DRAFT Spider-Man Merchandise Business Update April 2010 CONFIDENTIAL PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL
DRAFT Key Questions and Working Hypotheses Questions Hypotheses • Disney can and will drive further growth in Spider -Man • What impact will Disney ownership have on Spider-Man merchandise? • What is the value of SPE’s interest independent of a deal? • Will Disney/Marvel insist we ease protections and sell our full interest? • If so, what are the risks of easing protections and can we secure a premium for doing so? • Disney’s incentives do not encourage success of other Marvel characters to come at expense of Spider-Man • Roughly $300 MM before Disney grows revenues • Roughly $400 MM with growth from Disney • Disney is likely to insist on adjustments to blackout and retail promotions • Revising some protections can be done with limited risk and may be justified by a potential premium PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 1
Disney has significant incentives to continue to support the Spider-Man merchandise business • With Marvel leading sales, Spider-Man has become an evergreen retail property, similar to Mickey Mouse – Spider-Man is a consistent Top 5 overall merchandise brand Top 3 boys merchandise brand – • Maintains relevancy and provides retail leverage for the entire portfolio Spider-Man is critical to Disney’s boys strategy – Growth in boys demo is primary corporate objective for Disney CP – Library of boys properties was primary strategic rationale for Marvel acquisition – • S-M is considered premier property in boys category Disney needs to support the Spider-Man business to justify the Marvel acquisition price – Substantial piece of Marvel’s current business (62% of overall EBITDA, 69% of total licensing EBITDA) – • DRAFT Marvel acquisition premium suggests aggressive growth targets Disney has the opportunity to extract substantial incremental value from the Spider-Man merchandise business through its CP engine, particularly in international regions – 52/48 domestic/international split vs. 40/60 for Disney CP – Eliminate 25% commissions through shift from international agents to Disney sales force PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 2
DRAFT The Spider-Man merchandise business accounts for a majority of both Marvel’s licensing and overall profits 2007 -09 MVL Avg. EBITDA (1, 2) MVL 2007 -09 Avg. Licensing EBITDA Mix $260. 9 Film Production, $39. 2 S-M Merch. & Film Participations Other Publishing, $23. 2 Other Licensing, $62. 9 S-M Publishing, $23. 2 Other Licensing S-M Film Participations, $8. 0 MVL 2007 -09 Avg. Total EBITDA Mix (2) Total S-M, $162. 3 S-M - MVL Share of S-M Merch. EBITDA Post Audit, $131. 1 Total S-M Licensing, $139. 1 Total S-M Business Other, ($26. 8) Note: * S-M merchandise numbers based on SPE internal data. (1) MVL Total EBITDA defined as EBITDA less SPE’s share of film merchandise. MVL recognizes SPE share as minority interest, whereas other studios' shares of license royalty income is recorded within SG&A expense. (2) Assumes S-M publishing is 50% of Total Publishing or $23. 2 MM. PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 3
DRAFT Disney is likely to drive upside in Spider-Man merchandise revenues Approximate Annual Revenue Forecast to SPE Assumptions Base Case $40 M • Historical average, some increase for audit claims, S-M 4 in FY 13, S-M 5 in FY 15, S-M 6 in FY 18 Downside ($4 M) • 10% decrease in overall merchandise if S-M 4 underperforms Growth from International $11 M • Expand from 52/48 international to 60/40 (in-line with Disney overall) Growth from Disney Retail $1 M • Disney starts selling in Disney-owned retail and theme parks Eliminate Int’l Commissions $4 M • 25% commissions eliminated Upside Potential - Disney Food + Other Categories Source: MPG and Corp. Dev analysis. Minimal • Limited value in freeing up food categories given current regulatory environment PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 4
DRAFT SPE Share of Spider-Man Merchandise Rights Valuation A deal at $300 -$400 M is inline with what we would receive without a deal and avoids downside risk We need to determine whether a deal would include a premium ? +$34 +$102 -$32 Scenarios Downside Base Case Disney Int’l and Retail Eliminate Int’l Commissions Premium Upside Potential Source: SPCP and Corp. Dev analysis. PRIVILEGED/WORK PRODUCT; Note: DCF based on perpetuity growth rate of 2. 0%, discount rate of 9. 0% and Disney’s effective tax rate of 36. 2%. PREPARED AT THE REQUEST OF * Other increases include Disney selling S-M merch in Disney parks & resorts, in Disney stores, and online sales. LEGAL COUNSEL page 5
