august 2013 deal... · (2) owned channels defined as 100% owned as of april 30, 2013. (3) as of...

Deal Overview

August 2013

Executive Summary

2

• SPT Networks has an opportunity to acquire Chellomedia’s (a subsidiary of Liberty Global) operating business unit in the Latin America region, Chello Latin America (“Chello LatAm”)

– Chellomedia (“Chello”) is currently running a sale process for the entire business with initial non-binding indications of interest due by July 18, 2013

– We believe Chellomedia’s valuation is in the range of $822mm to $998mm, representing a 8.9x to 10.8x CY2012A EBITDA multiple and 8.5x to 10.4x CY2013E EBITDA multiple

– While Chellomedia represents an attractive asset, Chello LatAm represents the best strategic fit into SPT Networks’ current portfolio

• Chello LatAm provides an opportunity for SPT Networks to expand its presence in the high-growth Latin American Pay TV and ad sales market and realize significant synergies

– Expand SPT Networks’ distribution and reach, through ownership of Chello LatAm’s 10 portfolio channels with approximately 106mm subs in key countries in Latin America such as Brazil and Mexico

– Chello LatAm will enable us to recapture control of affiliate distribution from HBO, allowing us to better capitalize on the growing LatAm and Brazil Pay TV market

– Cross promote channels to drive viewership and ad sales

– Opportunities to utilize SPE’s content library across Chello LatAm channels

– Capture significant cost synergies (staff, marketing, G&A, up-link, etc.)

• SPT Networks proposes to submit a preliminary and non-binding indication of interest, subject to due diligence, of $150mm for Chello LatAm, representing a 11.8x CY2012A EBITDA multiple and 9.6x CY2013E multiple

• Based on high level financial information and a proposed $150mm purchase price, the Chello LatAm acquisition has a deepwater mark of ($148)mm, NPV of $14mm and IRR of 20.8% before synergies

• With preliminary synergies assumed at 10% of cash flow, the Chello LatAm acquisition has a deepwater mark of ($148)mm, NPV of $31mm and IRR of 24.0% after synergies

Chellomedia Overview

3

Business Description

• One of the largest producers and distributors of thematic Pay TV channels globally with a significant majority of revenues generated from subscriptions, and the remainder from advertising, ad space resale and services

• 65 (1) channels across six genres, 56 of which are 100% owned and 19 are joint ventures

• Distributes channels in 138 countries and in over 25 languages reaching approximately 394mm subscribers

• Content in popular genres of movies, entertainment, sports, children’s, lifestyle and factual

(1) As per Chello internal channel count; does not include channels held through associate investments (e.g. Disney XD-Poland, ShortsTV and OBN).(2) As of April 30, 2013 YTD.

Revenue By Genre

Revenue Breakdown (2)

Revenue By Type Revenue By Country

Diversified International Business Units(US$ millions)

4

(1) As per Chello internal channel count; does not include channels held through associate investments (e.g., Disney XD-Poland, ShortsTV and OBN).(2) Owned channels defined as 100% owned as of April 30, 2013.(3) As of April 30, 2013.(4) Represent full-time employees and excludes employees in central role. Pro forma 2013E.(5) Subscribers relate to MGM Netherlands, Weer, and Verkeer (JV with MeteoConsult).(6) Includes employees related to Chello Central Europe – At Media business.

Chello LatAm Overview

5

Summary Financials (US$mm)Overview (1)

• The overall Latin America Pay TV and ad spending market is projected to grow at a CAGR of 13% and 9%, respectively, from 2013 to 2017

• Portfolio of 10 channels, including MGM Latin America, the popular El Gourmet food channel, Film&Arts, and the lifestyle Cosmopolitan TV channel

• Top 5 channels expected to account for over 80% of CY13E revenue

• Subscription revenues accounted for the 85% of the total revenues, followed by advertising, which accounted for 14%(2)

• Projects subscription revenue growth CAGR of 8% from 2013 to 2018

• Total of ~106 million subs as of April 2013, representing a 13% growth from CY11A

• Channels are distributed by all the major operators within the relevant regions and also has a small presence of ~400k subscribers in the US through its Spanish-language channel, Ella

Note: Figures assume exchange rate of 1.3x € to USD.(1) All data as of or for April 2013A YTD.(2) Pre eliminations.

