Anna Burckhardt, Brett Cychosz, Sam Pickett

Faculty Advisor: Belinda Mucklow

February 2nd, 2017

Agenda

I. Executive Summary

II. Company Profile

III. Industry Overview

IV. ValuationI. Discounted Cash FlowII. Comparable CompanyIII. Precedent Transaction

V. Potential BuyersI. Strategic BuyersII. Financial Buyers

VI. Game of Thrones Damages

VII. Appendix

1

Executive Summary

2

Executive Summary

3

Industry Overview

Company Profile

Valuation

Potential Buyers

GoT Damages

HBO is the product of a merger between TV and movie producers and suppliers. This segment of the industry is called ‘Streaming Video On Demand’ (SVOD) and is growing rapidly.

HBO creates and distributes movies and television shows. HBO’s content has historically been distributed through traditional cable providers, but has recently seen a shift towards its streaming service, HBO Now.

We recommend a strategic buyer for HBO because of the synergy opportunities and premium price. Google and Disney are two optimal buyers for HBO because of their interest in content and/or the SVOD industry. HBO is a poor candidate for a financial buyer because of high investment required to create new shows.

Discounted cash flow, comparable companies, and precedent transaction analysis on HBO yielded a valuation range of $28 - $32 bn.

Methodology for valuing the lost cash flows resulting from illegal online downloads of the 6th season of Game of Thrones

Company Profile

4

5

Industry Definitions

Sources: IBIS World; WSJ.com; Apple.com; techopedia.com; Wikepedia

Industry Terms: SVOD and OTT

Subscription Video on Demand (SVOD): A service that provides users unlimited streaming for a monthly flat rate

Over-the-Top (OTT) Content: Media delivery over the internet without the involvement of a multi-system operator in the control of distribution or content

6

Streaming Timeline

Sources: IBIS World; WSJ.com; Apple.com; techopedia.com; Wikepedia

February 2007 – Netflix

launches streaming service

2004 2006 2008 20122010 2014 2016

March 2008 – Hulu

launches streamingservice

February 2013 – Netflix releases first original content series, House

of Cards

September 2006 – Original Amazon Prime streaming service

launched

April 2015: HBO Now launched

February 2010: HBO

Go Launched

7

TWX Overview

Sources: insidermonkey.com; turner.com; logodesignlove.com; hdiimagelib.com; hdreport.com; Cinemaxasia.com; sharealogo.org; americanbankingnews.org

Subscription: Purchase subscription through cable provider. Includes 13 multiplex channels, 7 24-hour multiplex channels, and an HBO Go Subscription

Price to Consumer: $10 - $20 per month

Programming: Game of Thrones, Curb your Enthusiasm, The Wire, other original TV series, and Blockbuster movies

8

HBO Products

Subscription: Included free with your paid TV packagePrice: Free with HBOProgramming: Unlimited access to HBODevices: Computers, tablets, Xbox, Apple products, PlayStation, Roku

Subscription: Purchased from an internet provider or on a smart phone; Over-the-top (OTT)Price: $15 per monthProgramming: Unlimited access to HBODevices: Same as HBO Go

Subscription: Purchased through cable provider. Online streaming service (Max Go) included.Price: ~$10 per monthProgramming: Action, comedy and science-fiction movies and seriesDevices: TV, Apple products, Android

Sources: Cinemax.com; HBO.com

Company Profile

Company Overview

9

Award Winning NetworkHBO as % of TWX Revenue

HBO Subscribers

CEO: Richard Plepler

Headquarters: New York, NY

Parent Company: Time Warner (TWX)

• HBO received 126 Emmy nominations in 2016o Most primetime nominations by

any network for the 15th year in a row

o Game of Thrones received 24 Emmy nominations

Sources: TWX 2015 10K; HBO.com; tvweek.com

40 41 43 46 49

53 73 84 92 98

2011 2012 2013 2014 2015*

Domestic Subscribers International Subscribers

*15.8 million subscribers for HBO India transferred to Turner operations Dec. 31st, 2014, which are included in 2015 subscribers

Sub

scri

ber

s (m

ms)

18.50% 18.50%

19.70% 19.90%20.70%

17.50%

19.50%

21.50%

2012A 2013A 2014A 2015A 2016p

% o

f TW

X R

even

ue

HBO Revenue

10

SWOT Analysis

Strengths

ThreatsOpportunities

Weaknesses

• High-quality original content• Extensive library of major motion pictures• Large amount of brand recognition• Ability to charge premium prices• International presence

