Canadian Movie Channels Investment Opportunity March 2012 MOVIES - - PowerPoint PPT Presentation

Canadian Movie Channels Investment Opportunity

March 2012

MOVIES

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Executive Summary

SPT Networks is acquiring a significant stake in two Canadian movie channels which will be rebranded Sony Movie Channel (SMC) and AXN Movies

• Hollywood Suite (HS) operates 4 HD movie channels: Warner Films, MGM Channel, Hollywood

Festival and Hollywood Storm

• Founded in 2010, experienced management team lead by Jay Switzer, Jeff Sackman and David Kines
• Fully operational with carriage on key operators including Bell and Telus
• Channels sold as a standalone $5-$8 bundle to the consumer
• SPT Networks will invest $6.1MM for a 46.7% voting interest in Hollywood Festival and

Hollywood Storm, which will be rebranded as SMC and AXN Movies

• Investment based on total enterprise value of $13.1MM
• HS will provide a non-interest bearing loan of up to $3MM (50% of SPT Networks’ investment) to the two channels

to fund working capital and marketing needs

• 46.7% SPT Networks’ share is the maximum foreign ownership threshold under current Canadian Radio-television

Telecommunications Commission (CRTC) regulations

• Shared services agreement between HS and Newco – costs shared evenly across all four channels
• SPT Networks believes there is an investment opportunity to capitalize on the significant

forecasted growth in HD pay TV households in Canada

• HD enabled households projected to grow from 5MM - 12 MM 2011-2015, reaching ~80% market penetration
• Packaging SMC and AXN Movies with Warner and MGM creates a compelling HD content bundle at a value price

to the consumer relative to premium and lower tier content packages currently in market

• Projected investment NPV of $4.5MM and IRR of 18%
• NPV of $7.4MM and IRR of 22% when including incremental license fees paid to SPT
• Newco is forecasted to be EBIT positive in FY15
• Projected DWM less than $3MM; SPT Networks anticipates no additional capital requirements
• FY13 cash impact of ($6.1MM) and EBIT impact of ($1.2MM) is contemplated in the Networks Group FY13 budget

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• SPT Networks will make an equity investment in Newco, which

will spin off Hollywood Festival and Hollywood Storm, and rebrand as Sony Movie Channel and AXN Movies

• SPT Networks will invest $6.1 million for a 46.7% voting

share in Newco, based on a total enterprise value of $13.1MM

• HS will loan Newco a non-interest bearing loan of up to $3MM

(50% of investment proceeds) to fund working capital and marketing

• 46.7% SPT Networks’ share is the maximum foreign ownership

threshold under current CRTC regulations; handshake agreement in place to buy-up to 50% ownership pending regulatory change

• Shared services agreement between Newco and Hollywood

Suite - total costs to be shared equally across all four channels

• Exit mechanism in place for SPT Networks to pull the channel

trademarks based on any dilution below its 46.7% interest, should capital be required and SPT Networks elects not to fund

• Mutual agreement over the first year’s business plan and budget

(consultation rights on subsequent budgets); consultation rights

• n the hiring and firing of personnel with compensation deals

exceeding $150k; standard minority protections in place in addition to the above rights

NewCo

Deal Structure

MOVIES

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High Pay TV Penetration

• Canada is one of the most highly penetrated

global pay TV markets with approx. 90% penetration; 2.6% annual growth in 2011

Significant HD Growth

• Impact of digital transition (currently ~80%

penetration) will drive significant HD adoption

• ver the next 5 years, projected to grow from

5MM to 12 MM HD HH 2011-2015 (HD penetration forecasted to increase from 45%- 80% 2011-2015)

Strong Consumer Spend

• Pay TV HH ARPU of approximately $56,

realizing growth of 6% Y/Y from 2006-2010

Competitive Position vs. OTT

• Relative to the U.S., Canadian operators offer

cheaper base packages with more flexible add- programming options

• Usage based broadband billing
• Operators have strong interest in compelling

programming offerings that will differentiate from emerging OTT services (Netflix)

Canada Pay TV Overview

HD Household Penetration

MM

45% 55% 64% 73% 81% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

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4 6 8 10 12 14 16 2011 2012 2013 2014 2015 HD HH Total TV HH % HD Penetration

Source: Mgmt forecasts, Screen Digest

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Premium Services ($15 - $20 price to the consumer)

• TMN: Premium series from HBO and Showtime, Pay 1

window movies from U.S. studios; popular series drive seasonal/short-term subscriptions (Approx. 1MM subs)

• Super Channel: Offers direct to video movies and basic

U.S. cable series less recognizable than TMN (Approx. 350k-450k subs)

