DRAFT SpiderMan Merchandising Business Update April 2010 CONFIDENTIAL
DRAFT Spider-Man Merchandising Business Update April 2010 CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED
DRAFT • Strategic Considerations • Deal Structure • Valuation • Negotiating Strategy ATTORNEY-CLIENT PRIVILEGED page 1
DRAFT Strategic Considerations • A sale would have significant financial benefits but only makes sense at an attractive valuation – A full valuation would allow SPE to capture full upside value today and avoid risks associated with the franchise aging or reboot underperforming – Addresses near-term cash and profit challenges • Spider-Man merchandising provides promotional value to the film franchise that would need to be protected • Our ability to secure a full value and ongoing promotional benefits depends in large part on Disney’s motivations for the property ATTORNEY-CLIENT PRIVILEGED page 2
DRAFT Disney’s Likely View of the Property We believe Disney has significant incentives and wherewithal to drive value in Spider-Man merchandising, both “Classic” and “Film” • Disney needs a Boys Franchise—Disney’s consumer products portfolio is dominated by girls or younger properties. Disney has had little success in building, let alone sustaining, Boys franchises. Disney’s new girl oriented properties are more likely to cannibalize existing franchises than provide Disney with sustainable incremental economics. Building a boys business has been a stated objective for Consumer Products for some time and is the best avenue for growth. • Owning a licensing annuity—Spiderman is in the rarefied world of being a classic character. Meaning that it is capable of maintaining consumer relevancy year after year. There are very few properties that have this kind of staying power and can command annual retail shelf space year. Owning an annuity represents consistent earnings, better profitability, retail and licensee leverage. • Paying for the Marvel Acquisition—No doubt, that a substantial part of the Performa to justify the acquisition of Marvel, rested on the existing and assumed cash flow from licensing under Disney management. As the movie and Theme Park rights to Spiderman are tied up and the development of new Characters is unknown, the vast majority of value needs to come from the exploitation of Spiderman, particularly in the early years of Disney’s ownership. • Disney brings a lot to the table—They have the best retail relationships and can leverage their scale. They have the best international licensing infrastructure and can exploit the opportunity faster and better than anyone. They are well represented in all classifications of merchandise and food, and can use their relationships to better capitalize on those opportunities. • Like the points, will need to streamline • Agree with but took out the “ 75% or what” point as I think only applies if we don’t sell? ATTORNEY-CLIENT PRIVILEGED page 3
Disney Has a Strong Financial Incentive to Manage Spider-Man Well as it Represented Roughly 50% of the Marvel Profit They Paid $4. 1 BN to Acquire DRAFT 2007 -2009 Marvel EBITDA Performance (1) Legend Total EBITDA S-M Merch. After Audit S-M Merch. Before Audit as a % of Total 45. 9% 35. 6% 51. 0% 42. 8% S-M Merch. After Audit as a % of Total 51. 3% 46. 7% 50. 7% Source: Note: SEC filings and SPE Corp. Dev analysis. ATTORNEY-CLIENT PRIVILEGED (1) MVL total EBITDA calculated as EBITDA less minority interest. Sony Pictures' share of royalty income is reflected as minority interest expense rather than SG&A, whereas other studios' shares of license royalty income is recorded within SG&A expense. (2) S-M Merchandising implied from SPE merchandising figures received from SPE CP based on a 75%/25% split. page 4
DRAFT SPE Must Also Reach Internal Consensus on Approach to Other Risks Below is a preliminary recommendation for how best to address potential risks Risks That Cannot or Need Not be Mitigated • Disney has early success with other Marvel Characters • Discuss – takes quite a while to build correct? And we’ll see how much of a push they make on Iron Man before we discuss a sale • There may be times that a Sony release date conflicts with another property and Disney tries to manage the market (licensee and retailer) to their economic and or long term benefit Is there a way to protect? Minimum sq footage? • Other Disney entertainment, e. g. Television product, diminishes the value of theatrical or video release Can’t protect can we? And shouldn’t it generally be additive to upcoming interest in the film? That Need to be Addressed Structurally • Disney develops a new look for Spiderman that conflicts with the movie art direction • Disney abuses the blackout periods ATTORNEY-CLIENT PRIVILEGED page 5
DRAFT • Strategic Considerations • Deal Structure • Valuation • Negotiating Strategy ATTORNEY-CLIENT PRIVILEGED page 6
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 7
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 8
DRAFT • Strategic Considerations • Deal Structure • Valuation • Negotiating Strategy ATTORNEY-CLIENT PRIVILEGED page 9
DRAFT Valuation Overview [All to be confirmed]: • $500 to $700 – Value based on price Disney paid for Marvel -- multiple may exceed DCFs and be highest possible value / best opening “anchoring” point • $450 to $600 --- Value based on Marvel’s value prior to Sony acquisition; implies value to Disney if they view our piece purely economically without a control premium • $XXX to $XXX – DCF after Disney increases it’s control / adds value • $XXX to $XXX – DCF “as is” before Disney increases it’s control / adds value • $XXX to $XXX – DCF if revenues decline X% (there is no sale and upcoming Spider-Man films underperform, merchandising declines) Reasonable Value is Between “As is” Value and Capturing a Portion of the Potential Upside from Disney ATTORNEY-CLIENT PRIVILEGED
DRAFT Proposed Value: Upside Value Assume Disney Takes Increased Control and Spider-Man Films Perform Well ATTORNEY-CLIENT PRIVILEGED page 11
DRAFT Proposed Value: Downside Value Assume Disney Takes Increased Control but Spider-Man Films Perform Poorly ATTORNEY-CLIENT PRIVILEGED page 12
DRAFT Disney’s acquisition valuation would require significant growth targets to meet typical return expectations Marvel Acquisition Valuations $4, 153. 0 $2, 953. 0 Requires 8. 8% growth in perpetuity to achieve 15% IRR Requires 6. 2% growth in perpetuity to achieve 15% IRR EV/EBITDA Multiple (1) Source: Note: 11. 4 x 16. 1 x SEC filings and SPE Corp. Dev analysis. ATTORNEY-CLIENT (1) All multiples calculated using a trailing 3 -year average Marvel EBITDA of $258. 7 MM (see previous page) PRIVILEGED
DRAFT Valuation of SPE Share of Merchandising Business SPE Share of Merch. Business Pre-Announcement (11. 4 x multiple) Closing (16. 1 x multiple) $421. 0 MM $498. 9 MM $592. 1 MM $701. 6 MM Before Audit SPE Share of Merch. Business After Audit Source: SEC filings and SPE Corp. Dev analysis. ATTORNEY-CLIENT PRIVILEGED
DRAFT Valuation of SPE Share of Merchandising Business (cont. ) ($ in millions except where otherwise indicated) Pre-Announcement (11. 4 x multiple) Closing (16. 1 x multiple) Before Audit After Audit 42. 8% 50. 7% Enterprise Value $2, 953. 0 $4, 153. 0 Marvel's Implied 75% S -M Value $1, 263. 0 $1, 496. 6 $1, 776. 3 $2, 104. 8 Implied Full S-M Value $1, 684. 0 $1, 995. 5 $2, 368. 3 $2, 806. 4 $421. 0 $498. 9 $592. 1 $701. 6 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
DRAFT • Strategic Considerations • Deal Structure • Valuation • Negotiating Strategy ATTORNEY-CLIENT PRIVILEGED page 16
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
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