely new perspectives and potentials on the
development-side possible. According to a market survey by
Datamonitor, the total market for video games increases by
15% annually. Accordingly, the market-volume will increase
from US$10.9 billion in this year to US$17.2 billion in 2003.
While the PC game market growth rate will be approximately
9%, the growth for consoles will roughly grow twice as strong.
Momentarily, three games of Phenomedia are directly before
completion. These are, the construction-simulation, Cultures,
the action role-play, Gothic, as well as the Kicker soccer
manager simulation. In future, a transposition above all in
the field of fullprice-games for various console-systems and
the Game-Boy is planned by the company. This step is justified
on the basis of the stronger growth rate in the console-area.
Datamonitor estimates that by 2003 approximately 70% of
fullprice-games are going to be distributed within the consolemarket.
The first development for the Game-Boy, with
Ravensburger Interactive, will be a transposition of the Moorhuhn-game.
The first software product for the PC “The
settlers of Catan” is already on the market. The game was
already sold 130.000 times. The market-introduction of the
Microsoft X-Box, in May 2001, will simplify the
3

4
transformation from PC to console-games on the basis of its
technological proximity to the PC. Phenomedia will
presumably be able to use this circumstance in order to carry
out a lasting market-entry into the console-area.
The Phenomedia AG will bring three products on the market
in the second half-year. On the basis of these new releases in
the second half-year, considerable turnover-contributions from
this area can be expected, especially in the fourth quarter. We
estimate that Phenomedia will generate revenues of more
than DM 3 million from the commissions of the sold
games alone. The most important game-developments of
Phenomedia in the near future, are described below.
Cultures
We estimate that Cultures, with up to 140.000 sold copies,
will be the most successful fullprice-game that has been
developed by the company until now. Phenomedia already
received DM 1,0 million from THQ for the development of
Cultures and was thereby able to cover the entire project
expenses. The marketing strategy intends that Cultures will
be released punctually at the beginning of September this
year, some weeks before the release of the competition
product, “Siedler 4”, in order to attain the full attention on
part of the press and consumers.
Gothic
After two years of lead time, Gothic will now be released
somewhat later than originally assumed, at the end this year.
The postponement occurred due to integrating the newest
beginning of the year 3D-graphic functions. The game has
thereby increased qualitatively and seems to have a clearly
visible optical advantage in comparison to competition
products like “Diabolo” or “Dungeon-Keeper”.
Due to the complexity of the game a development-budget at a
fixed price of DM 2,0 million could be secured. We assume that,
though characterised by tough competition, but nevertheless big
Christmas-business, approximately 100.000 games will be sold.
Kicker soccer manager
Promptly to the end of the year, the continuation of the
Kicker soccer manager will appear. The first part was
admittedly not quite as successful as hoped for, nevertheless
the second part seems to show considerable improvements.
Mainly, the complexity of the first part was simplified
considerably, without losing the depth of the game. Moreover,
the commercial exploitation is intended to include Great
Britain so that the planned sales figures of 60.000 units seem
conservative and attainable to us. The Publishing in France
and Great Britain is executed by Empire Active.
Advertising games
Phenomedia was already able to develop a multiplicity of
advertising games for renowned customers. Phenomedia
could assert itself especially successfully with the game “Moorhuhn”.
The “Moorhuhn” was created on behalf of the
whiskey producer Johnny Walker and was such a thorough
success that Phenomedia modified its previous strategy, in
order to accelerate the success of the “Moorhuhn” game.
Moorhuhn
”Moorhuhn” is the most well-known and momentarily most
successful product of Phenomedia. Hereby, Phenomedia has
taken a development push that would have otherwise cost a
considerable amount of work and money. The game’s
simplicity makes it an ideal short-term pastime, i.e. in the
office. On the technical side, Moorhuhn 1 took relatively little
work in its development. A sale of the game did not seem
possible at that time. However, the Internet enabled this
game concept to be spread rapidly and turned into a thorough
success. Up to now, Moorhuhn was down-loaded over ten
million times. Only shortly after this big success the
development was concentrated on a independent Moorhuhn-strategy.
Part of this strategy is the evaluation of all
rights and the continuous production of Moorhuhn content,
i.e. a screen saver, an editor to integrate pictures into the
game. In addition, as long as
demand exists, a new part of the
Moorhuhn-series will be released
in regular intervals. Moorhuhn 2,
in circulation since the middle of August,
has already been downloaded
more than 8 million times.