• High pricing can turn away customers• Late to streaming content• Success highly dependent on consumer

preference• Only HBO content on OTT (HBO Now) service

• HBO Go and HBO Now can capture growing streaming market share

• Licensing deals with other players could generate additional revenue

• Cord-cutters could replace premium cable packages with HBO Now

• Explosive growth and high competition within streaming services

• Other original content creators drawing viewership

• Relative ease of pirating content

Industry Overview

11

12

Industry Overview

US Television Producers US Cable Networks

Industry Description: Distributes TV programs through cable providers and other platforms. Industry excludes content creators.

Key Players: Time Warner Inc., Walt Disney Companies, NBC Universal Media LLC

Sources: IBIS World; Global Media & Consumer: The Big Shift Series Bernstein (2015)

Changes to Supply ChainMajor Deals

Industry Description: Industry produces programming and content that is then sold to cable providers.

Key Players: 3 Arts Entertainment, Bad Robot, ABC Studios

• AT&T to purchase Time Warner for $85.4 bn• Comcast purchased 49% stake in NBCUniversal for

$16.7 bn• NBCUniversal purchased Dreamworks for $4.2 bn• Charter communications purchased Time Warner

Cable for $78.2 bn• Lionsgate purchased Starz for $4.1 bn

Content Producer

Post-Consolidation

Content Provider

Content Producer

Consumer

Consumer

Pre-Consolidation

13

Industry Drivers

Sources: IBIS World, Bureau of Labor Statistics, Broadband Commission for Digital Development

Cable vs. Broadband Subscriptions

• Increases in disposable income lead to higher demand for premium entertainment

• Customers with greater disposable income are more likely to add additional services

• Disposable income is projected to increase 4.3% year over year into 2024

Disposable Income

Total Advertising Expenditure US Per Capita Disposable Income

• Most cable networks generate a significant portion of their revenue from selling advertising time

• HBO is not dependent on advertisements to drive revenue

• Lack of advertising is a major driver behind customer preference for premium subscription or streaming services

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

20

03

A

20

04

A

20

05

A

20

06

A

20

07

A

20

08

A

20

09

A

20

10

A

20

11

A

20

12

A

20

13

A

20

14

A

20

15

A

20

16

E

20

17

E

20

18

E

20

19

E

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20

E

20

21

E

20

22

E

20

23

E

US

Do

llars

0

50

100

150

200

250

300

350

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Mill

ion

s o

f C

on

nec

tio

ns

Cable Subscribers Broadband Connections

14

Industry Outlook

US Pay-TV Penetration Moving Instigates People to cut Cable• 21% of people who moved in the past year do not

subscribe to a pay TV service, up from 12% in 2010

• 63% of non-subscribers get a subscription video On-Demand (SVOD) service

• 41% of US Households had an SVOD by end of 2014

Sources: IBIS World; Pay TV Penetration Rates, 2010-2015 marketingcharts.com; statista.com

Projected Revenue in US SVOD MarketHBO Now Revenue Impact

87% 87% 87%86%

84%83%

80%82%84%86%88%90%

2010 2011 2012 2013 2014 2015

Per

cen

t P

enet

rati

on

From survey of US Adults

5,3595,949

6,5087,029

7,511

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2016A 2017E 2018E 2019E 2020E

Rev

enu

e ($

mm

)

• Very little advantage of using HBO Now for consumerso Growth prospects aren’t higher due to HBO

Nowo Protection against cable cutting

Streaming Competitors

Service Overview Popular Content Pricing Total Subscribers

Video streaming platform offering current and past HBO content.

Original series, blockbuster movies

$14.99/month 1 million

Video streaming platform available across multiple devices. Most entrenched player in the space.

Original series, legacy TV content

$9.99/month – basic package

81.5 million

Video streaming platform offering current-season TV, Hulu Originals, and movies. TWX currently owns a 10% stake in the company.

South Park, Seinfeld, Saturday Night Live

$7.99/month with ads - $11.99 without ads

12 million

On demand video streaming available to Amazon customers with Prime subscription.

