DRAFT Spider-Man Merchandising Business Update April 2010 CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED
DRAFT • Executive Summary • Strategic Considerations • Deal Structure • Valuation • Negotiating Strategy ATTORNEY-CLIENT PRIVILEGED page 1
DRAFT Executive Summary • Deal must work from a financial/valuation standpoint and not jeopardize the promotional value merchandising provides our films • Without a deal, the cash flows we derive from Spider-Man merchandising include both upside participation and risk – We will participate in international growth driven by Disney – We will bear risk inherent in a reboot of the Spider-Man film franchise • A sale could allow us to be paid for upside today and participate in a control of the control premium Disney was willing to pay for Marvel, but only if we cede key controls and, potentially sell our full share • Ceding controls to drive valuations creates some risk to promotional value, but we believe Disney has strong incentives to continue to drive Spider-Man merchandising ATTORNEY-CLIENT PRIVILEGED page 2
DRAFT • Executive Summary • Strategic Considerations • Deal Structure • Valuation • Negotiating Strategy ATTORNEY-CLIENT PRIVILEGED page 3
DRAFT Sony Control Points Today • Sony derives significant promotional benefits from Spider-Man merchandising today • While Marvel controls the majority of merchandising sales and activities, we do have protections and controls that Marvel would value, including – Black-out window – Retail controls – Prohibitions on licensing deals in certain food categories • Providing Disney increased control creates some risks – Disney succeeds with competing Marvel Characters and emphasized them at the expense of Spider-Man – Sony release dates conflict with Disney properties and Disney tries to manage the market (licensee and retailer) to their economic and or long term benefit – Other Disney entertainment, e. g. Television product, diminishes the value of theatrical or video release – Disney develops a new look for Spiderman that conflicts with the movie art direction – Disney abuses the blackout periods ATTORNEY-CLIENT PRIVILEGED page 4
DRAFT Value Drivers • Without a deal, Sony’s cash flow will be driven by – Steady-state cash flows for roughly $40 MM to $50 MM per year – Participation in the international revenue growth likely to be driven by Disney – Decreases in the event that Spider-Man 4 under-performs • With a deal, additional value would be driven by – Growth in cash flow driven by • Elimination of 3 rd party comissions (although we will argue we are already entitled to this today; it becomes certain with a deal) • Prohibitions on licensing deals in certain food categories – As they did with their Marvel acquisition, Disney may ascribe a control premium for intangible benefits that may not increase overall cash flow but benefit Disney, including • Retail management – gives them greater leverage with retailers • Black-outs lifted – Less administrative burden. Eliminate risk to Marvel that we abuse the provision ATTORNEY-CLIENT PRIVILEGED page 5
DRAFT Risks to Consider • Providing Disney increased control creates some risks – Disney succeeds with competing Marvel Characters and emphasized them at the expense of Spider-Man – Sony release dates conflict with Disney properties and Disney tries to manage the market (licensee and retailer) to their economic and or long term benefit – Other Disney entertainment, e. g. Television product, diminishes the value of theatrical or video release – Disney develops a new look for Spiderman that conflicts with the movie art direction – Disney abuses the blackout periods • Determining whether to cede these controls depends on our confidence that Disney has strong incentives to continue to expand Spider-Man merchandising than ATTORNEY-CLIENT PRIVILEGED page 6