Revenue Breakdown (1)(2)

Revenue By Genre

Revenue By Country

’11 – ’13 CAGR: 18%’13 – ’18 CAGR: 16%

’11 – ’13 CAGR: 11% ’13 – ’18 CAGR: 8%Revenue

EBITDA

6

Chello LatAm Strategic Acquisition Rationale

• SPT Networks will have independent distribution and direct engagement with affiliates; reducing our reliance on 3rd parties

• Opportunities to create greater value to broadcasters and SPT Networks by offering bundled options in distribution discussions (e.g., bundling Spin along with Chello channels)

Distribution

(1) Will examine selling off channel assets with limited strategic fit (e.g., Canal A )(2) Assumes 3 distinct linear channels, SET, AXN and Spin, for SPT Networks. MGM has an HD feed which is not a simulcast but has a different programming

schedule

• Expand our channel portfolio by offering content across 5 of the 6 major genres (1)• Opportunities for SPT Networks to create channel bundles (i.e., movie) to bring compelling offerings to

broadcasters and consumers

Channel Portfolio

• Expand ad sales offering by building scale in the region• Bundling of ad sales to create greater value for advertisers and SPT Networks across channels

Ad Sales

• Utilize production facility to develop our own content to air on our channelsLocal Production

Additional Opportunities

• Utilize Sony’s extensive content library across Chello’s portfolio of channels• Capture significant cost synergies including overlap on staff, marketing, play-out, programming, G&A etc.

Genre Entertainment Movies Lifestyle Sports FactualChildren’

sTotal (2)

Sony Pictures

- - - - - 3

Chello LatAm

- 10

Combined 5 2 4 1 1 0 13

Chello LatAm Channel Portfolio Strategy

7(1) As of April 30, 2013.

Chello LatAm Preliminary Valuation(US$ in millions)

8Note: Figures assume exchange rate of 1.3x € to USD. Fiscal year financials assume 75% of prior calendar year and 25% of current calendar year. Also

note that the low view is based on the preliminary valuation prior to synergies and the high view is based on the preliminary valuation with synergies.

• SPT Networks estimates a preliminary enterprise value range of $129mm – $152mm before synergies based on Chellomedia financial projections and by equally weighting the DCF and trading multiples valuation methodologies

– The valuation implies 9.6x – 11.3x FY13 EBITDA and 7.9x – 9.3x FY14 EBITDA

– The valuation is pre-diligence and gives full credit to Chellomedia’s projections

• Preliminary estimate of synergies of 10% of cash flow increases the upper range to an average of $169mm

• We recommend extending a non-binding offer of $150mm for Chello LatAm, representing 11.8x CY2012 EBITDA and 9.6x CY2013 EBITDA

METHODOLOGY IMPLIED ENTERPRISE VALUE COMMENTS

DCF - Exit Multiple

■■

WACC Range: 17.0% - 18.0%Terminal Multiple: 6.0x - 8.0x

DCF - Perpetuity Growth■■

WACC Range: 17.0% - 18.0%Perpetuity Growth: 6.5% - 7.5%

Trading Multiples - FY14E EBITDA

■Trading Multiple of FY14E EBITDA Range: 8.0x - 9.0x including a 25% Equity Control Premium

Trading Multiples - FY13A EBITDA

■Trading Multiple of FY13A EBITDA Range: 9.0x - 10.0x including a 25% Equity Control Premium$121

$131

$136

$130

$148

$162

$180

$185

$80 $100 $120 $140 $160 $180 $200

Enterprise Value

$165

$147

$162

$135

High View: $169Low View: $129

Incremental value from synergies

Chello LatAm Returns Analysis (without Synergies)(US$ in millions)

9Note: Figures assume exchange rate of 1.3x € to USD. Assumes transaction as of 12/31/13. Fiscal year financials assume 75% of prior calendar year and 25% of current calendar

year.(1) Assumes depreciation & amortization is 1% of revenue.(2) Assumes 40% of the purchase price attributed to intangibles. 70% of the intangibles value is attributed to affiliate relationships and amortized over 10 years (straight-line),

20% is attributed to programming and amortized over 3 years (50%/30%/20%) and 10% is attributed to advertiser relationships and amortized over 3 years (50%/30%/20%).

