hbo divestiture opportunity september 14, 2009. -- confidential --p. 2 executive summary spe is...
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HBO Divestiture Opportunity
September 14, 2009
-- Confidential -- p. 2
Executive Summary
• SPE is revisiting its global channels portfolio and seeking to rebalance the mix towards channels that are majority controlled and consolidated
• There are two primary channel holdings that SPE anticipates recommending we sell to Time Warner, HBO Central Europe (CE) and HBO Latin America, with discussions active on both
• Launch of HBO CE and HBO Latin America as multi-studio JVs was driven by a shared need for a pay outlet in each market that has now been met; operating benefits to SPE’s broader portfolio are expected to be achievable contractually rather than through minority equity stakes
• Sale of each is expected to occur at attractive valuations for the market, and at prices validated by Disney’s exit of each asset
• Proceeds from the sale of these channels would facilitate further investment in our majority owned and operated channel portfolio
-- Confidential -- p. 3
Executive Summary - continued
• At this time, SPE is submitting for consideration the sale of our 33% stake in HBO CE
• SPE believes Time Warner’s desire to consolidate HBO CE makes this the right time to monetize our investment, receive cash of $78MM, and recognize a gain of approximately $39MM– Presents an opportunity to exit a minority position at a full valuation– Time Warner is believed to have a “handshake” deal to buy Disney’s 33.3% stake in HBO CE; SPE’s options are
to exit, maintain a minority position with less board leverage, or exercise our preemptive right to buy-up and maintain equal ownership with Time Warner
• Transaction would be structured to protect SPE’s ongoing operating relationship with HBO in Central Europe
• Sale of our HBO CE stake requires near-term approval and execution to close within FY10 assuming a 4-6 month regulatory review
• SPE anticipates bringing the HBO Latin America sale to the committee in Q4 FY10
-- Confidential -- p. 4
Overview of HBO Investments
Overview
Ownership
SPERelationship
• Programs, operates, and distributes HBO and Cinemax channels across Central Europe
• Programs, operates, and distributes HBO and Cinemax channels across Latin and South America
• 33.3% SPE• 33.3% Time Warner• 33.3% Disney
• 29.4% SPE• 58.8% Time Warner• 11.8% Ole Communications(note: Disney sold 29.4% stake to TW in 12/08)
• Distributes and provides services for SPE channels in region
• Licenses content from SPE
• Distributes and provides services for SPE channels in region
• Licenses content from SPE• SPE provides ad sales for HBO &
Cinemax channels in Brazil
-- Confidential -- p. 5
Additional HBO CE Background
Overview
Financial Highlights
SPERelationship
• Leading premium movie service in Central Europe• Operates in 12 countries with over 2.1MM paying subscribers• Operates and distributes 13 SD and 3 HD channels under the HBO and
Cinemax brands
• SPT has invested $25.7MM and received $41MM(1) in dividends to-date (additional $1.1MM in dividends anticipated in Sept/Oct 2009 with another special dividend to be negotiated)
• Channel has enjoyed double-digit revenue and EBIT growth over last 5 years• Management is forecasting $21MM in Operating Income for CY09 on $110MM
in revenue• Go-forward estimates assume continued growth in core business driven by
strong demand for U.S. content in the region
• HBO CE distributes SPE channel brands (AXN, AXN SciFi, AXN Crime) in Central Europe
