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GENERAL EXECUTIVE COMMITTEE REVIEW: HBO Divestiture Opportunity October 7, 2009
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-- Confidential --p. 2 Executive Summary Proposed Matter to be Deliberated SPE is formally submitting for consideration the sale of our 33.3% stake in HBO CE –SPE believes Time Warner’s desire to consolidate HBO CE makes this the right time to monetize –Time Warner is in final negotiations to acquire 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 –Closing within FYE10 may require executed agreements in Oct due to regulatory approvals SPE is also requesting that CEO approval for the sale of all or a portion of its 29.4% stake in HBO Latin America be delegated to the CFO (Mr. Oneda) –Transaction will be made at a 100% market valuation of not less than $680MM and –SPE will sell its entire stake or, if SPE decides to hold a 10% interest, retain a board seat Background SPE is revisiting its global channels portfolio and seeking to rebalance the mix towards channels that are majority controlled and consolidated Studio investments in HBO CE and HBO Latin America 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
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-- Confidential --p. 3 Overview of HBO Investments Overview Ownership SPE Relationship 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
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-- Confidential --p. 4 Overview of Time Warner / HBO HBO Asia/ South Asia HBO Central Europe HBO Latin America TW seeking to buy Disney and SPE stake and fully consolidate TW purchased Disney stake in 2008 TW seeking to purchase SPE stake and fully consolidate TW purchased SPE stake in 2008 TW purchased Universal share in 2008 Overview of Time Warner One of the world’s largest media and entertainment conglomerates Owns and operates significant channel, film, TV, publishing, and internet assets Wholly owns HBO in the U.S. with over 40MM paying subscribers Has equity interests in multiple HBO joint ventures around the world Consolidation Activity / Rationale As a major channel operator with common interest in HBO brands across the globe, Time Warner is a likely eventual buyer Given that studios primarily invested in HBO channels to create an output for pay content in the regions, SPE, Disney and other content owners are ultimately likely sellers of their minority interests in HBO channels Time Warner has been and continues to seek opportunities to increase its ownership in HBO global channels with the goal of full consolidation
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-- Confidential --p. 5 HBO CE: Gain, Cash, and Ongoing EBIT Impact Valuation analysis includes: –Precedent transactions for minority HBO stakes –DCF of management forecast with assumed liquidity discount –Trading comparables with assumed liquidity discount $234MM valuation is above the high-end of our valuation analysis SPE recommends closing the sale at this valuation 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) FYE09 EBIT includes $26.6MM in income from the sale of Spektrum (3) FYE10 EBIT impact assumes a December 31, 2009 close (4) Excludes profits from HBO licensing of SPE content
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-- Confidential --p. 6 HBO CE: Summary P&L Calendar Years
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-- Confidential --p. 7 HBO CE: Valuation Considerations (1)Calculated Value Before Illiquidity Discount based on average of trailing and forward comps. (2)DCF valuation based on 2010-2013 forecast; assumes 8X terminal multiple applied to 2013 EBITDA of $26.2MM and 10% discount rate. (3)For values where a liquidity discount is applied, Low applies 40% illiquidity discount to calculated value and High applies 30% illiquidity discount to calculated value. For values where a liquidity discount is not applied, Low is the lesser of trailing and forward comps and High is the greater of trailing and forward comps Values in $MM
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-- 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 FYE10 due to time required for regulatory approvals –TW counsel believes approvals may require up to 6 months (SPE independently verifying timing) –Timing is not in SPE’s control Distribution and licensing relationships will be protected through long-term contracts –Deal extends our distribution services agreement to 3/31/12 (currently expires 12/31/09) and provides SPE options to extend by up to 8 years –Deal extends our existing license agreement to 12/31/13 (currently expires 12/31/11) and provides SPE a 4 year option to extend October close targeted to allow 5+ months within FYE10 for regulatory approvals
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-- Confidential --p. 9 HBO Latin America: Gain, Cash, and Ongoing EBIT Impact EBIT Impact EBIT Impact Valuation Consideration Gain & Cash Consideration Valuation analysis includes –Precedent transactions for minority HBO stakes, including Disney’s sale of its stake in HBO Latin America at a $680MM valuation –DCF of management and adjusted management forecasts with assumed liquidity discount –Trading comparables with assumed liquidity discount SPE seeks approval to close a sale at or above a $680MM valuation subject to a final review with Oneda-san (1)Includes $45MM in one time proceeds for SPE not to exercise its right to buy-up as part of the Disney/TW transaction
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-- Confidential --p. 10 HBO Latin America: Summary P&L Calendar Years
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-- Confidential --p. 11 HBO Latin America: Valuation Considerations Values in $MM (1)Calculated Value Before Illiquidity Discount based on average of trailing and forward comps. (2)DCF valuation assumes 8X terminal multiple applied to 2014 EBITDA (Mgmt Case: $182.5MM; Adjusted Mgmt Case $143.5MM). (3)For values where a liquidity discount is applied, Low applies 40% illiquidity discount to calculated value and High applies 30% illiquidity discount to calculated value. For values where a liquidity discount is not applied, Low is the lesser of trailing and forward comps and High is the greater of trailing and forward comps. (4)Disney Actual Value of Latin America Sale ($680) not included in calculation
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-- Confidential --p. 12 HBO Latin America Sale: Risks and Mitigations Risks Mitigations HBO distributes SPE channels in region HBO licenses $40-50MM of content from SPE annually SPE provides ad sales for HBO channels in Brazil Anticipated (subject to further negotiations) If SPE retains an ownership interest –Retain board seat with decreased governance –Receive a put on remaining stake –Extending license agreement for 6 years (through 4/2014) plus 4 years at our option If SPE sells entire stake –SPE will have a long-term contractual relationship for HBO to distribute our channels –Extending license agreement for 6 years (through 4/2014) plus 4 years at our option Deal may be subject to potential regulatory approvals –SPE legal independently reviewing what filings may be required, timing of filings (pre-close vs. post-close) and timing of approvals –Timing is not in SPE’s control Plan to have deal done as quickly as possible to increase likelihood of closing in FYE10
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-- Confidential --p. 13 HBO Latin America: Next Steps Secure approval to delegate decision to CFO for a transaction based on: –100% market valuation of not less than $680MM –SPE selling its entire share or, if SPE decides to hold a 10% interest, retaining a board seat –Under the above conditions, details of the transaction will be approved by the CFO SPE legal to review regulatory approval requirements Finalize negotiation of key terms in late November and present to Investment Committee Seek final approvals in December Sign and close by end of December Secure approvals to close Sign definitive agreements by mid October Regulatory review and approval process of up to 6 months (SPE legal is independently verifying) Close in February or March 2010, depending on regulatory approvals
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