Chello LatAm Returns Analysis (w/ Synergies)(US$ in millions)

10

• Assumes 10% synergies to cash flow

Note: Figures assume exchange rate of 1.3x € to USD. Assumes transaction as of 12/31/13. Fiscal year financials assume 75% of prior calendar year and 25% of current calendar year.

(1) Assumes depreciation & amortization is 1% of revenue.(2) Assumes 40% of the purchase price attributed to intangibles. 70% of the intangibles value is attributed to affiliate relationships and amortized over 10 years (straight-line),

20% is attributed to programming and amortized over 3 years (50%/30%/20%) and 10% is attributed to advertiser relationships and amortized over 3 years (50%/30%/20%).

Appendix

Chellomedia Preliminary Valuation Summary(US$ millions)

12

• Based on a sum-of-the-parts analysis, we believe Chellomedia will be valued in the range of $822mm to $998mm

– The valuation implies 8.9x – 10.8x CY2012 EBITDA and 8.5x – 10.4x CY2013 EBITDA

– The valuation is pre-diligence, assumes no synergies and gives full credit to Chellomedia’s projections

Note: Figures assume exchange rate of 1.3x € to USD.(1) CY2012 EBITDA of $92.3mm.(2) CY2013 EBITDA of $96.2mm.(3) Does not include synergies.

Chello Zone

Chello Zone Overview

14


• Portfolio of 20 channels comprising of:

• 10 owned channels including well-known brands such as Jim Jam, Extreme Sports, MGM and Horror Channel

• 10 channels with JV partners including 8 channels with CBS

• Content covers entertainment, movies, children’s, sports and lifestyle

• Total of 189 million subs as of April 2013, representing a 8% growth from CYE 2011

• Subscription and advertising comprise of 60% and 30% of total revenues, respectively

• Overall, the top 5 countries account for more than 60% of total revenues

• Channels are distributed widely across EMEA with carriage on over 1,000 operators

• Top 5 carriage operators accounted for 28% of total revenues



Revenue By Genre

Revenue By Country

Revenue

EBITDA

’11 – ’13 CAGR: 17%’13 – ’18 CAGR: 6%

’11 – ’13 CAGR: 1%’13 – ’18 CAGR: 5%

Chello Zone Strategic Rationale

• Overall, Chello Zone channels have strong brand fit with the SPT Networks portfolio and we see some meaningful opportunities in rolling-up the Chello Zone channels into existing SPT Networks brands (AXN Black/ White/ Spin or Movie properties)

• Particular interest in MGM, as well as channels jointly-owned by CBS EMEA and CBS UK

• Expected benefits include:

• Improved market position with increased reach which can be leveraged for future ad sales representation negotiations

• Potential opportunity to create local market feeds to access local advertising

• Greater content buying power across the region

• Access to CBS franchises that can be leveraged across the portfolio

• Improve economics by launching OTT catch-up services (CBS Action, Reality, Drama), SVOD services complementary to Animax (Horror Channel SVOD) and premium VOD

• Potential cost synergies (e.g. rolling Russian and African feeds into existing operating units, fold into SPT Networks’ London hub to deliver operational synergies)

15

Chello Zone Channel Portfolio Strategy

16 (1) As of April 30, 2013.

Chello Zone Preliminary Valuation(US$ in millions)

17Note: Figures assume exchange rate of 1.3x € to USD. Fiscal year financials assume 75% of prior calendar year and 25% of current calendar year.