Disney has significant incentives to continue to support the Spider. Man merchandise business • DRAFT Spider-Man is one of the few evergreen classic properties, similar to Mickey Mouse, that produce year to year benefits and advantage the overall portfolio – Maintains relevancy – Generates profit annuity – Provides retail leverage for the entire portfolio • Disney needs to support the Spider-Man merchandise business to justify the Marvel acquisition price – Substantial piece of Marvel’s current business (TBD% of overall EBITDA, TBD% of CP) – Marvel acquisition premium suggests aggressive growth targets – Growth targets unlikely to be achieved without sustaining S-M merchandise business – With untapped international potential, S-M merchandise business is primary target to support growth objectives • Spider-Man is critical to Disney’s boys strategy – Growth in boys demo is primary corporate objective for Disney CP – No meaningful boys property in current Disney CP portfolio – Library of boys properties was primary strategic rationale for Marvel acquisition – S-M is considered premier property in boys category with Mickey Mouse-like clout • Disney has the opportunity to extract substantial incremental value from the Spider-Man merchandise business through its CP engine, particularly in international regions – 50/50 domestic/international split vs. 40/60 for Disney CP – 25% uplift through shift from international agents to Disney sales force ATTORNEY-CLIENT PRIVILEGED page 7
The Spider-Man merchandising business accounts for a majority of both Marvel’s licensing and overall profits 2007 -09 MVL Avg. Revenue (1) 2007 -09 MVL Avg. EBITDA (2) $557. 7 $229. 3 MVL Share of S-M Merch. EBITDA is 76. 9% of Licensing EBITDA Total EBITDA $229. 3 Total Revenue $557. 7 S-M Merch. Revenue is 31. 3% of Total MVL Revenue DRAFT Total CP Revenue $262. 9 S-M Merch. Revenue is 66. 5% of Total CP Revenue MVL Share of S-M Merch. EBITDA is 57. 2% of Total MVL EBITDA Total Licensing EBITDA $170. 4 ATTORNEY-CLIENT PRIVILEGED Source: SEC filings and SPE Corp. Dev analysis. Note: * S-M Merchandising numbers based on SPE internal data. (1) MVL recognizes 100% of S-M merchandising revenue. (2) MVL Total EBITDA calculated as EBITDA per filings less $43. 7 MM of SPE’s share of merch. revenue. MVL recognizes SPE share as minority interest, whereas other studios' shares of license royalty income is recorded within SG&A expense. page 8
DRAFT • Executive Summary • Strategic Considerations • Deal Structure • Valuation • Negotiating Strategy ATTORNEY-CLIENT PRIVILEGED page 9
DRAFT NOTE TO DRAFT • Need to update the groupings / progression to show: • DCFs – As is without risk: • Historical flows, plus • Participate in international lift and Disney stores / parks – As is with risk • Above does not happen, revenues decline 10% due to S-M 4 risk – “Deal DCF” • As is, without risk plus • Cash based -- Eliminate commissions; open food categories • Intangible -- Premium for retail control and black-out window • Comparables – Disney’s own multiple – Other licensing businesses [Paul, ideas besides Toy Co’s] • Disney Marvel Deal – Marvel without Premium – Disney/Marvel original bid – Disney/Marvel closing multiple ATTORNEY-CLIENT PRIVILEGED page 10
DRAFT As its initial negotiation position, SPE will argue that it should participate in the control premium that Disney paid for Marvel Valuation Summary Likely Negotiating Range SPE Initial Negotiating Position DIS Acq. Closing Multiple (12/31/09) 18. 1 x DIS Acq. Bid Multiple (8/31/09) 16. 8 x MVL Pre-Acq. Multiple (8/28/09) 12. 9 x DCF incl Disney Uplift* 11. 4 x – 12. 2 x ** DCF excl Disney Uplift * 7. 0 x – 7. 6 x ** Disney Trading Multiple (4/2/10) Comparable Co. Multiple (4/2/10) 10. 1 x 7. 5 x e/ in ml e a re ng st ra to w ed rro Ne na SPE Merch Before Audit - $36. 9 SPE Merch After Audit - $43. 7 Source: SEC filings and SPE Corp. Dev analysis. ATTORNEY-CLIENT PRIVILEGED Note: * DCF range based on perpetuity growth rate from 2. 0% to 3. 0%, discount rate of 9. 0% and Disney’s effective tax rate of 36. 2%. ** Based on SPE’s 3 -year average trailing merch revenue of $44. 3 M (after audit). page 11