– Provides network operations and sales/marketing services– Channels reach 14MM households regionally
• HBO CE licenses approximately $8-9MM annually from SPE(1) Includes $26MM dividend associated with sale of Spektrum
-- Confidential -- p. 6
HBO CE: Gain, Cash, and Ongoing EBIT Impact
• Time Warner is believed to have a hand-shake deal to acquire Disney’s 33.3% stake in HBO CE on a $235MM valuation
• Sale of our HBO CE stake at this valuation would generate a gain of roughly $39MM and cash of $78MM in FY10
Valuation Consideration Gain & Cash Consideration
EBIT Impact
(1) Excludes potential benefit of special dividend; HBO CE will dividend excess cash of ~$10-20MM ($3-7MM to SPE) prior to close(2) FY09 EBIT from operations of $37.9MM includes $26.3MM in dividends from the sale of Spektrum(3) FY10 EBIT impact assumes a December 31, 2009 close(4) Excludes profits from HBO licensing of SPE content
($MM) HBO CE
Valuation $235.0
SPE Interest Sold 33%
Cash Proceeds from Sale $78.3
Book Value of Amount Sold $38.8 (1)
Gain $39.4
($MM) FY09 (2) FY10 (3) FY11 FY12
No Sale
SPE Share of HBO Net Income (4) $37.9 $6.0 $5.6 $5.8
If Sold
SPE Share of HBO Net Income (4) $37.9 $5.0 $0.0 $0.0
Sale Proceeds (1) $0.0 $39.4 $0.0 $0.0Total $37.9 $44.4 $0.0 $0.0
Variance $0.0 $38.4 ($5.6) ($5.8)
Based on Current Company Forecast
-- Confidential -- p. 7
HBO CE: Historical Returns
A sale of our HBO CE stake at the proposed valuation will provide an attractive return
(1) Includes $26MM in dividends from the sale of Spektrum(2) Excludes potential benefit of special dividend; HBO CE will dividend excess cash of ~$10-20MM ($3-7MM to SPE) prior to close
($MM)
Acquisition of Equity by SPE ($21.7)(FY98 - FY10)
SPE Share of Operational Funding ($4.1)(FY99 - FY01)
Total Dividends Received by SPE $42.5 (1),(2)
(FY00 - FY10)
Sale to Time Warner $78.3(FY10)
Net Cash as of Close of Sale $95.1
IRR 17%
-- Confidential -- p. 8
HBO CE Sale: Risks and Mitigations
Risks Mitigations
• Ownership in HBO CE has provided a key platform for growing SPE’s owned and operated channels
• Contracts must be structured to avoid risks to ongoing relationships after the sale of our stake
– HBO CE will continue to distribute SPE channels– SPE will continue to seek licensing revenues
from HBO CE (currently ~$8-9MM annually)
• Deal may not close in FY10 due to time required for regulatory approvals
– Approvals may require up to 6 months and timing is not in SPE’s control
• Distribution and licensing relationships will be protected through long-term contracts– Deal extends our distribution services
agreement (currently through 4/1/10) by up to 8 years at our option
– Deal extends existing license agreements (currently through 12/31/11) by up to 6 years at our option
• SPE seeks to close a deal quickly (in October), to allow the maximum time for regulatory approvals to be completed within the fiscal year
-- Confidential -- p. 9
Preview of HBO Latin America Sale Opportunity
• HBO Latin America negotiations are in earlier stages; agreement on terms is expected to require 60-90 days
• We are weighing selling our entire 29.4% stake or selling down to a 10% stake• Sale could generate $130-$200MM in proceeds and $108-163MM of gain
Relationship
• HBO distributes SPE channels in region
• HBO licenses ~$40MM of content from SPE annually
• SPE provides ad sales for HBO channels in Brazil
Potential Protections
• If SPE retains an ownership interest
– Retain board seat with decreased governance
– Receive a put on remaining stake
• If SPE sells entire stake
– SPE will have a long-term contractual relationship for HBO to distribute our channels