• SPT Networks estimates a preliminary enterprise value range of $235mm-$275mm based on Chellomedia financial projections and on a target IRR of at least ~20% on the low view and a positive NPV on the high view

– The valuation implies 11.3x – 13.3x FY13 Adj. EBITDA and 9.8x – 11.4x FY14 Adj. EBITDA

– The valuation is pre-diligence and gives full credit to Chellomedia’s projections, but excludes synergies to SPT Networks


DCF - Exit Multiple

■■




Trading Multiples - FY14E EBITDA

■Trading Multiple of FY14E EBITDA Range: 10.5x - 11.5x including a 25% Equity Control Premium

Trading Multiples - FY13A EBITDA

■Trading Multiple of FY13A EBITDA Range: 12.0x - 13.0x including a 25% Equity Control Premium

Transaction Comparables - LTM EBITDA (FY13A)

■Transaction Comparables Multiple of LTM EBITDA (FY13A) Range: 12.0x - 13.0x

$249

$249

$253

$256

$265

$269

$269

$277

$303

$295

$225 $250 $275 $300 $325

Enterprise Value


Chello Multicanal

Chello Multicanal Overview

19

Overview (1)

• Chello Multicanal is the biggest producer of thematic channels in Spain and Portugal, with a growing presence in Africa

• Portfolio of 20 channels comprising of:

• 13 owned channels including some of Chellomedia’s strongest offerings, such as Canal Hollywood, Odisea and Canal Cocina

• 7 channels with joint venture partners

• Top 10 channels (excl. The History Channel Iberia) represent 60% of subscribers and 72% of revenues

• Total of ~49 million subs as of April 2013 with an average of 35 million paying subs

• ~80% of revenues generated from subscription-based revenue

• Advertising revenues and services to JV channels make up ~10% each of revenues

• Carriage agreements with a wide variety of operators, including all the major players in Spanish and Portuguese markets



Revenue By Genre

Revenue By Country

’11 – ’13 CAGR: 2% ’13 – ’18 CAGR: 6%

’11 – ’13 CAGR: (1%)

’13 – ’18 CAGR: 3%Revenue

EBITDA

Summary Financials (US$mm)

Chello Multicanal Strategic Rationale

20

• While several of the Chello Multicanal channels are a strong complement to the SPT Networks portfolio, many of the others hold niche positions in their respective markets, with limited distribution and brand equity

• Strong position in Portugal with channels such as Canal Hollywood and Panda

• Largely niche channels in Spain where Chello Multicanal has limited leverage with the top three operators (i.e., Sogecable, ONO and Telefonica), along with sluggish ad sales

• Agreements with key operators are due to expire in the near future and renegotiations are expected to be challenging

• In the event of an acquisition, we expect that many of the lower-rated low distribution channels will need to be shut down

• Odisea, Canal Hollywood, and the movie and children’s channels jointly owned with Dreamia would be of greatest interest, and can be useful in reinforcing the AXN portfolio, particularly in Portugal and Angola

• Strong JV channels – Historia and Bio – have heavy original content and allow for OTT and SVOD expansion

• Chello Multicanal’s strengths lie in low-cost original production, mainly in the lifestyle genre, which can be leveraged across the SPT Networks portfolio

Chello Multicanal Channel Portfolio Strategy

21(1) As of April 30, 2013.

Chello Multicanal Channel Portfolio Strategy (Cont’d)

22(1) As of April 30, 2013.