On the basis of a since the
beginning existing marketing
strategy, Moorhuhn 2 could become an even bigger success
from a financial point of view than the first part, albeit the
level of awareness of the first part would be difficult to
supersede. Besides the possibility to download the game, it is
possible for Phenomedia to sell it via retail due to a cooperation
with Ravensburger Interactive. Until now, over
240.000 games have already been sold at a price of DM 20
each. Further activities were a German Moorhuhnchampionship
in co-operation with the Bild newspaper and
RTL TV, in which 250.000 players took part. This event
represents the biggest Internet game-competition in
Germany up to now. In addition, all imaginable types of the
Moorhuhn-character are marketed. These include on-line and
off-line games, the Moorhuhn-song, a cartoon, and
merchandising-characters like the plush-Moorhuhn.
Gnarf
The on-line fight-game
“Gnarf”, belongs to
the most successful
innovations in the area
of on-line games. Until
now 50.000 players
have registered for the
“Gnarf-league”,
although the project
was not marketed and no significant advertisingexpenditures
were transacted at the moment, due to the
success of the Moorhuhn. In winter this year the “Gnarf”
should be marketed in a completely revised version in cooperation
with one of the leading game portals in form of a
world-wide “Gnarf-league”.

Internet games
Phenomedia has been able to realise a whole series of
Internet-games. These include projects like the “Bimmel
und Bommel”-game for Sat1, the “Rettet die Kühe”-game
(Save the cows) for the milk-association of Bavaria, the “Kick
Out Polio”-game for Unicef, as well as the “Football
Punisher” for the mobile service provider Loop. Through
the use of a game-engine, alterations to the appearance of
the game are possible, without having to programme the
range of functions again. Hereby, Phenomedia achieves a
multiplication effect that adjusts the game graphically to
customer wishes, but leaves the game-principle untouched.
The company division of Internet games evolved extremely
dynamically after the IPO, on the basis of the surprisingly
successful introduction of the Moorhuhn-game. The implicit
image increase led to over 100 order-inquiries, of which the
company believes to be able to realise approximately 60 in
the medium term. The price for an Internet game will lie in
the range of • 40.000-140.000.
On-line games will replace traditional off-line games as the
transaction rate of the Internet increases. Especially the
possibility to do the settlement over the play time instead of
licenses as well as the improved copy protection should lead
to a growing demand of these products and services.
According to a study of Datamonitor, the market-volume of
on-line-game users (Germany and the USA) will equal 15
million players in the year 2002. The turnover-volume is
estimated to be up to € 1,4 billion in the year 2002.
Phenomedia could secure itself a competitive advantage,
because of its focussing on the main access medium - the PC.
Services & technology
The services & technology division has performed positively
since the company’s IPO. Several consulting projects were
successfully completed and customers for the 3D-Engine
Cycos were acquired. Due to the highly fragmented market
for game engines and the relatively short product life cycle
marketing efforts will be operated on a low scale.
Thus turnover-share for the current year in the business area
services & technology will only amount to approximately
30% of the overall revenues.
Interactive Entertainment
The growth of Phenomedia lies not only in the huge success
experienced by ”Moorhuhn” and ”Moorhuhn 2” but also in
the Interactive TV and mobile Entertainment divisions. The
Interactive Entertainment division should, through the strong
branding of the Phenomedia characters, see the highest
growth potential within the company. This potential will be
achieved through the company’s aforementioned alliances.
Through this strategy Phenomedia will be able to position
itself as a content distributor in the interactive media sector
whether it be television, PC, Internet, Video or Games
Consoles.
According to a data-monitor study, the number of the digital
TV-appliances shall increase more than three times in Europe
and the USA until 2003. In 1999 approximately 16 million
households where equipped with these terminals. The
integration of computer, Internet and television will not take
place in one step. Instead, different intermediate forms will
dominate the market, in which Phenomedia should act as a
content distributor from the outset.
Comparison for the market of interactive digital TV
(households in 1000)
With the availability of interactive media, spectators are no
longer in a passive role, but turn into a type of program-boss.
From a Content-Pool, video-films, documentation-films,
television-programs, computer-games and other digital
services like home-shopping, Internet, E-mail, and homebanking
can be selected and used individually.
The large presence of television sets, as well as their relatively
low acquisition costs and simple handling, ensures a disproportional
profit to special content-types. Video-films and
computer-games are among those. These can be selected
from the customer by remote control or keyboard.
Phenomedia already owns well known computer-games and
characters, that can easily be transferred into interactive
TV-systems.
Black Pencil AG developed the first interactive telephonecontrolled
game on Swiss TV in the year 1993. In addition to
that, the company produces Internet compatible business
software as well as advertising games and merchandising
products. Another area of business lies in the development
of TV series and in addition to that in writing film-scripts and
novels. The potential resulting from that can be integrated
as well into the Interactive Entertainment strategy of
Phenomedia.
