HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTION GSN Opportunity Overview January 2011.

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HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTION GSN Opportunity Overview January 2011

Transcript of HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTION GSN Opportunity Overview January 2011.

Page 1: HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTION GSN Opportunity Overview January 2011.

HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTION

GSN Opportunity Overview

January 2011

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Executive Summary

• SPE has an opportunity to acquire management control of and additional equity in GSN

• A transaction would:

– Expand SPE’s growing U.S. network portfolio by enabling SPE to control a well penetrated channel with an established infrastructure

– Reduce frequency of management stalemates inherent in the current 50/50 governance structure

– Provide a path to full ownership by SPE

• A transaction also has potential financial benefits, including:

– Step-up gain of approximately $200MM

– GSN’s annual distributable cash is forecast to grow from $85MM in FYE12 to $156MM in FYE14

– By consolidating, SPE’s annual share of GSN’s distributable cash would increase by $38MM in FYE12 (reaching $56MM) and by $84MM in FYE14 (reaching $118MM)

– GSN’s EBIT is forecast to grow from $89MM in FYE12 to $135MM in FYE14

– By consolidating, SPE’s share of EBIT (after preliminary PPA estimates) would increase by $20MM in FYE13 (reaching $60MM) and by $45MM in FYE14 (reaching $92MM)

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Historical Context and Rationale for Buying-up Today

• While GSN has remained an attractive asset, its 50/50 governance structure has inherent challenges that SPE has been attempting to resolve for several years

– Prohibits either party from consolidating

– Contributes to stalemates, preventing quick management decisions on significant matters, such as the decision to hire new senior management in 2008

• Until recently, Liberty was SPE’s partner in GSN and supported 50/50 governance with no clear exit, making 100% ownership by either owner the likely outcome

• In April 2009, with Liberty appearing the more likely buyer, SPE sold 15% of GSN to Liberty and instituted a buy/sell exit mechanism while leaving 50/50 governance in place

• Since 2009, SPE has expanded its U.S. network presence to include interests in four channels and GSN has continued to increase its profitability

• Today, 65% of GSN previously held by Liberty is held by DirecTV, which is willing to cede control and sell all or a portion of its stake, eliminating the challenges caused by 50/50 governance

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GSN Financial History and Forecast

• Since David Goldhill became GSN’s CEO in 2008, the business has grown significantly and is now highly profitable

• GSN forecasts continued growth and will generate over $150MM of cash in FYE14

REVENUE

$103$119 $126

$139

$218$231

$278$302

$338

0

50

100

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2005 (A) 2006 (A) 2007 (A) 2008 (A) 2009 (A) 2010 (F) 2011 (B) 2012 (F) 2013 (F)

Year

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enu

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MM

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EBIT

$6$14 $14

$47$52

$69

$85

$108

$134

0

20

40

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120

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2005 (A) 2006 (A) 2007 (A) 2008 (A) 2009 (A) 2010 (F) 2011 (B) 2012 (F) 2013 (F)

Year

EB

IT (

$M

M)

OPERATING CASH FLOW

$15$25 $24

$45

$70 $69

$91

$113

$136

0

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2005 (A) 2006 (A) 2007 (A) 2008 (A) 2009 (A) 2010 (F) 2011 (B) 2012 (E) 2013 (E)

Year

Op

era

tin

g C

as

h F

low

($

MM

)

NOTES: • 2005 – 2009 numbers are actuals (not pro forma) and management forecast used for 2010 – 2013• The figures include the impact from FUN Technologies acquired by GSN in March 2009, as well as Shizmoo and Mesmo acquired in April 2010

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Strategic Benefits

• Significantly increases presence in U.S. cable networks, one of the key profit drivers for SPE

– Adds increased scale to SPE’s portfolio of U.S. cable networks, which now includes minority stakes in GSN, FEARnet and 3Net, and 100% of the Sony Movie Channel

– GSN would become the cornerstone in a bouquet of channels to be managed eventually under a common infrastructure

– Provides a platform for increasing from minority stakes to majority positions in other networks in the future

• In addition to traditional network assets, GSN brings strength in online games that utilizes GSN’s game show brands

• Builds on GSN’s and SPE’s current operating relationship to further mutually benefit by exploiting SPE’s light entertainment assets

– GSN could be a launching pad for new SPE game show formats – GSN’s current success has occurred despite no major hits

– GSN would continue to license completed game show episodes from SPE’s library (Wheel of Fortune, Jeopardy!) and commission new versions of library formats (The Dating Game, The Newlywed Game)

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Risks and Mitigation

Carriage Deals• GSN will need to retain its carriage deals with

distributors to achieve its forecast

• This may be more difficult for GSN vs. channels owned by media conglomerates with larger network portfolios

• GSN expects to extend its DirecTV carriage agreement prior to closing under current terms for multiple years

• GSN will benefit from Sony’s and DirecTV’s relationships with other distributors

Skill-based Games• A portion of GSN’s growth is driven by online

casual skill-based game tournaments for a fee, which are subject to gaming regulations

• “Skill-based” determination is done on a game-by-game basis, is factually intensive and can vary based upon the jurisdiction

• If gaming regulations become more restrictive, GSN’s revenues in this area could decrease

• To comply with gaming regulations, FUN does not offer fee-based tournament games in certain prohibited U.S. states, employs filtering technology to exclude players from these prohibited states and designs its games, utilizing outside counsel review, to be skill-based