Chello Multicanal Preliminary Valuation(US$ in millions)






DCF - Exit Multiple■■




Trading Multiples - FY14E EBITDA ■ Trading Multiple of CY14E EBITDA Range: 10.5x - 11.5x including a 25% Equity Control Premium

Trading Multiples - FY13E EBITDA ■ Trading Multiple of CY13E EBITDA Range: 12.0x - 13.0x including a 25% Equity Control Premium

Transaction Comparables - LTM EBITDA (FY13E)

■ Transaction Comparables Multiple of LTM EBITDA (FY13E) Range: 11.5x - 12.5x$268

$280

$251

$250

$250

$291

$303

$274

$305

$275

$175 $225 $275 $325 $375

Enterprise Value


Chello Central Europe

Chello Central Europe Overview

25

Summary Financials (excl. At Media) (US$mm)Overview (1)

• Chello Central Europe, based in Budapest, includes a channels business as well as an ad space resale business , At Media

• Portfolio of 13 channels, comprising:

• 12 owned channels, including leading sports, children’s, factual, movie and lifestyle channels

• 1 MGM-branded joint venture channel (55% owned) with NC+ in Poland

• Total of ~46 million subs as of April 2013, representing a 12% growth from CYE 11

• Top 5 channels account for more than 75% of the segment’s revenues with Sport1, Sport2, Spektrum, Minimax and TV Paprika the key drivers of performance

• Excluding At Media, 90% of Chello Central Europe revenues are generated from subscriptions, with advertising and other revenues making up the remaining 10%

• The At Media business provides advertising agency services to both Chellomedia channels as well as external clients

• Accounts for ~50% of total Chello Central Europe revenues with Poland as accounting for 75% of total At Media salesNote: Figures assume exchange rate of 1.3x € to USD.(1) All data as of or for April 2013A YTD.(2) Pre eliminations.


Revenue By Genre

Revenue By Country (Channel

Business)

Revenue

’11 – ’13 CAGR: 10%’13 – ’18 CAGR: 4%

’11 – ’13 CAGR: (1%)’13 – ’18 CAGR: 3%

EBITDA

Chello Central Europe Strategic Rationale

• Chello Central Europe acquisition could help SPT Networks build out a very deep and wide channel portfolio - particularly in SPT Networks’ main markets of Poland, Hungary and Romania - that would have enough reach to build significant scale in ad sales and leverage over content sellers

• Movie-focused channels (MGM, Film Café, Film Mania), and the kids’ property, Minimax, would be of greatest interest. The strategic fit with Chello Central Europe’s sport channels is less clear, given the unknown element of costs of rights and operations

• The overarching strategy post-acquisition would be to keep the kids’ and lifestyle brands as they are, but convert most of the other existing brands into AXN Black/ White/ Spin/ Movies properties, maximizing distribution of all AXN brands and building a much cleaner, clearer brand portfolio

● In terms of the sports channels, there is some opportunity to build a pan-regional sports business that could acquire rights for the region at competitive valuations thanks to economies of scale

• In creating distribution width by providing a wide portfolio of channels that becomes a must-have for platforms, SPT Networks could secure higher long-term rates and carriage for SPT Networks channels

• If sufficient market share is built, SPT Networks could consider an independent ad sales play in Poland, Hungary and Romania to further increase our leverage with strategic ad sales partners in the region26

Chello Central Europe Channel Portfolio Strategy

27(1) As of April 30, 2013.

Chello Central Europe (excl. At Media) Preliminary Valuation(US$ in millions)










Trading Multiples - FY14E EBITDA ■ Trading Multiple of FY14E EBITDA Range: 10.5x - 11.5x including a 25% Equity Control Premium


Transaction Comparables - LTM EBITDA (FY13E)

■ Transaction Comparables Multiple of LTM EBITDA (FY13E) Range: 11.5x - 12.5x

$203

$211

$198

$175

$180

$220

$229

$217

$210

$200

$100 $125 $150 $175 $200 $225 $250 $275 $300

Enterprise Value


At Media

At Media Overview

30


• At Media is the leading advertising sales house in Central Europe, representing leading TV channels in Poland, Hungary and Czech Republic

• Established in Poland in 1998 and grew significantly whilst also expanding into Czech Republic (2008) and Hungary (2010)

• Currently represents 101 international channels

• Services provided to Chellomedia channels account for less than 10% of total At media revenues and gross profit

• Whilst At Media’s core business is acting as a broker selling advertising time on TV as well as on internet and VOD, it also provides channel income optimization services to the channels it represents including sponsorship & promotion, consultancy on channel positioning, etc.