5

6
To strengthen the existing position in the area of content
development, Phenomedia AG has agreed to co-operations
with further companies of the media-industry, with which
Phenomedia plans to produce 52 sequences of a Gnarf
cartoon (á 11 minutes). Daywalker Studios will supplement
the development and commercial marketing of Internet-,
film- and TV-content for Phenomedia. Further negotiations
consist with well-known companies of the media sector.
Phenomedia also sees itself as a partner for the realisation
of projects for right-possessors (for example the transposition
of TV-characters from children- and youth-programmes into
a format utilisable for the Internet).
The expansion of the Interactive Entertainment market and
further possibilities generated by the advances in
telecommunications technologies, i.e. WAP and UMTS
standard, open countless possibilities for Phenomedia. From
2002 providers of Mobile Entertainment will have to generate
further content to gain users and longer online-duration.
The chance presents itself to Phenomedia AG, to utilise its
strong positioning in the market, in order to bring well-known
game characters into the area of portable terminals.
Therefore, the company is in negotiations with a leading
WAP-Portal-developer as well as a world-wide operating
mobile supplier. A concrete goal of the Phenomedia AG is to
first transfer the Moorhuhn and Gnarf to portable
communication appliances. The customer potential for mobile
entertainment products will probably rise in the year
2005 to one billion mobile users. Therefore, Phenomedia takes
on the function of the creative developer and content-supplier
in the area of Interactive Entertainment as well as in the
strong growth segment for content of mobile terminals.
Opportunities
• Due to the popularity of the Moorhuhn game, Phenomedia
was able to raise its image and profile, which could lead to
higher demand for its products.
• We expect large sales figures for the products that are in
the pipeline (Cultures, Gothic).
• Phenomedia differentiates itself through higher EBIT and
profit margins as compared to its peer companies.
• International partners reduce the risks within the game
industry resulting from over-reliance on certain games and
products.
• New developments such as, i.e. wireless telephony, Internet,
and Interactive TV, can lead to increased demand.
• Despite small marketing expenses, Phenomedia has a large
backlog of orders.
Risks
• Comparatively high accounts receivable as compared to
sales revenue puts pressure on the firm’s liquidity.
• Competition from independent developers as well as
producers of game platforms will increase and challenge
Phenomedia’s competitive advantage.
• Changing trends in the game market constitute a large
threat. It is also questionable whether a success such as
Moorhuhn can be repeated.
•· Software developers depend on large projects.
Phenomedia, therefore, depends on its relationship with
publishers such as THQ and Infogrames.
• The fact that a large part of the future growth of the
company will be generated by acquisitions, which are
financed through stock swaps can have diluting effects for
previous shareholders
Valuation
Our Valuation of Phenomedia leads to a value of • 59,64
per share.
Because of the unexpectedly successful growth of
Phenomedia’s leading computer-game “Moorhuhn” and the
strategic focus on divisions such as games & licensing and
Interactive Entertainment we refer to our pre-IPO
assumptions regarding Phenomedia’s business development
and growth rate in a very positive way. As done in the IPOstudy
dated 12.11.1999 we determined the value of the
company with a 3-Phase DCF-model and a peer-group analysis
including the changes in our estimates. Both valuation
methods each contribute to 50% of our valuation-base.
DCF-Valuation
Phase I of the model is essentially based on a detailed financial
plan from Phenomedia reaching into the year 2002. We
hereby assume that the high level of account receivables will
be lowered to a near industry wide average.
In Phase II we assume a constantly lower rate of revenue
growth and lower EBIT-margins.
On the basis of low marketing expenses and the position of
the company in the field of content development we believe
that the EBIT-margins will remain at over 40% as a percentage
of revenues over the entire period.
The revenue growth will face additional positive effects from
the deployment of the UMTS-standard in 2003 and 2004.
This means that there will be a significant higher demand for
game and media content. Phenomedia is very well positioned
in this area and therefore should be able to profit from these
developments.
In Phase III we assume a nominal free cash flow growth rate
of 2,5% yearly.
As the following table illustrates, the DCF-model leads to a
valuation for Phenomedia of € 232,35 mil., or € 55,32
per share.