New release movies, HBO licensing

$99/year – includes other services

54 million

15Sources: Netflix.com; Hulu.com; Amazon.com; TWX 10K 2015; Netflix 10k 2015; Hulu Grows to 10 Million Subscribers techcruch.com; Amazon 10K 2015

Valuation

16

17

Financial Overview

Sources: TWX 10-k & 10-Q

Pent up demand for OTT service boosts sales, then growth is expected to fade into 2019 as business is relatively mature

Growth estimates are line with analyst estimates

Gross margins increase slightly as customers transition to the slightly higher margin, HBO Now service.

Revenues generated through cable subscribers are subject to discounts based on subscriber numbers or other performance metrics

X Income Statement

2015A 1Q16A 2Q16A 3Q16A 4Q16P 2016P 2017P 2018P 2019P 2020P 2021P

Subscription Revenue 4,748 1,236 1,253 1,262 1,259 5,010 5,311 5,576 5,799 5,973 6,153Growth 3.7% 4.8% 6.1% 5.2% 6.0% 5.5% 6.0% 5.0% 4.0% 3.0% 3.0%

Content and Other Revenue 867 270 214 164 226 874 883 892 901 910 919Growth 5.7% 23.3% (16.7%) (1.8%) 1.0% 0.8% 1.0% 1.0% 1.0% 1.0% 1.0%

Gross Profit 2,804 723 759 736 767 2,985 3,221 3,461 3,585 3,683 3,783% Margin 49.9% 48.0% 51.7% 51.6% 51.6% 50.7% 52.0% 53.5% 53.5% 53.5% 53.5%

Depreciation and amortization (95) (22) (23) (21) (24) (90) (101) (97) (92) (86) (84)as % of Revenue 2.0% 1.8% 1.8% 1.7% 1.9% 1.8% 1.9% 1.7% 1.6% 1.4% 1.4%

EBITDA 1,955 499 504 551 622 2,088 2,320 2,520 2,610 2,682 2,755% Margin 41.2% 40.4% 40.2% 43.7% 49.4% 41.7% 43.7% 45.2% 45.0% 44.9% 44.8%

Capex (68) (19) (74) (77) (81) (84) (86) (88)as % of Revenue (1.4%) (1.5%) (1.5%) (1.5%) (1.4%) (1.4%) (1.4%) (1.4%)

Change in Working Capital (7) (29) (26) (22) (17) (18)% of change in revenue (9.7%) (9.7%) (9.8%) (9.8%) (9.9%) (9.9%)

18

Financial Overview

Sources: TWX 10-k & 10-Q

X Income Statement

2015A 1Q16A 2Q16A 3Q16A 4Q16P 2016P 2017P 2018P 2019P 2020P 2021P

Subscription Revenue 4,748 1,236 1,253 1,262 1,259 5,010 5,311 5,576 5,799 5,973 6,153Growth 3.7% 4.8% 6.1% 5.2% 6.0% 5.5% 6.0% 5.0% 4.0% 3.0% 3.0%

Content and Other Revenue 867 270 214 164 226 874 883 892 901 910 919Growth 5.7% 23.3% (16.7%) (1.8%) 1.0% 0.8% 1.0% 1.0% 1.0% 1.0% 1.0%

Gross Profit 2,804 723 759 736 767 2,985 3,221 3,461 3,585 3,683 3,783% Margin 49.9% 48.0% 51.7% 51.6% 51.6% 50.7% 52.0% 53.5% 53.5% 53.5% 53.5%

Depreciation and amortization (95) (22) (23) (21) (24) (90) (101) (97) (92) (86) (84)as % of Revenue 2.0% 1.8% 1.8% 1.7% 1.9% 1.8% 1.9% 1.7% 1.6% 1.4% 1.4%

EBITDA 1,955 499 504 551 622 2,088 2,320 2,520 2,610 2,682 2,755% Margin 41.2% 40.4% 40.2% 43.7% 49.4% 41.7% 43.7% 45.2% 45.0% 44.9% 44.8%

Capex (68) (19) (74) (77) (81) (84) (86) (88)as % of Revenue (1.4%) (1.5%) (1.5%) (1.5%) (1.4%) (1.4%) (1.4%) (1.4%)

Change in Working Capital (7) (29) (26) (22) (17) (18)% of change in revenue (9.7%) (9.7%) (9.8%) (9.8%) (9.9%) (9.9%)

Depreciation and amortization fall to meet capital spending. Previous years D&A was increased to account for unusually high acquisition costs

Working capital was taken as a percent of revenue consistent with industry average

