investment in maa tv presentation to the group executive committee august 22 nd, 2012 draft august...
TRANSCRIPT
Investment in Maa TV
Presentation to the Group Executive Committee
August 22nd, 2012
DRAFT August 13th, 2012
DRAFTFOR DISCUSSION ONLY
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• SPE has an opportunity to expand beyond its current focus on Hindi-speaking markets and
acquire a controlling stake in Maa TV, a bouquet of regional Telugu channels
• Maa TV has grown rapidly and has recently overtaken ETV to become the #2 channel in Andhra
Pradesh
• Acquisition of Maa TV will provide strategic benefits to both SPE and to Sony
− Improves competitive positioning and brings SPE one step closer to a national India footprint
− Capitalizes on the growth in ad revenues for Southern regional language channels that are growing faster than Hindi channels and diversifies ad revenue to regions that aren’t affected by the same factors that affect the Hindi market
− Provides a platform for the regional rollout of MSM franchises such as SAB and MIX
• SPE is seeking approval to acquire a majority stake in Maa TV for INR 6.2BN ($113MM) with
INR 5.9BN ($107.5MM) (FYE13) & INR 300MM ($5.4MM) (FYE15)
• NPV of $21MM, IRR of 17% and payback period of 11 Years
Executive Summary
NationalChannels
• 20 national channels
• 5 HD channels
NewsCorp
Essel Group
(Indian Conglom)
• TheOneAlliance JV (24 total)
DistributionBouquet
• 6 channels (SET, MAX, SAB, PIX, MIX, SIX)
• 2 HD channels• 2 SPE-owned
(AXN/Animax)
• 13 national channels
• 3 HD channels• Majority stake
in TEN Sports (5 channels)
• MediaPro Bouquet (71 total)
SPE has strong national channels in India but limited presence with regional channels
RegionalChannels
• 1 regional channel (AATH)
• 10 regional channels
• 9 regional channels
MSMSPE
Source: Zee Annual Report 2012; startv.com; MediaPro.net.in
Maa
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SPT Networks Growth Strategy
• The Indian TV market is critical to the continued success of SPT Networks– India comprises almost 20% of the world’s population and is adding ~9MM TV households annually
– The media industry in India is forecast to grow at a 15% CAGR through 2016; television is expected to be a primary driver of this growth, with an expected 17% CAGR over the same period
• Footprint expansion is crucial to SPT’s ongoing success in India‒ Captures growth: Higher forecast growth in ad and subscription revenues, higher per capita incomes and greater
combined viewership than the Hindi regions
‒ Improves SPT’s competitive positioning: Zee and Star (News Corp) currently own 6 and 12 regional channels, respectively; SPE owns 1
– Enhances other SPT business: Adding regional channels to TheOneAlliance1 partnership would strengthen our distribution bouquet, making it a more compelling offering in all parts of the country
• SPE’s existing India operations will drive strong growth in Maa TV– MSM will manage Maa TV’s operations, narrow the pricing gap with its main regional competitor and realize efficiencies
through economies of scale (i.e. decreased programming costs (2) and higher ad rate growth)
– Maa TV’s ad rates are lower than its #2 market position would suggest (INR 2,300 effective rate versus INR 8,200 for the #1 regional channel)
• Investment in Maa TV is consistent with SPT’s growth strategy and is highly strategic to future growth and profitability
1 TheOneAlliance is a channel distribution joint venture with Discovery Communications(2)MSM will be able to provide Maa TV with access to its large content catalog to be dubbed into regional languages. Maa TV already purchases programming from MSM (in FYE12 Maa TV purchased CID for INR 18MM)
• Maa TV operates 4 channels in Andhra Pradesh, the second largest regional ad market in India
– Maa TV (GEC), Maa Music, Maa Movies and Maa Gold (formerly Maa Junior)
– Andhra Pradesh is the 2nd largest regional cable & satellite television market in India and is expecting to grow at a 14%-16% CAGR for ad revenue and 23%-25% CAGR for subscription revenue through 2015
• Maa TV, the flagship channel, is currently the #2 channel in Andhra Pradesh, after recently passing ETV in ratings
• From FYE09 to FYE11 Maa TV’s revenue increased by over 60% due primarily to increased sellout and higher advertising rates; EBITDA more than doubled over the same period