DRAFT Premium Included in Disney’s Acquisition of Marvel +8. 1% +30% +31% Comparable Company Multiples* Driver of Premium Marvel Pre-Deal Trading Multiple** Disney/Marvel Bid Multiple** Disney/Marvel Acquisition Multiple** Superior growth prospects for all Marvel properties Disney control + synergies Disney stock price run-up Source: SEC filings and Corp. Dev analysis. Note: * Multiples based off LTM EBITDA for entertainment, CP, licensing, and publishing comparables ** Multiples based off trailing 3 -yr. avg. Marvel EBITDA ($273. 1 MM) less trailing 3 -yr. avg. SPE share of film merchandise ($12. 2 MM) or $260. 9 MM PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 6
DRAFT SPE may only be able to argue for a portion of the control premium Disney paid for Marvel Disney Rationales for Marvel Acquisition • Drive international growth, particularly for Marvel licensing business SPE Should Participate in Premium? Comments • Substantial international growth potential at 52%/48% domestic vs. international split vs. 40%/60% for Disney CP Yes • Spider-Man represents major share of Marvel international growth potential • Produce content featuring other Marvel characters Possibly • Argument requires SPE to provide increased retail flexibility that would allow other Marvel characters to draft off Spider-Man’s retail strength • Extend and grow Marvel properties on new media (video games, Internet, mobile content) Possibly • SPE only participates to the extent Disney’s new media extensions boost Spider-Man merchandise • Take Marvel film distribution in-house upon expiration of distribution deal with Paramount in 2012 No • Not relevant for Spider-Man PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 7
Disney is likely to insist on adjustments to SPE retail protections, which we would consider if they are exchanged for a premium and we are comfortable with the impact DRAFT Negotiating Dynamics SPE Asks • Payment for audit • Payment for value of growth drivers – International growth – Disney retail growth – Eliminate commissions • Premium Potential Sources of Premium • Sale of 100% of our S-M merchandise participation • Increase Marvel participation in retail promotion for Film merchandise • Ease Classic “black-out” window • Ease or lift certain food category constraints Off the Table • Restrictions on ability for SPE to promote film (independent of merchandise at retail) • Increased SPE commitment to release new films (already committed to release to retain rights) • Increase Marvel participation in Spider. Man films PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 8
DRAFT Potential Path Forward on the Classic Merchandise “Black-out” • Easing the “Black-out” will not work for either party if the outcome is a significant reduction of Film merchandise at retail • Easing the “Black-out” may be workable for both parties if – Disney / Marvel is satisfied • Provide administrative and financial benefit by allowing Classic characters to maintain shelf presence; (particularly helpful for small licensees that cannot afford cost of Film merchandise) • Allow introduction of non-Film merchandise with new looks to further expand the franchise and seed product; increase continuity during non-Film years • Allow Disney/Marvel to allow new Spider-Man merchandise types drag along on Film promotion – SPE is protected • A minimum percentage of retail presences that is dedicated to Film merchandise • On a practical basis, SPE has made exceptions allowing Classic merchandise in the past and Disney/Marvel have strong incentives to satisfy retailer and customer demand for Film merchandise PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 9
DRAFT Potential Path Forward on Promotion of Film Merchandise • Increasing Marvel’s role in retail promotion for Film merchandise will not work for either party if it divorces retail promotion from Film creative • Increasing Marvel’s role may be workable for both parties if – Disney / Marvel is satisfied • Move Disney/Marvel to a leadership position in discussions with retailers about retail merchandise promotional campaigns and elements • Allow Disney/Marvel to better coordinate discussions with retails about Spider-Man promotion and other character promotion – SPE is protected • Promotional elements relate specifically to Spider-Man films; no co-mingling of other characters and no co-mingling of Classic merchandise (effectively a creative “black-out) • SPE retains control of creative direction (style guide) and creative execution • SPE retains the right to be in the room for discussions with retailers PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 10