Capital spending is in line with HBO’s historical data

HBO Discounted Cash Flow

19

Market rate is base US Equity cost of capital used by Duff & Phelps

Risk free rate is the normalized 20yr US Treasury yield

Weights of debt and equity taken from median industry capital structures

Valuation Range: $24,166 - $27,901 mm

Sources: TWX 10-k & 10-Q; Duff & Phelps Equity Risk Premium Client Alert, March 2016

Cash Flows xall in $millions

4Q16P 2017P 2018P 2019P 2020P 2021P

Discount period 0.25 1.25 2.25 3.25 4.25 5.25

EBIT $628 $2,343 $2,552 $2,652 $2,733 $2,812

Tax (220) (820) (893) (928) (957) (984)

EBIAT 408 1,523 1,659 1,724 1,777 1,828

D&A 24 101 97 92 86 84

Changes in working capital (7) (29) (26) (22) (17) (18)

Capital expenditures (19) (77) (81) (84) (86) (88)

Free Cash Flow $407 $1,517 $1,649 $1,710 $1,759 $1,806

Present value of FCF 398 1,363 1,360 1,295 1,222 1,152

Perpetuity GrowthSum of PV of FCF 6,789.9

Terminal Value 29,953.2

PV of terminal value 19,103.5

Implied Enterprise Value 25,893.3

Implied exit multiple 10.87x

Perpetuity Growth SensitivityLT Growth Rate:

$25,893 2.25% 2.50% 2.75% 3.00% 3.25%

8.44% 26,359 27,228 28,173 29,205 30,336

8.69% 25,332 26,125 26,985 27,921 28,942

WACC: 8.94% 24,381 25,108 25,893 26,745 27,672

9.19% 23,498 24,166 24,886 25,664 26,508

9.44% 22,677 23,293 23,954 24,668 25,438

WACC Calculation

Market Rate 9.50%

Risk Free Rate 4.00%

Beta 1.3

Cost of Equity 11.04%

Credit Spread 1.81%

Pretax Cost of Debt 5.81%

Tax Rate 35.00%

Cost of Debt 3.78%

Debt/Equity 40.5%

Weight of Debt 28.85%

Weight of Equity 71.15%

WACC 8.94%

LT Growth Rate 2.75%

HBO Comparable Company Analysis

20Sources: Capital IQ

Final Comps3.0 6.0 8.0 10.0 12.0 #

Company Enterprise NTM EBITDA 3 Yr SalesName Value ($mm) EV/EBITDA Margin Growth Est.

HBO -- -- 32.3% 15.2%

The Walt Disney Company 171,263 9.8x 26.3% 15.7%CBS Corporation 33,637 9.7x 21.5% 6.2%Netflix, Inc. 53,469 56.4x 3.5% 99.1%Starz 4,255 8.6x 21.6% 9.5%Twenty-First Century Fox, Inc. 66,861 9.2x 22.2% 6.6%Discovery Communications, Inc. 23,034 9.1x 32.6% 14.5%Lions Gate Entertainment Corp. 4,353 15.0x (1.8%) 83.2%*Comcast Corporation 210,889 7.7x 21.1% 19.2%Time Warner** 83,652 9.4x 27.9% 15.0%

High 210,889 56.4x 32.6% 99.1%Median 43,553 9.5x 21.6% 15.1%Mean 70,970 15.7x 18.4% 31.8%Low 4,255 7.7x (1.8%) 6.2%

NTMExpected Multiple Range EV/EBITDAHigh 12.0xLow 9.5x

Expected Valuation Range Implied EVHigh $26,469Low $20,913

*Lions Gate growth includes the acquisition of Starz**Time Warner statistics as of Sept 2016 (before acquisition announcement)

HBO Precedent Transaction Analysis

21

Valuation Range: $27,571 - $33,086 mm

X Transactions

Implied EBITDA LTM

Announce Date Target Buyers/Investors Percent Sought Consideration EV ($mm) Margin EV/EBITDA

4/28/16 DreamWorks Animation SKG Inc. NBCUniversal Media, LLC 100.00% Cash 4,147 12.5% 34.3x

5/26/15 Time Warner Cable Inc. Charter Communications 100.00% Cash; Equity 78,200 34.4% 9.8x

6/30/16 Starz Lions Gate Entertainment Corp 95.37% Cash; Equity 4,159 21.6% 11.3x