• High rates of monthly churn, high cost of sale, high cost of

retention and marketing Movies Plus ($6-$10 price to the consumer)

• Constant commercial interruptions, limited HD
• ffering
• Services are not exclusively movie channels, offer

series and reality television

• Limited SVOD brand extensions
• Repeats and cross-scheduling of titles across all

channels HOLLYWOOD SUITE ($5 - $8 price to the consumer)

• Movies from trusted Hollywood studios with significant brand

recognition to the consumer

• No commercial interruptions, no editing or cutting of the film
• 100% HD
• Brings exceptional value to important, high spend HD

customer

• Subscriber can access content across all service; TV, On

Demand, Online and via wireless

Market Opportunity

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Key Operating Assumptions

• SMC and AXN Movies to be distributed with Warner and MGM as a four channel bundle; $5 –

$8 bundle price to the consumer, 50/50 rev share between the operator and HS; revenue to be shared evenly across all four HS channels

• Carriage secured on Bell, Telus, Sasktel, MTS, and Eastlink; carriage on other BDUs,

including majors Shaw and Rogers, projected within 18 months

• No distribution revenue to date – free period on existing carriers ended February 2012
• Base case assumes 255k subscribers by year end FY13, growing to 850k in FY17
• Minimal sponsorship revenue only
• Channels have right to carry ads at any time
• Revenue to be shared evenly across all four HS channels

Distribution Ad Sales

• HS currently licenses 100 SPT titles to feature on SMC and AXN (20% of total

programming) along with a mix of other 3rd party U.S. studio and native Canadian content

• As 3rd party licenses burn off, SPT Networks can ensure HS ramps up additional SPT

content

• Estimated $500k - $750k in incremental license fees paid to SPT per year in FY14 and

beyond

• Programming costs allocated to specific HS channels
• CRTC regulations mandate that 35% of content must be native Canadian programming

in Y3 and beyond (Y1 - 15%, Y2 - 25%, Y3 -35%)

Programmin g

• Shared services agreement between HS and Newco – all non-programming

costs to be allocated evenly across all four channels

• Lean operating team with 9 total headcount (16 including freelancers)
• Provide $1MM - $1.5MM of annual marketing support for SMC/AXN Movies
• Encompass handles network operations

Operations

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Values in 000s FY2013 FY2014 FY2015 FY2016F FY2017F FY2018F FY2019F FY2020F FY2021F FY2022F Total S ubs c ribers 255 552 771 826 847 878 905 929 953 966 966 R evenue S ubscriber 2,711 6,662 9,930 11,962 12,833 13,249 13,694 14,079 14,447 14,857 114,424 Advertising 144 207 265 298 313 329 346 363 381 395 3,041 Total $2,855 $6,869 $10,195 $12,261 $13,146 $13,578 $14,039 $14,442 $14,828 $15,252 $117,466 Y /Y G rowth 141% 48% 20% 7% 3% 3% 3% 3% 3% E xpens es Programming Amortization 2,128 3,625 4,484 4,690 4,831 4,976 5,125 5,279 5,437 5,665 46,241 %

• f R

evenue 75% 53% 44% 38% 37% 37% 37% 37% 37% 37% R evenue Based C

• sts

40 118 187 228 244 252 261 268 275 286 2,159 Marketing and Promotion 579 770 1,020 1,226 1,315 1,358 1,404 1,444 1,483 1,543 12,141 Distribution and Delivery 495 526 548 577 607 638 672 707 743 781 6,294 S alaries 708 836 922 987 1,036 1,088 1,143 1,200 1,260 1,323 10,503 Other 333 389 387 397 418 430 442 455 468 487 4,207 Total 4,283 6,264 7,549 8,105 8,451 8,743 9,046 9,352 9,666 10,085 81,545 E B ITDA ($1,429) $605 $2,646 $4,155 $4,695 $4,836 $4,993 $5,090 $5,162 $5,168 $35,921 Depreciation 107 111 109 103 100 100 100 100 100 100 1,030 E B IT ($1,536) $494 $2,537 $4,053 $4,595 $4,736 $4,893 $4,990 $5,062 $5,068 $34,890 E BIT Margin

• 54%

7% 25% 33% 35% 35% 35% 35% 34% 33% Interest 13 9 3

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Income T ax

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• 238

891 1,246 1,284 1,326 1,352 1,401 7,738 Net Inc

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($1,549) $485 $2,534 $3,814 $3,704 $3,490 $3,609 $3,663 $3,710 $3,667 $27,127 C as h Flow ($1,995) ($358) $2,287 $3,528 $2,965 $2,746 $2,860 $2,909 $2,950 $3,055 $20,947 C umulative C as h Flow ($1,995) ($2,353) ($66) $3,462 $6,427 $9,173 $12,033 $14,942 $17,892 $20,947 $20,947 S PT View - E B IT R ec