Revenue Breakdown by Country (1)(2)

Revenue

EBITDA’11 – ’13 CAGR: (18%) ’13 – ’18 CAGR: (5%)

’11 – ’13 CAGR: 2% ’13 – ’18 CAGR: 4%

Selected Represented Channels

At Media Preliminary Valuation(US$ in millions)


• SPT Networks estimates a preliminary enterprise value range of $12mm-$16mm based on Chellomedia financial projections and by equally weighting the DCF methodologies and trading multiples

– The valuation implies 4.5x – 5.9x FY15 EBITDA







Trading Multiples - FY15E EBITDA ■Trading Multiple of FY15E EBITDA Range: 5.0x - 6.0x including a 25% Equity Control Premium$14

$11

$13

$16

$14

$19

$0 $5 $10 $15 $20 $25

Enterprise Value


Chello DMC

Chello DMC Overview

33


• Chello DMC provides advanced play-out and content management solutions to local and worldwide clients seeking to maximize the value of their content

• Acts as in-house engineering and broadcast operations centre of excellence for Chellomedia

• Services include play-out, VOD services, content management, and connectivity

• Currently transmits over 100 feeds across Europe, Middle East, Asia and South Africa

• Content delivery for VOD and OTT platforms with over 22,000 titles across 13 different regional platforms

• Also provides technical services that support UPC Direct, a DTH satellite TV platform, across Central Europe

• It operates an advanced and highly integrated media-handling and play-out system, using modern server technology

• Services offered to Chellomedia channels, Liberty Global and external third-party clientsNote: Figures assume exchange rate of 1.3x € to USD.

(1) All data as of or for April 2013A YTD.(2) Pre eliminations.

Select Customers

Chellomedia & Liberty Global

Services

Third-Party Services

Revenue

’11 – ’13 CAGR: 7% ’13 – ’18 CAGR: 8%

’11 – ’13 CAGR: 2% ’13 – ’18 CAGR: 3%

EBITDA

Chello DMC Strategic Rationale

34

• DMC has limited strategic fit with SPT Networks’ future plan for distribution infrastructure

• DMC’s headquarters is not ideal as SPT Networks has vetted Amsterdam in detail when exploring possible locations for our own MediaCentre and found that it was deficient in several areas as compared to other regions in EMEA

• The facility, workflow and operations are built around legacy technology while SPT Networks’ current strategy is to move operations to the cloud, ultimately making centralized network services facilities and infrastructures redundant

• SPT Networks has recently renegotiated and extended contracts until the start of FY18 with another network service provider in London for an additional 4 years, at highly competitive prices, while we architect the cloud solution

• However, DMC would likely be considered a valuable asset to other network services competitors (e.g., GlobeCast, RRSat, Encompass Digital Media), and could be a good source of monetization were we to sell it off post acquisition

• Potential conflict of interest with SPT Networks as the facility owner/operator as the majority of DMC’s customers are SPT Networks direct competitors, which will likely be problematic for service renewals

• A large portion of DMC’s business, ~56% of CY2012 revenue comes from related parties (i.e., Chello channels and Liberty)

• If we were to buy DMC from Liberty, we would have to secure long term service agreements

• Matters can be further complicated if we were to sell the business to a third party

• Relatively low projected growth suggests that we may not be able to replace current related parties if they were to discontinue the relationship with DMC once contracts end

Chello DMC Preliminary Valuation(US$ in millions)



– The valuation implies 7.5x – 8.5x FY14 EBITDA and 6.6x – 7.6x FY15 EBITDA



DCF - Exit Multiple

■■



Trading Multiples - FY14E EBITDA ■ Trading Multiple of FY14E EBITDA Range: 9.0x - 10.0x including a 25% Equity Control Premium$85

$85

$75

$94

$95

$85

$30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130

Enterprise Value


august 2013 deal... · (2) owned channels defined as 100% owned as of april 30, 2013. (3) as of...

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