2/12/13 NBCUniversal Media, LLC Comcast Corporation 49.00% Cash; Equity 39,997 22.8% 9.3x

10/22/16 Time Warner Inc. AT&T, Inc. 100.00% Cash; Equity 107,056 27.9% 12.6x

High 107,056 34.4% 34.3x

Mean 46,712 23.8% 15.5x

Median 39,997 21.6% 11.3x

Low 4,147 12.5% 9.3x

Expected Multiple Range EV/EBITDA

High 15.0xLow 12.5x

Expected Valuation Range ($mm) Implied EVHigh 33,086

Low 27,571

Sources: Capital IQ

Valuation Football Field

22

$24,166

$20,913

$27,571

$15,000

$17,000

$19,000

$21,000

$23,000

$25,000

$27,000

$29,000

$31,000

$33,000

$35,000

DCF - Perpituity Growth Comparable Companies Precedent Transactions

Ente

rpri

se V

alu

e ($

mm

)

Valuation Ranges

$33,086

$26,469

$27,921

Suggested Valuation Range: $28,000 - $32,000 mm

Potential Buyers

23

24

Financial Buyers

Definition Leveraged Buyout (LBO)

• Methodology for the acquisition of a company using debt to finance a large portion of the purchase price

Exit StrategiesPurchase Price

Financial Buyer: Investors interested in return they can get from buying a business

o Known as a private equity (PE) firm

• PE firms often pay less than strategic buyers because they don’t realize synergies

• Small equity stake from PE fund, remainder funded by leverage

Sale of business: Sell company to strategic buyer or another financial buyer

o Strategic buyers often pay a higher price for synergies

Initial Public Offering (IPO): Sells a portion of shares through equity offering

o Partial monetization of investment initially, creating a liquid market for investment

Sources: Investment Banking by Rosenbaum and Pearl; Deal Book; TWX 10k

Strong LBO Candidate Characteristics

25

Characteristic Analysis HBO

Strong Cash Flow Generation• Ability to pay down debt and make interest payments

• Strong brand recognition and stable customer demand resulting in consistent monthly payments

Growth Opportunities• Creates EBITDA multiple expansion and increase

Enterprise Value

• Saturated market with strong competition

Low NWC and Capex Requirements• Enhances a company’s cash flow generation

• Programming costs ~50% of revenues

Strong Asset Base• Pledged as collateral against a loan and dictates debt

available for LBO

• Illiquid intangible assets, rights to media content

Proven Management Team• Necessary to operate leveraged company

• Lavish corporate culture will conflict with cost saving efforts of a financial buyer

Leading and Defensible Market Position• Predicts strong cash flow generation

• 49 million domestic subscribers with award winning content Game of Thrones and True Detective

Sources: Investment Banking by Rosenbaum and Pearl; Deal Book; TWX 10k

26

Strategic Buyers

Strategy Premium

• Use cash or issue debt to buy companyo Debt financing options: revolving credit, term

loan, bond, note, commercial paper• Cheapest purchase consideration from tax

benefits• Preferred by buyer because of the concrete

purchase price vs. stock purchase

Cash PurchaseStock Purchase

Strategic Buyer: Buyer that looks for synergies between its existing business and target company

Maximum Premium: present value of synergies• Higher premiums than financial buyers cause

strategic buyers to pay more for acquisitionsTypes of Synergies:• Cost• Tax

• Revenue• Financial

• Use an exchange ratio to trade buyer shares for seller shares

Exchange Ratio =𝑆ℎ𝑎𝑟𝑒𝑠 𝑖𝑠𝑠𝑢𝑒𝑑 𝑏𝑦 𝑎𝑐𝑞𝑢𝑖𝑟𝑖𝑛𝑔 𝑐𝑜𝑚𝑝𝑎𝑛𝑦

𝐴𝑐𝑞𝑢𝑖𝑟𝑒𝑑 𝑐𝑜𝑚𝑝𝑎𝑛𝑦 𝑠ℎ𝑎𝑟𝑒𝑠

• More expensive to buyero Lack of interest payments provides more

financial flexibility for issuer • Often used in a merger of equals transaction

Sources: Investment Banking by Rosenbaum and Pearl; Deal Book; TWX 10k

27

Types of Synergies

Operating Synergies

Sources: NYU.edu

Definition: Allows firms to increase operating income, revenue growth, or both

Sources of Operating Synergies HBO Application

Economies of scale• Combined firm more cost-efficient and profitable

• Merger with content creator creates cost synergies from production costs

Greater pricing power• Stems from reduced competition and higher market share

• HBO merges with an OTT service, increasing market share and power in SVOD

Combination of different functional strengths• Marketing skills, good product line, efficient supply chain