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 • Incremental revenues from lifting exclusive rights in certain food categories: $250 k / year • 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: $153 k / year DCF Assumptions Value of Intangible SPE Control Rights Ø Assumes Disney pays a premium (10% of base revenue) to gain control of retail and Classic merch blackout periods DCF Assumptions Ø Ø Disney WACC of 9. 0% Disney effective tax rate of 36. 2% Perpetuity growth rate ranges from 2. 0% - 3. 0% Terminal year revenue = 5 -year average of Spider-Man Film and Classic merch (FY 16 -FY 20) plus other increases Source: SPE Consumer Products and SPE Corp. Dev estimates. ATTORNEY-CLIENT PRIVILEGED page 12
DRAFT Proposed Value: Disney Uplift Value Assuming Disney Takes Increased Control and Spider-Man Films Perform Well ($ in millions) Intangibles ATTORNEY-CLIENT Source: SPE Consumer Products and SPE Corp. Dev estimates. Note: Value based on 2% perpetuity growth rate, 9% discount rate and Disney’s effective tax rate of 36. 2%. * Other increases include Disney selling S-M merch in Disney parks & resorts, in Disney stores, and online sales. PRIVILEGED page 13
DRAFT Proposed Value: Downside Scenario Value Assume Disney Takes Increased Control but Spider-Man Films Perform Poorly ($ in millions) Intangibles Revenues decline 10% ATTORNEY-CLIENT Source: SPE Consumer Products and SPE Corp. Dev estimates. Note: Value based on 2% perpetuity growth rate, 9% discount rate and Disney’s effective tax rate of 36. 2%. * Other increases include Disney selling S-M merch in Disney parks & resorts, in Disney stores, and online sales. PRIVILEGED page 14
DRAFT SPE can argue for a significant portion of control premium Disney paid for Marvel, as the S-M merchandise business represents a major share of international growth potential Disney Rationales for Marvel Acquisition • Drive international growth, particularly for Marvel licensing business • Produce content featuring Marvel characters Role of Spider-Man Merchandise • Substantial international growth potential at 50%/50% domestic vs. international split vs. 40%/60% for Disney CP • At TBD% of overall Marvel profitability, represents major share of Marvel international growth potential • Indirect impact (promotional value) on success of TV content featuring Spider-Man • Disney intent to produce Spider-Man TV content unclear • Extend and grow and Marvel properties on new media (video games, Internet, mobile content) • Take Marvel film distribution in-house upon expiration of distribution deal with Paramount in (20 XX) • Indirect impact (promotional value) on success of new media featuring Spider-Man • Disney intent to feature Spider-man on new media is likely • No impact ATTORNEY-CLIENT PRIVILEGED page 15
DRAFT his nt e e o tiv e gr arra oa dn • Executive Summary d t ad ee N • Strategic Considerations • Deal Structure • Valuation • Negotiating Strategy nd a his et ov r, M tion de lua Or Va ge er n ha Aft C ATTORNEY-CLIENT PRIVILEGED page 16
DRAFT Disney is Likely to Seek Sources of value Beyond SPE’s share of merchandising revenue Potential Source of Value Impact on Revenues Importance to Disney Risks to Sony • Uncertain • Creates drafting opportunities for other Disney properties • Limited as long as characters are properly represented • Increases • Bring existing partners to bear • Risk to film promotion partnerships • Black-out lifted on Classic • Increases • Increased flexibility at retail and consistency with partners • Risks emphasis on Classic over Film, may dilute promotional value • Disney as international sales agent • Increases revenue, eliminates 3 rd party fees • Leverage existing infrastructure, financial benefits • Conflicts if Disney has a competing title • Disney leads retail sales • Incremental food categories ATTORNEY-CLIENT PRIVILEGED page 17
