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 (initial outline form)
•
Sale makes sense only if promo value to films protected and price at fair valuation
•
Disney has strong incentives to support Spider-Man merchandising and is unlikely to destroy promo value
•
Fair valuation is between NPV of current SPE base case projections which assume no Disney uplift
– While biz can expect uplift from base due to Disney, material chance for downturn due to S-M4 delay and reboot
– Valuation above base would allow SPE to share in uplift
– However base is win should downturn from S-M4 materialize
•
We should expect ultimate valuation between base at $TBD mil and Disney uplift case of $TBD mil
– Benefit to Disney predominantly financial and driven by how much of uplift they can capture
– However, we’ll argue that we should share in uplift due to merch biz impact on Marvel int’l growth, a primary driver
of uplift
•
We may be able to sell control rights for incremental value beyond payment for rev share, with no material
impact on promo value
– Control of retail promo for estimated $TBD mil incremental value
– Lift of blackout on Classic for estimated $TBD mil incremental value
•
We recommend SPE make initial offer for sale price equal to $TBD mil, based on Marvel acquisition multiple
– Lead offer based on rationale that won’t get us thrown out of room
– Leaves massive room to fall back on acceptable valuation
ATTORNEY-CLIENT PRIVILEGED
page 2
DRAFT
• Executive Summary
• Strategic Considerations
• Deal Structure
• Valuation
• Negotiating Strategy
ATTORNEY-CLIENT PRIVILEGED
page 3
DRAFT
Strategic Considerations
• A deal must capture a portion of the upside Disney will create without risking the promotional
value merchandising provides Spider-Man films
• In order for Disney to pay SPE for a portion of upside, we likely need to provide increased
control, potentially selling-off our full participation
• 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 the theatrical or
video release
– Disney develops a new look for Spiderman that conflicts with the movie art direction
– Disney abuses the blackout periods
• However, we believe Disney has greater incentives to expand Spider-Man merchandising
which may, in turn, in crease promotional value
ATTORNEY-CLIENT PRIVILEGED
page 4
Disney has significant incentives to continue to support the SpiderMan 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 5
DRAFT
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)
$600
$300
$557.7
Other, $6.6
$229.3
Film
Production,
$138.6
$500
$250
Film
Production,
$39.2
$200
Publishing,
$46.4
Publishing,
$124.0
$300
$0
Studio
Licensing,
$25.6
Total
Revenue
$557.7
$150
S-M Merch.
Revenue is
31.3% of
Total MVL
Revenue
S-M Merch.
Revenue
(After Audit),
$174.8
Total CP
Revenue
$262.9
$50
S-M
Merch.
Revenue is
66.5% of
Total CP
Revenue
Total
EBITDA
$229.3
Other
Licensing,
$39.3
$100
Other CP,
$88.1
$200
$100
EBITDA ($M)
REVENUE ($M)
$400
MVL Share
of S-M
Merch.
EBITDA is
57.2% of
Total MVL
EBITDA
MVL Share
of S-M
Merch.
EBITDA is
76.9% of
Licensing
EBITDA
MVL Share of
S-M Merch.
EBITDA
(After Audit),
$131.1
Total
Licensing
EBITDA
$170.4
$0
Other, ($26.8)
($50)
ATTORNEY-CLIENT PRIVILEGED
Source: SEC filings and SPE CorpDev 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 $43.7MM 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 6
DRAFT
• Executive Summary
• Strategic Considerations
• Deal Structure
• Valuation
• Negotiating Strategy
ATTORNEY-CLIENT PRIVILEGED
page 7
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 3rd 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 8
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 3rd 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 9
DRAFT
• Executive Summary
• Strategic Considerations
• Deal Structure
• Valuation
• Negotiating Strategy
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
DISAcq.
Acq.Closing
ClosingMultiple
Multiple
DIS
(12/31/09)
(12/31/09)
$668
Acq.
Multiple
DISDIS
Acq.
BidBid
Multiple
(8/31/09)
(8/31/09)
$618
MVL
Pre-Acquisition
MVL
Pre-Acq.
Multiple
Multiple
(8/28/09)
(8/28/09)
$475
DCF incl Disney Uplift*
DCF incl Disney Uplift *
11.4x – 12.2x **
DCF excl Disney Uplift *
DCF excl Disney Uplift *
7.0x – 7.6x **
$505
$311
Disney Trading Multiple
Disney Multiple
(4/2/10)
LicensingCo.
andMultiple
CP-Toy
Comparable
(4/2/10)
Multiple
16.8x
$791
$733
$563
$541
$336
$374
$278
12.9x
18.1x
7.5x $330
10.1x
$443
SPE Merch Before Audit - $36.9
SPE Merch After Audit - $43.7
$200 $250 $300 $350 $400 $450 $500 $550 $600 $650 $700 $750 $800 $850
Source: SEC filings and SPE CorpDev 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

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

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: $250k / year
• Disney sells S-M merch in Disney parks & resorts: $186k / year
• Disney sells S-M merch in Disney stores: $160k / year
• Online sales: $153k / year
DCF Assumptions
Value
of Intangible SPE Control Rights

Assumes Disney pays a premium (10% of base revenue) to gain control of retail and Classic merch
blackout periods
DCFAssumptions
Assumptions
DCF