• The acquiring company has a more efficient supply chain with DVD sales and distribution

Higher growth in new or existing markets• Occurs when a company acquires a firm in a different market

• An international content creator buys HBO, giving the company a stronger presence internationally

28

Types of Synergies

Financial Synergies

Sources: NYU.edu

Definition: Synergies that create higher cash flows or lower costs of capital

Sources of Financial Synergies HBO Application

Tax benefits• Use of acquisition tax laws or using net operating losses to shelter

income of buyer

• HBO is acquired by a European company with a lower corporate tax rate

Increase in debt capacity• Stability of combined company cash flows allows for more debt, and

thus tax benefits

• Merger of equals creates higher debt capacity for both companies

Combination of a firm with excess cash and a firm with project opportunities• Projects can be funded from firm with excess cash and create value

• Company with a big balance sheet has funds to develop HBO Now

29

Strategic Buyer Characteristics

Pre-Disposition for Acquisitions Strategy Compatibility

Sources: IBIS World; Investment Banking by Joseph Perella and Joshua Harris

SynergiesCapability for Large Acquisition

• Little long-term debt and/or large cash balance preferredo Can raise cash through equity offering or

debt issuance• Necessary because stockholders prefer cash over

stock for consideration

• More synergies equate to a higher premium• Acquirer characteristics for maximum synergies

with HBO:o Global presence to expand HBO

internationallyo Competency in the media, content, or

streaming businesso Cash to invest in HBO Now

• Companies tend to use same strategy for new business ventureso Mergers and acquisitionso Research and development

• Interest in entering the SVOD and OTT market• Media or technology company with similar

corporate culture• Content creation

Recommendation

30

Sale to Strategic Buyer

• HBO’s content creation platform is attractive to many potential strategic acquirerso Synergy opportunities exist with both content creators and content distributorso Economies of scale would reduce supply chain and/or production costs

1. Synergy Opportunities

2. Strategic Buyer Premium

• Strategic buyers have historically paid a premium for potential synergieso Greater premiums help the board to best maximize shareholder value

3. Poor LBO Candidate

• High cost of producing new shows reduces cash flow available for debt repaymento New content creation is a key driver of HBO’s success

• Small tangible asset baseo Limits ability for financial sponsor to add additional leverage

Google Profile

Company Overview

31

Video Services EntryPrior Acquisitions

Key Financials

CEO: Sundar Pichai

Headquarters: Mountain View, CA

Year Founded: 1998

Sources: Alphabet 10k, google.com; wsj.com; Capital IQ

• Google occasionally acquires multi-billion dollar companies to enter new industrieso $1.7 bn YouTube acquisition in 2006 – Online Videoo $12.5 bn Motorola acquisition in 2011 – Smartphoneo $3.2 bn Nest Labs acquisition in 2014 – Home automation

Revenue $85,537 mm

EBITDA Margin 33.1%

EV/EBITDA 16.6x

Net Debt -$79,188 mm

Enterprise Value $453,075 mm

• YouTube Red is a subscription based premium YouTube

• Google is creating a new live “skinny” bundle TV streaming service off of its YouTube platformo CBS recently signed to distribute contento 21st Century Fox, NBC, and Disney also in talks with Google

Google Synergies with HBO

• Google has shown interest in SVOD and OTT through new TV-streaming service, ‘Unplugged’o Service will be a “skinny” bundle of TV channels, ranging from $25-$40

o CBS reached agreement with Google

o 21st Century Fox, NBCUniversal, and Walt Disney Co. also in talks with Google

• HBO can give Google an edge in the new skinny bundle spaceo HBO content on Unplugged can create a premium service – at a premium price

32

Interest in Entering SVOD and OTT Space

Both Companies have a Large International Presence

• 46% of Google revenues and 37% of HBO subscribers are domestic• Similar geographic presence will create an ease in HBO strategy integration to

Google• International markets are a source of SVOD subscriber growth

Sources: Google 10k; Google Signs up CBS for Planned Web TV Service wsj.com; Capital IQ