Risks Mitigation

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Summary of Proposed Deal Structure

• SPE to acquire management control of GSN prior to end of FYE2011; deal would allow SPE to consolidate in the near-term while delaying a majority of cash payments to future years

– Valuation to be negotiated – preliminary estimate of $1 - $1.1BN, but value could be higher with more robust forecast or higher control premium

– SPE to secure key controls at close (e.g., majority of board seats, hire/fire over senior management, final say on budget), in order to allow for consolidation

– SPE to acquire 6% of GSN on deal close (increasing SPE’s stake from 35% to 41%)

– DirecTV would have a put option on an additional 19% stake exercisable after April 15, 2012 at the same valuation

– The existing buy / sell provision will apply to DTV’s 40% or SPE’s 60% but cannot be triggered until April of 2015 or 2016 (specifics to be negotiated)

Step Resulting SPE Stake*

Timing Payment

SPE acquires 6% 41% FYE2011 $60MM

SPE acquires 19% (assuming DirecTV exercises put)

60% FYE2013 $190MM

SPE acquires 40% (assuming buy/sell is triggered with SPE as buyer)

100% TBD (if at all) TBD – Likely over $400MM

Example Payments Assuming a Preliminary Valuation of $1BN

* Percentage ownership equals percentage of any dividends and any distribution on dissolution / sale of GSN

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Preliminary Valuation Analysis

• SPE is currently in the preliminary stages of conducting due diligence on the fair market value of GSN

• Based on a limited universe of publicly traded networks and precedent transactions, the implied value of GSN is approximately $1BN - $1.1BN

• Valuation could be significantly higher based on a more robust forecast / DCF or multiples on comparable online games businesses

• We are in the process of refining the analysis and engaging a 3rd party to conduct an independent valuation

TRADING COMPS PRECEDENT TRANSACTIONS

CY2010 Trailing 12 MonthsValues in $MM Enterprise Value EBITDA EV/EBITDA Values in $MM Transaction Value EBITDA TV/EBITDA

Scripps Network Interactive $8,683 $908 9.6X Comcast / NBCU $37,300 $3,000 12.4X

Discovery Communications $18,477 $1,652 11.2X Scripps / Travel Channel $975 $81 12.0X

Average Multiple 10.4X Average Multiple 12.2X

GSN CY2010 EBITDA $75 GSN CY2010 EBITDA $75

Implied Value $779 Implied Value $918

ADD: Control Premium 25% - 30% $214

ADD: Cash $85 ADD: Cash $85

GSN Adjusted Implied Value $1,079 GSN Adjusted Implied Value $1,003

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Financial Impact:Preliminary Estimate of Step-up Gain

• If SPE assumes management control of GSN on an enterprise valuation of roughly $1BN, there would be a potential $200MM step-up gain on the 35% of GSN SPE currently owns

– The deal must obtain sufficient management controls to meet the accounting requirements for control

– FMV for purposes of gain calculation must be the result of an independent valuation, which will likely be less than the purchase price due to control premium

– For example, if the transaction value were $1.0BN with control premium and FMV were $800MM before control premium; gain would be based on $800MM

Gain Calculation

Fair Market Value $800Value of SPE Share (35%) $280 Book Value SPE Share - December '10 $81

Gain $199

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Financial Impact:Preliminary Estimate of Increased EBIT

• Acquiring management control would allow consolidation and would increase SPE’s EBIT by $20MM-$45MM per year once initial purchase price amortization (PPA) levels taper off

• Note, PPA figures are rough estimates only and will require analysis and calculation by an outside specialist

Values in $MM FYE12 FYE13 FYE14Net Income $89 $114 $135

Current Ownership - 35% of Net Income $31 $40 $47

Buy up as of March 31, 2011

100% of EBIT $89 $114 $135PPA - Estimate ($69) ($54) ($43)

SPE Consolidated EBIT Post PPA $21 $60 $92

Variance to Current State ($10) $20 $45

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Financial Impact:Preliminary Estimate of Increased Cash Flow• Deal would also increase SPE’s share of distributable cash by $38MM in FYE12, increasing to

$84MM in FYE14 under GSN’s estimated dividend policy

• Note, SPE’s share of GSN’s distributable cash will be lower if GSN pays out a greater portion of cash in dividends as SPE consolidates 100% of any cash that remains on GSN’s balance sheet

Values in $MM FYE11 FYE12 FYE13 FYE14

Current State (1)

Assumed Dividend $50 $81 $96

Current SPE Ownership - 35% of Dividend $18 $28 $34

Post Deal SPE Cash Flow (1)

Distributable Cash (2) $30 $85 $121 $156

Dividend to Direct TV (59% FYE12 and 40% thereafter) N/A ($30) ($32) ($38)

SPE Share of Distributable Cash $30 $56 $89 $118

Variance to current state (3) $30 $38 $60 $84

Purchase Price ($60) $0 ($190) $0

Variance to current state ($30) $38 ($130) $84

Notes(1) Estimates based on GSN projectiions(2) FYE11 represents an esimtaed $30MM of cash on GSN's balance sheet that SPE would consolidate(3) If GSN were to distribute all but $10MM of cash each year the SPE variance to the current state prior to purchase price would be $23MM in FYE12, $48MM in FYE13 and $64M in FYE14