Phenomedia AG: Discounted Cash Flow-Bewertung
Assumptions
Riskfree rate (10 year German Tressury
Bond from 1.9.2000)
Average yearly stock market yield
(CDAX 1980-2000)
Beta
Tax rate
Debt ratio
Cost of Equity
Cost of Debt
WACC
Years
Revenue growth rate
EBIT-Margin
(US-GAAP)
Specification in thousands €
Revenues
EBIT
- (fictitious) taxes from EBIT
+ Depreciation
-/+ Change in long term working capital
and accruals
- Capital spending
Free Cash Flow
Present Value
Results
2000e
5.26%
12.40%
1.00
52.00%
0.00%
12.40%
n.a.
12.40%
0.3
497.06%
43.45%
2000e
14,827
6,443
3,350
2,454
6,000
2,700
-3,153
-3,039
Specification in thousands €
Present Value of Free Cash Flow in Phase I
Present Value of Free Cash Flow in Phase II
Present Value of Free Cash Flow in Phase III
Value of the Firm
+ Liquid assets as of 30.06.00
Market Value of Equity
Number of shares outstanding (in ‘000)
Value of Equity per Share €
Phase I
2001e
5.26%
2002e
5.26%
12.40% 12.40%
1.00 1.00
40.00% 40.00%
0.00% 0.00%
12.40% 12.40%
n.a. n.a.
12.40% 12.40%
1.3 2.3
34.48% 43.59%
45.57% 43.71%
Phase I
2001e
19,940
9,086
3,634
3,122
3,000
3,435
2,139
1,835
2002e
28,632
12,514
5,006
5,431
1,800
5,974
5,165
3,941
2,736.8
72,256.6
138,545.2
213,538.6
18,815.5
232,354.1
4,200
55.32
2003e
5.26%
12.40%
1.00
40.00%
0.00%
12.40%
n.a.
12.40%
3.3
45.00%
43.00%
2003e
41,516
17,852
7,141
7,252
950
7,977
9,036
6,134
Peer-Group comparison
In order to achieve a fair valuation based on the general
market conditions we derived a valuation for Phenomedia
from comparable companies based on a peer-group analysis.
Two peer groups where established and included; on the one
hand companies from the Neue Markt Frankfurt and on the
other hand international companies with a main focus on
Europe.
The companies which are listed at the Neue Markt are not
direct competitors of Phenomedia, but either belong to the
Entertainment industry or address the same group of
customers. The international companies belong to the group
of game developers and publishers and therefore have a
business model, which is similar to Phenomedia’s.
2004e
5.26%
12.40%
1.00
40.00%
0.00%
12.40%
n.a.
12.40%
4.3
40.00%
42.00%
2004e
58,123
24,412
9,765
9,499
997
10,449
12,700
7,670
2005e
5.26%
12.40%
1.00
40.00%
0.00%
12.40%
n.a.
12.40%
5.3
35.00%
41.00%
Phase II
2006e
5.26%
12.40%
1.00
40.00%
0.00%
12.40%
n.a.
12.40%
6.3
30.00%
40.00%
1,100
15,746
22,632
10,819
2007e
5.26%
2008e
5.26%
12.40% 12.40%
1.00 1.00
40.00% 40.00%
0.00% 0.00%
12.40% 12.40%
n.a. n.a.
12.40% 12.40%
7,3 8.3
25.00% 20.00%
40.00% 40.00%
2005e 2006e 2007e 2008e
78,466 102,006 127,507 153,009
32,171 40,802 51,003 61,203
12,868 16,321 20,401 24,481
12,082 14,996 18,153 21,310
1,047
12,686
17,651
9,484
Phase II
1,155
19,060
28,539
12,138
1,212
23,441
33,379
12,630
2009e
5.26%
12.40%
1.00
40.00%
0.00%
12.40%
n.a.
12.40%
9,3
15.00%
40.00%
7
Phase III
...
5.26%
12.40%
1.00
40.00%
0.00%
12.40%
n.a.
12.40%
...
2009e
Phase III
...
175,960 Terminal
70,384
28,154
Value
24,151 Nominale
Rate der Free
1,273 Cash Flows
25,359
39,750
2.5%
13,381 138,545
Especially Kalisto Entertainment pursues a similar business
strategy as Phenomedia and as can be seen in the analysis,
has a significant premium over the comparable average. A
description of all peer group companies is located in the
appendix.
For the valuation basis of Phenomedia, the following multiples
have been used and calculated on the average.
• Price to Earnings ratio for the years 2001 and 2002
• Enterprise Value to EBIT ratio for the years 2001 and 2002
• Figures for turnover and enterprise value to turnover ratio
have been included only for informative purposes.
We consider these characteristic numbers meaningful,
because of the fact that all companies will be profitable by
2001/02. Therefore a valuation based on the companies
revenues would lead to unjustified distortions and would
underscore the profitability of Phenomedia.