Revenue $56,002 mm

EBITDA Margin 30.63%

EV/EBITDA 9.3x

Net Debt $15,214 mm

Enterprise Value $170,845 mm

Disney Profile

Company Overview

33

BrandsRecent Activity

Key Financials (as of LTM July 2nd, 2016)

CEO: Bob Iger

Headquarters: Burbank, CA

Year Founded: 1923

Sources: Capital IQ, Disney 10K FY2015; thewaltdisneycompany.com

• Disney took a large stake in Hulu in order to gain access to streaming market

• The company has made large acquisitions to increase its content portfolioo $4.1 bn Lucasfilms acquisition in 2012o $3.9 bn Marvel Studios acquisition in 2009

Disney Synergies with HBO

• 40% of Disney’s FY2015 revenue was from consumer products, parks and resorts

• Disney can use popular HBO content to generate additional revenueo Game of Thrones themed rollercoaster at theme parks

Creates competitive edge against Universal Studios for older generations

o Memorabilia from content sold in Disney stores

Costumes, toys, posters, DVDs

Increased margin on content sold through Disney store

34

Disney Fully Monetizes its Customers

Synergies Available with Disney and HBO Strength in Content Creation

• HBO’s strength in the adult space and Disney’s strength with children can help each content creator enter a different age bracket

• Disney content can be added to HBO Family channel and HBO Nowo More valuable subscription to families since quality content is available for all age groups

Sources: Disney 10k; Capital IQ

Game of Thrones Damages

35

Background/Task

36

Task

• Create a methodology to estimate the lost cash flows to HBO from the 2 million illegal downloads of season 6 Game of Thrones

Broad Methodology

1. Estimate Lost Revenues• Would the downloaders buy the season?• How would they buy?• Could piracy drive future sales?

2. Project effect on profits• What are the marginal costs associated with

revenues?

Background

• Game of Thrones is one of the most popular TV shows on the airo 23 million people viewed the 6th season

finale• BitTorrent made pirated copies of the 6th season

available for download within hours of broadcasto Over 2 million people illegally downloaded

the season

Traditional Cost of Game of Thrones

• Watch live over 4 month release period on HBO$15 x 4 months = $60

• Purchase season on DVD$35

• Purchase Episodes over Amazon Prime or iTunes$3.99 x 10 = $39.99

Sources: HBO.com

Methodology

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Estimating Lost Revenues Example

• Estimate the percent of downloaders that would have bought the season had the season not been pirated

• Estimate the method of purchase for the lost buyerso Find the breakdown of HBO subscribers vs.

physical units soldo Estimate the average length of an HBO

subscription

• Value new subscribers addedo Illegal downloaders may want to watch more

HBO content after seeing Game of Throneso Illegal downloads could add subscribers

• Assume 40% of downloaders would make a purchase had the free version not been available o 2,000,000 x 40% = 800K lost unit sales

• The 15% of sales are physical copies while 85% are HBO subscriptionso 800K x 15% = 120K physical unitso 800K x 85% = 680K subscriptions

• On average, season 6 sells for $40o 120K x $ 40 = $4.8M lost revenue

• The average length of an HBO subscription is 4 months at $15

• 5% of downloaders will create HBO subscriptions

2,000,000 x 40% = 800K lost unit sales

800K x 15% = 120K physical units800k x 85% = 680K subscriptions

120K x $40 = $4.8M lost revenue

680K x 4 months x $15 = $40.8M lost revenue

2M x 5% x 4 months x $15 = $6M gained revenue

Methodology

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Estimating Margins Example

• Physical Saleso Determine the margins on permanent

content purchase i.e. physical content (disks) or online marketplace

purchase (iTunes etc)

• HBO Subscriptionso Estimate any marginal costs for new

subscriberso Include lost gains from subscribers added

• Corporate Tax Rateo Assumed 35%

• Physical Saleso Assume a gross margin of 30%

$4.8M x 30% = $144,000 lost pretax income

• HBO Subscriptionso Assume a marginal cost of 1%

$40.8M - $6M = $34.8 Net lost revenue

$34.8M x (1-1%) = $34,452,000 lost pretax income

• Tax rate is assumed to be 35%

$34,596,000 x (1-35%) = $22,487,000 Damages

Total Damages = $22,487,000

Summary

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1. HBO is a poor LBO candidate

2. We suggest a sale to a strategic buyer for $28 - $32 bn

3. Google and Disney are recommended potential buyers

Summary

Q & A

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