• gnition is

46.7%

• f Total NewC
• Net Inc
• me

E BIT ($723) $226 $1,183 $1,781 $1,730 $1,630 $1,686 $1,711 $1,732 $1,713 $12,668 PPA ($508) ($508) ($508) $0 $0 $0 $0 $0 $0 $0 ($1,525) Total S PT E B IT IMPAC T ($1,232) ($282) $675 $1,781 $1,730 $1,630 $1,686 $1,711 $1,732 $1,713 $11,143 C hannel S PT (1) NPV of C ash Flows $2,807 $2,807 NPV of S PT L icense Fees

• $2,880

NPV of Terminal Value $7,806 $7,806 L ess: Upfront Payment ($6,100) ($6,100) NPV of C hannel $4,512 $7,392 IR R 18% 22%

Channel P&L and Returns Analysis

(1) SPT View includes provision for incremental license fees paid to SPT less residuals (15%) and taxes (27%) (2) Terminal value of 10X EBITDA, 6% implied long term growth rate NOTE: Based on a $13.1MM enterprise value for Newco, transaction multiple of ~5X 3 year forward EBITDA (FY15 $2.6MM); for reference Bell recently acquired Astral for 10X 1 year forward (2012) EBITDA

Newco: SMC / AXN Movies

(2)

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Next Steps / Timeline

March 2012

• Completed negotiation of non-binding term sheet

April 2012

• Execute long form agreements and establish Newco

April 2012

• SPT Networks pays HS initial payment of $2.6MM

April 2012

• Hollywood Storm and Hollywood Festival rebranded SMC and

AXN Movies September/October 2012

• CRTC approval of the HS/SPT Networks venture; if CRTC

approval is not obtained transaction can be unwound and initial $2.6MM payment returned September/October 2012

• SPT Networks pays HS second payment of $3.5MM

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Appendix

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Key Management

Jay Switzer, Chair and Co-founder

Jay is the former longtime President and CEO of Canadian broadcaster CHUM Limited and a twenty-five year veteran of the Canadian arts & media business community. Jay started at CHUM Ltd in 1983 as Program Manager Citytv and worked through various promotions to become the President and CEO of CHUM Ltd. until July 2007. Jay was instrumental in the creation and launch of CHUM’s specialty channels including the launch of MuchMusic in 1983/84. He helped execute the eventual sale of the publically traded company and it’s more than 3200 employees to CTV for $1.7 billion.

Jeff Sackman, Co-founder

Jeff possesses significant experience with startup operations. After joining Cinepix Film Properties as executive VP Sackman moved the company into U.S. distribution in the

• 1990s. Cinepix merged into Vancouver’s sales and distribution firm (then named) Lions

Gate Films in 1998, with Sackman as President. Under his tenure, Lions Gate Films moved into the U.S. and revenue for the publically traded company grew from $6 million to $125

• million. Jeff left Lions Gate in 2000 to create ThinkFilm.

David Kines, President

Kines began his career in 1983 as an editor for THE NEW MUSIC. A year later, he helped launch MuchMusic and subsequently held positions as Coordinating Producer, Director of Music Operations, Program Manager, Vice-President, and Senior Vice-President in the years following. Kines is a graduate of Ryerson Polytechnic University in Toronto and holds a degree in Radio and Television Arts.

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• SPT Networks will invest $6.1 million for total direct and indirect ownership of 46.7% of the

voting share in Newco

• HS will spin off Hollywood Festival and Hollywood Storm into Newco, rebranding the channels as

Sony Movie Channel and AXN Movies respectively

• Total Newco enterprise value of $13.1MM
• Payment of $2.6MM upon signature of transaction documents; remaining $3.5MM paid upon

transaction approval by the CRTC

• HS will loan Newco a non-interest bearing loan of up to $3MM (50% of investment proceeds) to

fund working capital and marketing

• Shared services agreement between Newco and Hollywood Suite - total costs to be shared equally

across all four channels

• Trademark Licensing Agreement established whereby Sony grants HS/Newco a royalty-free license

for use of the SMC and AXN Movies brand marks in Canada; exit mechanism in place for SPT Networks to pull the channel trademarks based on any dilution below its 46.7% interest

• SPT Networks may appoint 1 board member (out of 5); mutual agreement of the first year’s

business plan and budget (consultation rights on subsequent budgets); consultation rights on the hiring and firing of personnel with compensation deals exceeding $150k; standard minority protections in place in addition to the above rights

Additional Detail on Deal Terms