DRAFT Negotiating Milestones Key Dates Negotiating Milestones May 7, 2010 • Iron Man 2 released May 14, 2010 • Both parties exchange audit reports Jul 13, 2010 • Each side responds to the other side’s audit report Aug 24, 2010 • End of audit report negotiation period ~Sep 30, 2010 (1) • Disney fiscal year end TBD 2010 • Hearing date for audit claims (at least 30 days after Aug 24; could occur on Oct 2011 or later) Mar 31, 2011 • Agree on common base of financials in June • Trade on key terms (Jul, Aug, Sep) • SPE fiscal year end Jun 20, 2011 • Commence discussion late May • Estimated date for hearing on non-audit claims • Target completion prior to arbitration ruling (Sep/Oct+; may depend on whether Disney desires to complete in their fiscal year end) Source: SPE Legal. Note: (1) Disney’s fiscal year ended on October 3 in 2009, September 27 in 2008, and September 29 in 2007. PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 11
DRAFT Negotiating Considerations • Initial Contact – Interplay between Ike Perlmutter and Bob Iger • Tone of Initial Conversation – Driven by current animosity and implication that Marvel appears to want SPE out – Start with the premise that we seek to better monetize for both • Ongoing Negotiations – Is Disney willing to pay a premium for our protections – Ike will clearly be involved, need to monitor his motivations • Personal desire to “fix” the last deal vs. opportunity to utilize “Disney’s money” to secure what he wants • Should be less sensitive to price than when he was Marvel’s owner or than if he had an earn-out – Disney corporate used as a counter-point for SPE Corporate Development to ensure “rational” negotiations – What role does Andy Mooney play in negotiations PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 12
DRAFT Next Steps • Preview findings with key constituents • Determine in more detail if key controls can be modified rather than eliminated (with G. Leon and R. Toll) • Refine approach to negotiating strategy (based on today’s discussion) • Broader meeting on April 27, 2010 PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 13
DRAFT APPENDIX A Summary of Marvel Deal CONFIDENTIAL PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 14
DRAFT Disney / Marvel Deal Summary Transaction Analysis I. Perlmutter Considerations • Based on public filings, it appears that Perlmutter has an employment contract with an estimated $19. 4 MM cash severance paid on early termination (within 12 months following the closing date) • No reported earn-out structure from merger documents or news runs • At Disney, Perlmutter will be the most senior executive running the licensing and publishing businesses but not the film production business • Received approximately $1. 6 BN in stock and cash from the transaction Source: Note: SEC filings and SPE Corp. Dev analysis. (1) Adjusted EBITDA defined as Total EBITDA less SPE share of film merchandise PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 15
DRAFT Disney / Marvel Deal Mechanics • Disney’s stock price rose between bid and close; thus the value delivered to Marvel shareholders rose as Disney’s stock price rose between bid and close Deal Mechanics Fixed Exchange Ratio & Ownership Split with No Cap Note: PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 16 (1) Disney share price x exchange ratio (2) If the stock consideration falls below 40% of the total consideration, the following adjustment will be made: for each 0. 0001 increase to the exchange ratio that is made, the amount of cash paid per share of Marvel common stock will be reduced by the product of 0. 0001 multiplied by the average of $26. 84 and the closing date price (3) Marvel shares outstanding x exchange ratio
DRAFT APPENDIX B Additional Detail CONFIDENTIAL PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 17
Valuation of SPE Share of Merchandise Business: Comparable Company Analysis DRAFT Comparable Company Analysis Source: SEC filings and Wall Street research. PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 18
DRAFT Gain If Sold at New Values Partial Sale Value ($ M) Full Sale Amortization Rate Source: MPG. $200 $250 $275 $300 $350 $400 $127 $150 $173 $220 $244 $267 $315 $364 FY Gross Profit $175 $150 16% 15% 14% 12% 11% 10% 9% $450 $500 $413 $462 8% 8% PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 19
DRAFT Spider-Man Merch Rights Valuation: Key Assumptions General Assumptions Revenue Projections excluding Disney Quantifiable Uplift Ø Revenues projections equal SPE current base case assuming: • S-M 4 performs on par • Disney does not get distracted even as Marvel has other properties General Assumptions Revenue Projections including Disney Quantifiable Uplift Ø Revenues projections equal SPE current base case + Disney uplift assuming: • Domestic vs. international mix shifts from 52/48 to 40/60 (implies 62. 5% international growth) • International commissions savings: 25% of international gross revenue • Disney sells S-M merch in Disney parks & resorts: $186 k / year • Disney sells S-M merch in Disney stores: $160 k / year • Online sales: $153 k / year DCF Assumptions Ø Ø Disney WACC of 9. 0% Disney effective tax rate of 36. 2% Perpetuity growth rate ranges from 2. 0% - 3. 0% (implied exit multiple of 14. 3 x - 16. 7 x) Terminal year revenue = 5 -year average of Spider-Man Film and Classic merch (FY 16 -FY 20) plus other increases Source: SPE Consumer Products and SPE Corp. Dev estimates. PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 20