Cash and Gain Structural Considerations
($MM) Retain 10% Full Sale
Valuation $680 $680
SPE Interest Sold 19.4% 29.4%
Proceeds from Sale $132 $200
Book Value of Amount Sold $24 $37
Gain $108 $163
-- Confidential -- p. 10
Next Steps
• Secure approvals
• Sign definitive agreements by mid October
• 4-6 month regulatory approval process
• Close in February or March 2010, depending on regulatory approvals
• Finalize negotiation of key terms in late November
• Present to GEC for approval in December
• Sign and close by end of December
-- Confidential -- p. 11
Appendix
-- Confidential -- p. 12
HBO CE: P&L
Values in USD $000s BudgetActuals Reforecast Management Forecast
2005 2006 2007 2008 2009 2010 2011 2012 2013
Net Revenue $70,048 $78,956 $96,131 $117,909 $109,082 $120,466 $127,139 $132,505 $138,302Y/Y Growth 11% 13% 22% 23% -7% 10% 6% 4% 4%
ExpensesProgramming License Fees (21,831) (22,942) (25,855) (30,772) (39,688) (39,858) (42,754) (45,733) (48,020) Other Programming (4,228) (3,721) (4,690) (6,121) (5,944) (6,980) (7,344) (7,725) (8,124) Sales & Marketing (5,811) (8,499) (9,963) (9,271) (8,837) (10,739) (11,265) (11,189) (11,664) Network Operations (9,028) (8,707) (9,904) (10,647) (9,064) (8,985) (9,584) (9,837) (10,011) G&A / Staff (9,572) (8,785) (10,799) (12,925) (10,285) (13,768) (14,450) (15,167) (15,919) Other Expenses (1,591) (774) (813) (532) (718) (1,302) (890) (930) (1,422) Total Operating Expenses (52,060) (53,427) (62,024) (70,268) (74,535) (81,631) (86,287) (90,581) (95,161)
EBITDA $17,987 $25,529 $34,107 $47,640 $34,548 $38,834 $40,852 $41,924 $43,141Operating Margin 26% 32% 35% 40% 32% 32% 32% 32% 31%
Depreciation (1,173) (922) (1,094) (1,345) (1,134) (1,549) (1,854) (1,783) (1,783)
EBIT $16,814 $24,606 $33,013 $46,295 $33,414 $37,285 $38,998 $40,141 $41,359
Corporate Allocation (10,650) (11,393) (14,655) (16,545) (12,096) (16,153) (16,961) (16,961) (16,961)
Operating Profit (Loss) 6,164 13,213 18,358 29,750 21,318 21,132 22,037 23,181 24,398
Additional Items (1) (171) (1,598) (1,897) 80,515 (3,240) (4,298) (4,520) (4,674) (4,746)
Net Income (Loss) $5,993 $11,615 $16,461 $110,266 $18,078 $16,833 $17,517 $18,506 $19,651
(1) 2008 Additional Items includes $80.5MM for the sale of Spektrum.(2) Decline in CY09 revenues attributed to loss of operating revenue from Spektrum and weakening of local currencies against the USD
-- Confidential -- p. 13
HBO CE: Valuation
Preliminary DCF implies $235MM is an attractive valuation
HBO CE multiples are in-line with multiples on Disney’s sale of its HBO Latin America stake
(1) DCF valuation assumes 8X terminal multiple applied to 2013 adjusted EBITDA of $26.2MM (EBITDA less corporate allocations).(2) At close HBO CE will have cash of roughly $20MM. As this is considered the necessary working capital it is not added back to the valuation.(3) Implied HBO CE multiples based on adjusted EBITDA (EBITDA less corporate allocations).
Values in $MM
Forecast
2010 2011 2012 2013
Operating Cash Flow $15.9 $15.3 $18.0 $19.0
Terminal Value at 8X (1) - - - $209.4
Total $15.9 $15.3 $18.0 $228.4
NPV at 10% DR $196.6
ADD: Excess Cash (2) $0.0
Enterprise Value $196.6
Terminal Multiiple
$197 7X 8X 9X 10X9.0% $184.6 $203.2 $221.7 $240.3
Discount 10.0% $178.7 $196.6 $214.5 $232.4Rate 11.0% $173.1 $190.3 $207.6 $224.8
12.0% $167.7 $184.3 $201.0 $217.6
HBO Latin America Multiples Implied HBO CE Multiples
Valuation as of Prior Current Prior CurrentDisney Sale (2007) (2008) Valuation (2008) (2009)
$680.0 $235.0
Revenue 2.5X 2.1X 2.0X 2.2XEBITDA (3) 8.8X 8.1X 7.6X 10.5X