• Current shareholders are N. Prasad (67.2%), local actors (30.7%) and key employees participating in ESOP plan (2.1%)
• Maa TV has 400 employees
Overview of Maa TV
5FYE09 FYE10 FYE11
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5
10
15
20
25
14
19
23
FYE09 FYE10 FYE11 -
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2
3
4
5
6
2
4
5
($MMs) ($MMs)Revenue EBITDA
Note: Historical period is shown with unadjusted EBITDA and has been restated using a constant FX rate of 55 INR:USD
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Maa TV offers a unique opportunity to the Sony GroupSPE Regional platform: Maa TV is the last significant regional platform which can be used to
organically build the SPE Regional presence in different states (Karnataka, Tamil Nadu, Kerala) and leverage existing MSM India brand franchises such as SAB and MIX; upside of these opportunities have not been included in the financials
Diversification and competitive position: Telugu market is faster growing and more self contained than the Hindi market
Distribution: Strengthens TheOneAlliance distribution bouquet by adding regional channels and making it a more compelling offering in all parts of the country
Efficiencies: Ad sales, distribution infrastructure and management services to be provided by MSM over time
SONY Sony brand exposure: With a careful migration to Sony branding, Maa TV offers an opportunity
to expand the Sony brand presence with a deep penetration of small town India in the 3 rd richest state with 90%+ cable & satellite penetration and hence a ready market for Sony electronics
Integration of hardware/content: Over time, implementation of one-click exclusive access to Maa TV content on various hardware products like Sony Bravia TVs and Sony mobile phones supports premium pricing for these products
On the ground presence: Maa TV on the ground activities can be used to showcase Sony products and give it a leadership profile in the Andhra Pradesh market
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Maa TV Deal Status• Drafts of the shareholder and share purchase agreements are being negotiated
• SPE to acquire 53% of Maa TV for a total purchase price of INR 6.2BN ($113MM), representing an
enterprise value of INR 11.2BN ($204MM)– SPE will acquire 51% of fully-diluted equity at close for INR 5.9BN (~$107.5MM) by purchasing shares from certain
shareholders as agreed among the existing shareholders
– Additional 2% to be purchased in FYE15 from key individuals for INR 300MM (~$5.4MM) (1)
– Purchase price derived as 23.3x reported FYE12 EBITDA of INR 482MM ($8.8MM). (2)
• Maa TV performance YTD is on budget; FYE13 EBITDA Budget is INR 567MM ($10.3MM)
• FYE13 multiple of acquisition is 19.8x EBITDA vs. 23.3x trailing
• SPE will have a call option on the 47% minority position beginning on the 5 th anniversary of closing– Call option will be for fair market value, determined by mutual agreement (most likely an appropriate multiple of EBITDA),
or by independent valuation if agreement cannot be reached
– If SPE does not exercise its call by the 7th anniversary of closing, minority shareholders can force a sale of 100% of the company to a third party
• Maa TV will have a 7-member board, with 4 members appointed by SPE, therefore SPE will control the board and the Company
• Share transfer restrictions for 5 years (except any party can transfer to an affiliate).
• Key management to remain in place immediately post-close, with proper integration over time
(1) Purchase price calculation based on multiple of FYE14 EBITDA(2) EBITDA figures presented reflect adjustments due to FYE12 non-operating income itemsAssumed FX rate of 55 INR:USD
Maa TV Financial Summary
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All years for fiscal years ending March 31st in Indian GAAP and exclude expected MSM inter-company transaction, management service and representation fees(a) Assumes January 31, 2013 close and excludes $5MM in estimated transaction costs; stub period amounts are included in FYE13 column
(b) Purchase Price of $204MM based on FYE12 reported EBITDA of $8.8MM, assumption of debt and ESOP share purchase; EBITDA adjusted here for changes to amortization policy in FYE12; Company changed its amortization policy in FYE12 and adjustment upwards was largely effect of moving a portion of show amortization to previous year.