Because of the better comparability of the international peer
group we derived 2/3 of the valuation from it and just 1/3
from the Neue Markt peer group.
Based on the following peer group table we receive a
valuation of € 63,96 per share.

in €
Neuer-Markt Comparable Companies
RTV
e-multi AG
Brainpool
ID-Media
CDV Software AG
Swing Entertainment AG
Average
Phenomedia AG
derived Valuation
for Phenomedia AG
Average
Share
Price
09/11/00
19.15
10.90
24.70
52.60
97.50
15.70
50.00
50.33
Number
of Shares
(in ´000)
23,875
3,400
10,600
9,900
800
3,800
4,200
4,200
Mkt.
Cap.
(in mil.)
457.2
37.1
261.8
520.7
78.0
59.7
210.0
211.4
Enter-
prise-
Value
460.20
28.56
235.13
498.70
67.94
44.45
191.3
192.6
99
0.33
-0.08
0.11
-0.19
-0.13
0.08
0.21
0.21
00e
0.70
-0.08
0.25
-0.06
-1.39
0.11
0.78
0.78
01e
1.48
0.19
0.44
0.16
-0.69
0.29
1.06
1.06
02e
1.70
0.42
0.70
0.76
3.91
0.45
1.80
1.80
EPS
99
58
n.m.
235
n.m.
n.m.
196
163
238
240
00e
27
n.m.
100
n.m.
n.m.
143
90
64
65
01e
13
57
57
329
n.m.
54
45
47
47
02e
11
26
35
69
25
35
34
28
28
P/E CAGR
99-02e
72.7%
n.m.
88.0%
n.m.
n.m.
77.8%
79.5%
71.5%
71.5%
PEG
02
0.15
n.m.
0.40
n.m.
n.m.
0.45
0.34
0.90
0.90
99
5.1
-0.5
2.3
-2.7
-0.1
0.9
1.7
1.7
00e
12.4
-0.7
6.5
-0.8
-1.2
1.3
6.4
6.4
01e
17.8
1.8
9.5
2.5
-0.6
3.2
9.1
9.1
02e
23.4
3.9
140
11.3
4.8
5.8
12.5
12.5
EBIT (in mil.)
99
23.4
11.1
8.3
11.5
10.3
11.1
12.6
39.0
39.3
00e
8.0
5.2
5.2
4.5
5.5
4.3
5.4
12.9
13.0
01e
5.7
2.2
4.1
2.2
4.0
2.1
3.4
21.0
21.2
EV/Turnover
02e
4.4
1.5
3.0
1.6
2.2
1.4
2.4
6.7
6.7
99
90.2
n.m.
102.2
n.m.
n.m.
49.4
72.8
112.2
113.0
00e
37.1
n.m.
36.2
n.m.
n.m.
34.2
35.8
29.8
30.0
01e
25.9
15.5
24.8
72.1
n.m.
13.9
20.0
21.0
21.1
EV/EBIT
02e
19.7
7.3
16.8
15.9
14.2
7.7
13.6
15.3
15.4
International Comparable Companies
Argonaut
Cryo Interactive
Eidos
Infogrames
Kalisto
UBI Soft
Average
Phenomedia AG
derived Valuation
for Phenomedia AG
Average
Share
Price
09/11/00
£0.53
€ 26.80
£4.32
€ 33.00
€ 18.20
€ 59.60
€ 50.00
€ 70.77
Number
of Shares
(in ´000)
91,800
11,780
102,800
74,767
16,258
16,654
4,200
4,200
Mkt.
Cap.
(in mil.)
48.7
315.7
444.1
2,467.3
295.9
992.6
210.0
297.2
Enter-
prise-
Value
31.2
334.1
523.3
2,565.0
299.5
1.023.4
191.3
278.5
99
-0.03
0.15
0.00
0.28
0.83
0.00
0.21
0.21
00e
-0.04
0.24
-0.10
0.39
0.13
0.65
0.78
0.78
01e
0.03
0.34
0.15
0.64
0.18
0.99
1.06
1.06
02e
0.07
0.40
0.18
0.91
0.23
1.17
1.80
1.80
EPS
99
n.m.
175
n.m.
118
22
n.m.
105
238
337
00e
n.m.
113
n.m.
84
140
92
107
64
91
01e
17
78
29
52
104
60
47
47
67
02e
8
68
23
36
79
51
44
28
39
P/E CAGR
99-02e
122.2%
37.3%
24.1%
48.0%
33.0%
33.8%
53.1%
71.5%
71.5%
PEG
02
0.06
1.81
0.97
0.76
2.40
1.51
1.32
0.90
1.27
99
n.a.