DRAFT Deal Can be Structured to Provide Key Value Drivers While Protecting Sony • % of Sony Stake Sold • Disney leads retail sales • 100% sale is required to drive full valuation • Allow Disney to lead but maintain tight control over use of film related characters • [Can we seek minimum shelf space dedicated to Film properties? ] • Incremental food categories • [Discuss – what do we need to keep sufficient promotion on Films] • Black-out lifted on Classic • [Discuss – Does the lift in revenues from consistent in-store presence outweigh the risk to a shift away from film properties? Or do we argue there isn’t real risk, Classic and Film presence is equally powerful for promotion? ] • Disney as international sales agent • Allow. Be clear that waiver of 3 rd party agent fees is only available on Sony’s share in conjunction with a deal and must be factored into valuation ATTORNEY-CLIENT PRIVILEGED page 18
DRAFT • Executive Summary • Strategic Considerations • Deal Structure • Valuation • Negotiating Strategy ATTORNEY-CLIENT PRIVILEGED page 19
DRAFT Negotiating Strategy and Next Steps • Paul – Let’s discuss – Initial discussion • When (post Iron Man on the assumption sell through is so-so) • Who approaches whom initially (Michael with Bob) • Stated rationale (“your actions imply you want us out”) • Headline terms – 100% exit (implies we’ll give up key controls; but don’t state which early) – Some ongoing upside participation – Key inputs into retail promotions but not retail control – “Full” valuation (unlikely to quote number initially, but likely anchor with “at least” the value implied in the Marvel deal) – Resolve open Audit issues – Ongoing discussions • Expect Disney will have whom lead (Ike problematic) ATTORNEY-CLIENT PRIVILEGED page 20
DRAFT APPENDIX CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED
DRAFT Disney’s acquisition valuation would require significant growth targets to meet typical return expectations Marvel Acquisition Valuations $4, 153. 0 $3, 841. 0 $2, 953. 0 Requires 7. 2% growth in perpetuity to achieve 15% IRR EV/EBITDA Multiple (1) Source: Note: 12. 9 x Requires 9. 5% growth in perpetuity to achieve 15% IRR Requires 9. 0% growth in perpetuity to achieve 15% IRR 16. 8 x SEC filings and SPE Corp. Dev analysis. (1) All multiples calculated using a trailing 3 -year average Marvel EBITDA of $229. 3 MM 18. 1 x ATTORNEY-CLIENT PRIVILEGED page 22
DRAFT Valuation of SPE Share of Merchandising Business ($ in millions except where otherwise indicated) Pre-Announcement 8/28/09 12. 9 x multiple At Announcement 8/31/09 16. 8 x multiple Closing 12/31/09 18. 1 x multiple $474. 9 $618. 2 $667. 9 $562. 8 $732. 6 $791. 5 SPE Share of Merch. Business Before Audit SPE Share of Merch. Business After Audit Source: SEC filings and SPE Corp. Dev analysis. ATTORNEY-CLIENT PRIVILEGED page 23
DRAFT Valuation of SPE Share of Merchandising Business (cont. ) ($ in millions except where otherwise indicated) Pre-Announcement 8/28/09 12. 9 x multiple At Announcement 8/31/09 16. 8 x multiple Closing 12/31/09 18. 1 x multiple Before Audit After Audit 48. 2% 57. 2% Enterprise Value $2, 953. 0 $3, 844. 1 $4, 153. 0 Marvel's Implied 75% S-M Value $1, 424. 8 $1, 688. 3 $1, 854. 7 $2, 197. 8 $2, 003. 8 $2, 374. 4 Implied Full S-M Value $1, 899. 7 $2, 251. 1 $2, 473. 0 $2, 930. 3 $2, 671. 7 $3, 165. 8 $474. 9 $562. 8 $618. 2 $732. 6 $667. 9 $791. 5 Marvel's S-M Merch. EBITDA as a % of Total Marvel EBITDA Sony’s Share of S-M Merch. (25%) Source: SEC filings and SPE Corp. Dev analysis. ATTORNEY-CLIENT PRIVILEGED page 24
Valuation of SPE Share of Merchandising Business – Comparable Company Analysis DRAFT Comparable Company Analysis Source: SEC filings and Wall Street research. ATTORNEY-CLIENT PRIVILEGED page 25
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