(c) Fair value analysis in progress. Purchase price amortization is estimated and may vary by >10%
Actual Forecast
Post-Acq FYE12-FYE17(US$ MMs) FYE11 FYE12 FYE13 FYE13 (a) FYE14 FYE15 FYE16 FYE17 CAGR
Feb-MarStub Period
Ad Revenue 19.3 27.2 35.8 6.0 43.1 52.5 65.8 75.2 23%Growth 41% 32% 20% 22% 25% 14%
Subscription Revenue 5.1 6.6 7.3 1.2 8.8 10.8 12.1 13.4 15%Growth 29% 10% 22% 23% 12% 10%
Net Revenue 22.8 31.4 39.2 6.5 47.5 57.8 71.0 80.6 21%Growth 23% 38% 25% 21% 22% 23% 14%
Total Operating Expenses 6.0 8.8 11.3 1.9 12.6 14.1 15.3 17.0 14%Adjusted EBITDA(b) 5.9 9.4 10.3 1.7 14.9 20.6 29.2 33.4 29%
Margin 26% 30% 26% 26% 31% 36% 41% 41%
Depreciation 0.8 1.1 1.0 0.2 1.1 1.3 1.4 1.4Purchase Price Amortization (c) 2.7 15.9 13.5 11.6 9.4
EBIT 5.1 8.3 9.3 (1.2) (2.1) 5.8 16.3 22.7 22%Margin 22% 26% 24% -18% -4% 10% 23% 28%
Net Income 3.1 4.9 5.7 (1.8) (6.7) (0.6) 7.0 12.1 20%
Cash Flow (1.1) (0.2) 1.8 7.3 13.1 16.8
120
140
160
180
200
220
240
260
Source: Deloitte Valuation
Third Party Valuation
$257
$235
$195
$168
$144
Proposed SPE enterprise value
($204MM) for 100%
($MMs converted from INR at 55 INR:USD)
• Deloitte Touche Tohmatsu (D&T) was engaged to value Maa TV
• SPE’s proposed purchase price is at the low end of the value that SPE or another strategic buyer is expected to derive from this acquisition of Maa TV
Independent Fair Market Value Range – 100% Value
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• At SPE’s proposed price of $113MM (including $9MM debt assumption) for 53%, SPE’s estimated post-tax IRR is 17% and payback is 11 years.
Notes: These comparables do not include ETV that would be considerably higher. Transaction comp includes Asianet-Star acquisition, adjusted for time since close. Public comps include Sun TV and Zee TV, both of which have operations in Andhra PradeshAssumed FX rate of 55 INR:USD
$208
19.1x
16.4x
29.2x
23.6x
26.7x
22.2x
WeightedOverallValue
DCFComps
Public/Trans
Financial Impact to SPE
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EBIT Impact• Acquiring a controlling interest will allow SPE to consolidate Maa TV and is expected to increase SPE’s EBIT by over $20MM
per year by FYE17
Cash Impact
(a) Assumes January 31, 2013 close(b) it is our intent to not pay dividends until $10MM in working capital is achieved on the balance sheet, after which dividends will be paid on 100% of cash available
Cumulative cash flow break even estimated at 11 years
Feb-Mar Fiscal Years Ending March 31($MMs) FYE13 (a) FYE14 FYE15 FYE16 FYE17 Total
EBIT before Purchase Price Amort 1.6 13.8 19.3 27.9 32.1 94.6Less: Purchase Price Amortization (2.7) (15.9) (13.5) (11.6) (9.4) (53.1)Incremental Annual EBIT to SPE (1.2) (2.1) 5.8 16.3 22.7 41.5
Cumulative EBIT to SPE (1.2) (3.3) 2.6 18.8 41.5
Feb-Mar Fiscal Years Ending March 31($MMs) FYE13 (a) FYE14 FYE15 FYE16 FYE17 Total
Cash Flow Before Dividends (0.2) 1.8 7.3 13.1 16.8 38.9
Minority Dividends(b) 0.0 0.0 0.0 6.2 7.9 14.0Cash Flow to SPE after Minority Dividends (0.2) 1.8 7.3 7.0 8.9 24.8Less: Purchase Price (107.5) (5.4) (112.9)
Net Cash Flow to SPE (107.7) 1.8 2.0 7.0 8.9 (88.0)
Cumulative Cash Flow to SPE (107.7) (105.8) (103.9) (96.9) (88.0)
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Regulatory Approvals
• Transaction is subject to the following regulatory approvals
– Foreign Investment Promotion Board (FIPB)– Ministry of Information and Broadcasting (MIB)
• Timing on regulatory approval is uncertain, but could be as little as 2 to 3 months after signing, and although unlikely, as late as 1 year after signature
• We will need additional FIPB and MIB approvals for 2% stake in FYE15
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Risk and Mitigation
Risk Mitigation
Downturn in Indian advertising marketMSM’s expanded footprint and premier client list insulates against this better than Maa TV or MSM stand-alone
Channel growth slower than expected
Key performance drivers relate to improving the programming, advertising sales, and channels distribution, which are areas of expertise of MSM management
Difficulties integrating with MSM leads to operational disruptions
MSM proposes to keep existing Management in place and only slowly integrate Operations with the exception of distribution
Evolving regulatory framework may reduce advertising minutes
MSM management does not feel that the recent recommendations by the Telecom Regulatory Authority of India will be implemented
SPE will need to receive FIPB approval to exercise our call option after year 5
We know of no specific reason why the FIPB would not approve the buy-up
Next Steps
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• Complete and execute long form documents
• Submit filings and obtain regulatory approvals
• Close