2.9
n.a.
22.5
1.4
n.a.
1.7
1.7
00e
1.5
4.5
10.2
44.6
3.8
18.4
6.4
6.4
01e
1.7
6.2
37.4
81.9
5.4
26.5
9.1
9.1
02e
4.0
7.9
51.0
107.5
8.1
36.6
12.5
12.5
EBIT (in Mio.)
99
13.5
9.3
2.3
8.6
20.0
n.a.
10.7
39.0
56.8
00e
7.0
6.5
2.4
4.2
13.9
5.3
6.6
12.9
18.8
01e
3.4
4.9
2.0
2.7
12.4
4.1
4.9
21.0
30.6
EV/Turnover
02e
2.3
4.0
1.7
2.2
11.1
3.3
4.1
6.7
9.7
99
n.a.
114.5
n.a.
114.2
210.2
n.a.
114.2
109.8
163.5
00e
20.8
75.1
51.4
57.5
78.9
55.5
54.8
29.2
43.4
01e
18.3
53.9
14.0
31.3
55.7
38.6
32.4
20.5
30.5
EV/EBIT
02e
7.8
42.5
10.3
23.9
37.0
28.0
24.9
14.9
22.2
99
19.7
2.6
28.3
15.6
6.6
4.0
4.9
4.9
00e
57.6
5.5
44.8
40.0
12.4
10.3
14.8
14.8
01e
80.1
12.7
57.3
83.0
17.0
20.9
20.0
20.0
02e
104.1
19.2
77.8
112.7
30.7
30.9
28.6
28.6
Turnover (in mil.)
99
2.3
36.1
226.3
300.0
15.0
k.A.
4.9
4.9
00e
4.5
51.7
216.5
605.6
21.5
191.7
14.8
14.8
01e
9.1
67.7
261.9
938.4
24.2
248.1
20.0
20.0
02e
13.58
84.11
316.1
1,175.0
26.9
313.2
28.6
28.6
Turnover (in mil.)
Penomedia AG PeerGroup Vergleich
8

Summary of the evaluation models
Peer-Group Neuer-Markt
in € per share
50.33
Peer Group International
70.77
Results from Peer-Group Valuation
63.96
Average of the Peer-Group Valuation
63.96
DCF-model
55.32
Fair Stock-Price-Valuation from different valuation models 59.64
Results of the valuation
We think that the stock of Phenomedia is at the current
levels fundamentally undervalued. We recommend to buy
the stock with a price target of € 60,00. Crucial to this
recommendation was the previous success of business as well
as the good outlook to further expand in new markets. The
successful development of “Moorhuhn” and the focus on new
high growth markets as WAP games or Interactive TV offers
significant opportunities. Therefore the stock price should
reflect this and could benefit from these developments.
Appendix
Brief descriptions of the peer group companies.
Brainpool TV AG (BTV)
Brainpool TV is engaged in the production, licensing and
merchandising process of TV characters. Brainpool is also
active in the development of Internet content and the
organisation of events. The programme stock covers German
TV productions like weekly comedy and erotic shows.
CDV Software Entertainment AG (OGG)
CDV is active in the sale and distribution of eTainment
(computer games, infotainment, educational software) and
inexpensive application software. CDV distributes successful
products, such as “Doom” or “Duke Nukem” as well as the
recently published action hit “Sudden Strike”.
e.multi Digitale Dienste AG (EMH)
e.multi Digital Services offers entertainment and information
systems using the Internet. The company develops, organises
and implements winning games for operators of websites,
which use them to attract potential customers to their
content. In Germany e.multi is, with its 80% market share,
leader in providing stock market tournaments via the
Internet. Additionally, e.multi provides information services
like stock quotes for private investors.
RTV Family Entertainment AG (RTV)
RTV Family Entertainment belongs to the group of leading
producers and licensers of high quality TV programmes for
children and family entertainment. Besides the production
of films and soaps, RTV is engaged in the merchandising of
film characters. RTV is also the merchandising partner of
Phenomedia in respect to the distribution of “Moorhuhn”
articles.
Swing! Entert@inment Media AG (SGV)
Founded in 1998, Swing develops, produces and markets
software for digital entertainment platforms (PCs, video
game consoles and the Internet). Additionally Swing buys
the licensing rights of finished entertainment products and
characters to produce the software and market them over
their electronic channels.
I-D Media AG (IDL)
I-D Media is a marketing and communication services
provider. The company develops and markets innovative
media -content, -services and -technologies using the
Internet. With Cycosmos I-D Media hosts a virtual community
platform via the Internet.