SPE Share of Worldwide Spider-Man Merchandise Revenue: Historical Performance (FY 02 -FY 10) Source: Notes: DRAFT SPCP, SPE Legal and SPE Corp. Dev analysis. PRIVILEGED/WORK PRODUCT; 1. Marvel paid on Nov. to Nov. qtr. calendar schedule; these calendar pmts. were shifted back by 1 -mo. to estimate qtr. allocations to the traditional and fiscal calendars. PREPARED AT THE REQUEST OF 2. Current audit includes multi-character advance claim of $27 M + other claims of $550 K from FY 05 -FY 09. 3. FY 09 spike is due to Marvel having received a large advance for its renewal of the Hasbro license. LEGAL COUNSEL page 21
SPE Share of Worldwide Spider-Man Merchandise Revenue: Projected Performance (FY 11 -FY 20) Source: Notes: DRAFT SPCP, SPE Legal and SPE Corp. Dev analysis. PRIVILEGED/WORK PRODUCT; 1. Marvel paid on Nov. to Nov. qtr. calendar schedule; these calendar pmts. were shifted back by 1 -mo. to estimate qtr. allocations to the traditional and fiscal calendars. PREPARED AT THE REQUEST OF 2. Current audit includes multi-character advance claim of $27 M + other claims of $550 K from FY 05 -FY 09. 3. FY 09 spike is due to Marvel having received a large advance for its renewal of the Hasbro license. LEGAL COUNSEL page 22
DRAFT Valuation Expectations – Post-Audit Numbers Before Premium Scenarios Value Multiple* Deal; No Control Premium, Uplift for Int’l Commissions $453. 3 +Premium 10. 4 x Value Range $566. 6 Min. Acceptable Range No Deal; Disney Performs Internationally & Other Increases* $418. 9 9. 6 x No Deal; No Disney Uplift $317. 1 No Deal; S-M 4 Underperforms $285. 4 Note: After Premium $589. 3 Multiple* 13. 0 x 13. 5 x Focus of Negotiations $523. 6 $544. 6 12. 0 x 12. 5 x 7. 3 x $396. 4 $412. 2 9. 1 x 9. 4 x 6. 5 x $356. 8 $371. 0 However, SPE’s initial negotiating position will be for the 15. 9 x DIS/MVL multiple at close 8. 2 x 8. 5 x 25% 30% * Trailing calendarized 3 -yr avg. SPE share of merchandise revenues (post audit) = $43. 7 MM PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 23
DRAFT Valuation Expectations – Pre-Audit Numbers Before Premium Scenarios Value Multiple Deal; No Control Premium, Uplift for Int’l Commissions $453. 3 +Premium 12. 3 x Value Range $566. 6 Min. Acceptable Range No Deal; Disney Performs Internationally & Other Increases* $418. 9 11. 4 x No Deal; No Disney Uplift $317. 1 No Deal; S-M 4 Underperforms $285. 4 Note: After Premium $589. 3 Multiple 15. 4 x 16. 0 x Focus of Negotiations $523. 6 $544. 6 14. 2 x 14. 8 x 8. 6 x $396. 4 $412. 2 10. 7 x 11. 2 x 7. 7 x $356. 8 $371. 0 However, SPE’s initial negotiating position will be for the 15. 9 x DIS/MVL multiple at close 9. 7 x 10. 1 x 25% 30% * Trailing calendarized 3 -yr avg. SPE share of merchandise revenues (pre-audit) = $36. 9 MM PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 24
DRAFT Spider-Man 3 Lifetime Film Revenues by Category Source: SPCP and SPE Corp. Dev analysis. PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 25
DRAFT Spider-Man 3 Lifetime Implied Classic Revenues by Category Source: Note: SPCP and SPE Corp. Dev analysis. Assumed Classic merch has similar dynamic to Film merch. PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 26
DRAFT SPE Share of Worldwide Spider-Man Merchandise Revenue: Historical Performance (FY 02 -FY 10) FCST HISTORICAL (Includes Estimated Audit Adjustments) 1 2 2 Average 3 $35. 4 M $9. 5 3 S-M 1 S-M 2 S-M 3 Indicates Release Year Source: Note: SPCP, SPE Legal and SPE Corp. Dev analysis. PRIVILEGED/WORK PRODUCT; 1. Historical Classic merch represents what SPE believes SPE should have received per 2004 audit, which includes what Marvel paid + SPE asserted underpayments of PREPARED AT THE REQUEST OF $1. 5 M in FY 02, $5. 1 M in FY 03 and $8. 6 M in FY 04. FY 05 -FY 06 figures include current claims from current audit totaling $27. 1 M. 2. Film merch for S-M 1 and 2 include toy biz merch. LEGAL COUNSEL page 27 3. FY 02 -FY 10 avg excludes SPE claim for $9. 5 M in FY 09 against advance Marvel received for Hasbro license renewal.
SPE Share of Worldwide Spider-Man Merchandise Revenue: Projected Performance (FY 11 -FY 17) DRAFT PROJECTED Average $40. 9 M S-M 4 S-M 5 Indicates Release Year Source: SPCP, SPE Legal and SPE Corp. Dev analysis. Note: Film merch revenue represents figures net of int’l commissions/taxes/bank. PRIVILEGED/WORK PRODUCT; PREPARED AT THE REQUEST OF LEGAL COUNSEL page 28
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