HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTION GSN Opportunity Overview January 2011.
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Transcript of 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
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HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTIONpage 2
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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HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTIONpage 3
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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HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTIONpage 4
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
$338
0
50
100
150
200
250
300
350
400
2005 (A) 2006 (A) 2007 (A) 2008 (A) 2009 (A) 2010 (F) 2011 (B) 2012 (F) 2013 (F)
Year
Rev
enu
e ($
MM
)
EBIT
$6$14 $14
$47$52
$69
$85
$108
$134
0
20
40
60
80
100
120
140
160
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
$136
0
20
40
60
80
100
120
140
160
2005 (A) 2006 (A) 2007 (A) 2008 (A) 2009 (A) 2010 (F) 2011 (B) 2012 (E) 2013 (E)
Year
Op
era
tin
g C
as
h F
low
($
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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HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTIONpage 5
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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HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTION page 6
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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HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTIONpage 7
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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HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTIONpage 8
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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HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTIONpage 9
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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HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTIONpage 10
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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HIGHLY CONFIDENTIAL. NOT FOR FURTHER DISTRIBUTIONpage 11
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