Argonaut Games Plc (AGT)
Argonaut Games is one of the largest independent producers
of video games. With more than 120 employees Argonaut
designs and develops entertainment software for PCs and
video game consoles. The customers and strategic partners
of Argonaut are big publishers and producers like Fox
Interactive, Electronic Arts, Disney, Sega and Nintendo.
Cryo Interactive SA (RYI)
Listed at the Nouveau Marche since december 1998, Cryo
Interactive develops and publicises culture, adventure and
strategic role play games for the PC, Sony PlayStation,
Nintendo 64, Nintendo Game-Boy, Sega Dreamcast and the
Internet. The targeted customers of Cryo are between the
ages 18-35. Cryo Networks, will be spun off later this year
and develops online games and sells an online-game
developer’s toolbox based on its standard “SCOL” that allows
to create 3-D environments
Eidos Plc (EID)
The core activities of Eidos cover the development and
marketing of interactive entertainment products for PCs and
video game consoles as well as the Internet under its own
label “Eidos Interactive”. One of the most famous of its games
is “Tomb Raider” with the virtual character Lara Croft.
Additionally, Eidos possesses licence agreements with the
organisers of Formula 1, the Olympic games as well as Disney.
9

10
Infogrames Entertainment SA (IFG)
Infogrames Interactive develops, markets and distributes
interactive entertainment software for PCs and video game
consoles. Infogrames has the licences for characters like
“Asterix”, “Die Schlümpfe” (Smurfs), “Loony Toons” and the
Brazilian national soccer team. Through the acquisition of GT
Interactive, Infogrames passes another milestone on the way
to position itself in the US markets.
Kalisto Entertainment SA (KALI)
The French based entertainment software company, Kalisto
Entertainment, is engaged in the development and marketing
of PC and video game software. Kalisto also claims to be one
of the leaders in the Internet gaming market. Games
developed by Kalisto are for example “Nightmare
Creatures”, “Dark Earth”, “Ultimate Race” and “The Fifth
Element”. Founded in France, Kalisto also maintains offices
in Japan, USA, China and England. Like Phenomedia, Kalisto
deals with the development of online games.
UBI Soft Entertainment SA (UBIN)
UBI Soft Entertainment belongs to the group of the biggest
companies in the entertainment software business. UBI Soft
is a publisher and sells its software via CD-ROM and the
Internet. UBI Soft has about 1500 employees and licenses its
software mainly to Nintendo, Sega and Sony.
Phenomedia AG: Profit and Loss statement
1999
2000e
2001e
‘000 DM ‘000 € ‘000 DM ‘000 € +/- ‘000 DM ‘000 €
Revenues
9,513 4,864 29,000 14,827 205% 39,000 19,940
Games&Licensing
7,362 3,764 18,000 9,203 144% 25,000 12,782
Interactive Entertainment
0 0 2,500 1,278 0% 3,800 1,943
Service&Technology
2,151 1,100 8,500 4,346 295% 10,200 5,215
Other revenues
492 252
Cost of revenues
1,694 866 4,500 2,301 166% 5,800 2,965
Personnel expenses
1,687 863 3,900 1,994 131% 5,100 2,608
Other operating expenses
1,424 728 3,200 1,636 125% 4,200 2,147
EBITDA
5,200 2,659 17,400 8,896 235% 23,900 12,220
Depreciation and amortization
1,889 966 4,799 2,454 154% 6,106 3,122
Earnings before interest and taxes (EBIT) 3,311 1,693 12,601 6,443 281% 17,794 9,098
Interest income
87 44 800 409 820% 400 205
Result from operational activities
3,398 1,737 13,401 6,852 294% 18,194 9,302
Extraordinary income
-2,081 -1,064 0 0 -100% 0 0
Income taxes
656 335 6,968 3,563 962% 9,461 4,837
Net income
661 338 6,432 3,289 873% 8,733 4,465
DVFA Adjustments
1,041 532
Adjusted DVFA earnings
1,702 870 6,432 3,289 135% 8,733 4,465
Number of shares outstanding
������������������
4,200
0.41
0.21
4,200
1.53
0.78
4,200
2.08
1.06
Sources:
• Value-Research Data
• Phenomedia AG
• Datamonitor
• Bloomberg
+/- ‘000 DM ‘000 €
34% 56,000 28,632
39% 36,500 18,662
52% 6,700 3,426
20% 12,800 6,545
29% 8,100 4,141
31% 6,900 3,528
31% 5,900 3,017
37% 35,100 17,946
27% 10,622 5,431
41% 24,478 12,515
-50% 200 102
36% 24,678 12,618
0 0
36% 9,871 5,047
36% 14,807 7,571
36%
14,807
4,200
3.53
2002e
7,571
1.80
+/-
44%
46%
76%
25%
40%
35%
40%
47%
74%
38%
-50%
36%
4%
70%
70%

Phenomedia AG
Consolidated Balance Sheets to IAS
Assets
A. Assets
I. Intangible assets
1. Rights to use, licenses and software
2. Prepaid expenses on assets under construction
3. Goodwill
II. Property, plant and eqipment
Other equipment, factory and office equipment
B. Latent taxes
C. Current Assets
I. Inventory
1. Unfinished Products
2. Goods
3. Prepaid expenses
II. Receivables and other current assets
1. Trade receivables
2. Other assets
III. Cash-in-hand and bank balances
D. Deferred items
Total Assets
Equity and Liabilities
A. Equity
I. Subscribed capital
II. Capital surplus
III. Accumulated deficit
IV. Yearly surplus/deficit
B. Accruals
I. Tax reserves
II. Other accruals
C. Liabilities
I. Liabilities to banks
II. Received pre-payments on orders
III. Trade liabilities
IV. Other liabilities
Total liabilities and shareholders equity
01/01/1999 - 06/30/1999
‘000 DM
2,140
1,971
971
911
89
169
169
66
3,121
90
24
66
0
2,356
1,512
844
675
23
5,350
‘000 DM
724
1,000
0
23
-299
368
205
163
4,258
37
1,005
1,444
1,772
5,350
’000 €
1,094
1,008
496
466
46
86
86
34
1,596
46
12
34
0
1,205
773
432
345
12
2,735
‘000 €
370
511
0
-153
-153
188
105
83
2,177
19
514
738
906
2,735
%
40.0%
36.8%
18.1%
17.0%
1.7%
3.2%
3.2%
1.2%
58.3%
1.7%
0.4%
1.2%
0.0%
44.0%
28.3%
15.8%
12.6%
0.4%
100%
01/01/1999 - 06/30/1999
%
13.5%
18.7%
0.0%
-5.6%
-5.6%
6.9%
3.8%
3.0%
79.6%
0.7%
18.8%
27.0%
33.1%
100%
1,332
1,332
0
55,952
2,372
0
417
1,955
16,782
9,708
7,074
36,798
9
61,172
‘000 DM
56,053
8,215
46,156
821
861
1,742
1,524
218
3,377
1,261
96
978
1,042
61,172
11
01/01/2000 - 06/30/2000
‘000 DM ‘000 € %
5,211 2,664 8.5%
3,879 1,983 6.3%
3,815 1,951 6.2%
0 0 0.0%
64 33 0.1%
681
681
0
28,608
1,213
0
213
1,000
8,581
4,964
3,617
18,815
5
31,277
‘000 €
28,659
4,200
23,599
440
440
891
779
111
1,727
645
49
500
533
2.2%
2.2%
0.0%
91.5%
3.9%
0.0%
0.7%
3.2%
27.4%
15.9%
11.6%
60.2%
0,0%
100.0%
01/01/2000 - 06/30/2000
31,277
%
91.6%
13.4%
75.5%
1.4%
1.4%
2.8%
2.5%
0.4%
5.5%
2.1%
0.2%
1.6%
1.7%
100%

Internet / Structure
Internet / eTailing
Health Care & Biotech
Media & Entertainment
New Technologies
Telecommunication
IT-Software
IT-Security & IT-Hardware
IT-Semiconductor
IT-Services & Financial Services
General Equities
This document is for information purposes only. Although the information in
this report has been obtained from sources which Value Research GmbH & Co.
KG (Value Research) believes to be reliable, we do not represent or warrant its
accuracy, and such information may be incomplete or condensed.
This document was prepared independently of Phenomedia AG and its authors
have no authority to make any representation or warranty on behalf neither
Value Research, Phenomedia AG or any other person accepts any liability
whatsoever for any loss arising from any use of this document or its contents
or otherwise arising in connection therewith.
The investments discussed or recommended in this report may be unsuitable
for investors depending on their specific investment objectives and financial
position. Before acting, private investors should obtain the advice of their
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or will result of reliance upon any opinion or statement contained herein or for
any omission.
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Rolf Kunz
Andreas Lambrou
Gerrit Rohleder
Volker Braun
Dr. Martin Possienke
Ralf Marinoni
Lars Kuhnke
Jörg Müller
Peter Klostermeyer
Steffen Manske
Sven Jochim
Katrin Andreas
Michael Anschütz
Ralph Struthoff
Peer Sven Beers
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