Disney WACC of 9.0%
Disney effective tax rate of 36.2%
Perpetuity growth rate ranges from 2.0% - 3.0%
Terminal year revenue = 5-year average of Spider-Man Film and Classic merch (FY16-FY20) plus
other increases
Source: SPE Consumer Products and SPE CorpDev estimates.
ATTORNEY-CLIENT PRIVILEGED
page 12
DRAFT
Proposed Value: Disney Uplift
Value Assuming Disney Takes Increased Control and Spider-Man Films Perform Well
($ in millions)
Intangibles
$600
$500
$30
$5
$400
$8
$30
$89
$32
$300
$505
$200
$311
$100
$0
S-M3 Film Int'l Comm.
Merch
Value
Int'l Boost
Open Food
Other
Categories Increases*
Open
Classic
Merch
Retail
Control
ATTORNEY-CLIENT
Source: SPE Consumer Products and SPE CorpDev estimates.
Note:
Value based on 2% perpetuity growth rate, 9% discount rate and Disney’s effective tax rate of 36.2%.
* Other increases include Disney selling S-M merch in Disney parks & resorts, in Disney stores, and online sales.
S-M3 Film
Merch Uplift
Value
PRIVILEGED
page 13
DRAFT
Proposed Value: Downside Scenario
Value Assume Disney Takes Increased Control but Spider-Man Films Perform Poorly
($ in millions)
$600
Intangibles
$500
$400
Revenues
decline 10%
$5
$8
$27
$27
$80
$300
$29
$455
$200
$280
$100
$0
S-M3 Film Int'l Comm.
Merch
Value
Int'l Boost
Open Food
Other
Categories Increases*
Open
Classic
Merch
Retail
Control
ATTORNEY-CLIENT
Source: SPE Consumer Products and SPE CorpDev 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.
S-M3 Film
Merch Uplift
Value
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 (20XX)
• 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
• Executive Summary
• 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
page 17
DRAFT
APPENDIX
CONFIDENTIAL
ATTORNEY-CLIENT PRIVILEGED
DRAFT
Disney’s acquisition valuation would require significant growth targets to meet
typical return expectations
Marvel Acquisition Valuations
$4,500
$4,153.0
$3,841.0
$4,000
Spider-Man EV ($M)
$3,500
$2,953.0
$3,000
$2,500
$2,000
Requires
7.2%
growth in
perpetuity
to achieve
15% IRR
$1,500
$1,000
Requires
9.5%
growth in
perpetuity
to achieve
15% IRR
Requires
9.0%
growth in
perpetuity
to achieve
15% IRR
$500
$0
Pre-Announcement (8/28/09)
EV/EBITDA
Multiple (1)
Source:
Note:
12.9x
At Announcement (8/31/09)
Closing (12/31/09)
16.8x
18.1x
SEC filings and SPE CorpDev analysis.
(1) All multiples calculated using a trailing 3-year average Marvel EBITDA of $229.3MM
ATTORNEY-CLIENT PRIVILEGED
page 19
DRAFT
Valuation of SPE Share of Merchandising Business
($ in millions except where otherwise indicated)
Pre-Announcement
8/28/09
12.9x multiple
At Announcement
8/31/09
16.8x multiple
Closing
12/31/09
18.1x multiple
$474.9
$618.2
$667.9
$562.8
$732.6
$791.5
SPE Share of Merch.
Business
Before Audit
SPE Share of Merch.
Business
After Audit
Source:
SEC filings and SPE CorpDev analysis.
ATTORNEY-CLIENT PRIVILEGED
page 20
DRAFT
Valuation of SPE Share of Merchandising Business (cont.)
($ in millions except where otherwise indicated)
Pre-Announcement
8/28/09
12.9x multiple
At Announcement
8/31/09
16.8x multiple
Closing
12/31/09
18.1x multiple
Before
Audit
After Audit
Before
Audit
After Audit
Before
Audit
After Audit
48.2%
57.2%
48.2%
57.2%
48.2%
57.2%
Enterprise Value
$2,953.0
$2,953.0
$3,844.1
$3,844.1
$4,153.0
$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
$791.5
Marvel's S-M Merch.
EBITDA as a % of Total
Marvel EBITDA
Sony’s Share of S-M
Merch. (25%)
Source:
SEC filings and SPE CorpDev analysis.
ATTORNEY-CLIENT PRIVILEGED
page 21
DRAFT
Valuation of SPE Share of Merchandising Business – Comparable Company
Analysis
Comparable Company Analysis
($ in millions, except per share values)
Trailing 3-Yr.
Selected
Avg.
Multiple
EV Range
SPE Merch. (Before Audit)
$36.9
7.5x
$278.1
SPE Merch. (After Audit)
$43.7
7.5x
$329.6
Current
Percentage of
MV of
Enterprise
Stock Price
52-Week High
Equity
Value
Company
EV / Revenue
LTM
EV / EBITDA
NFY
LTM
NFY
CONSUMER PRODUCTS - TOYS
Mattel Inc.
$22.61
96.3%
$8,254.5
$7,889.5
1.45x
1.35x
8.2x
7.5x
Hasbro Inc.
$38.36
96.9%
$5,741.1
$6,251.1
1.54x
1.53x
8.1x
8.1x
$6.53
91.5%
$418.3
$356.7
0.94x
0.79x
29.5x
10.5x
$13.29
81.7%
$370.8
$222.9
0.28x
0.33x
4.9x
2.8x
CKX Inc.
$5.95
72.2%
$553.9
$617.5
1.88x
0.15x
8.9x
0.8x
4 Kids Entertainment Inc.
$1.06
43.6%
$14.2
$0.3
0.01x
NA
NMF
NA
Mean
1.22x
0.83x
7.5x
5.9x
Median
1.45x
0.79x
8.2x
7.5x
Min
0.28x
0.15x
4.9x
0.8x
Max
1.88x
1.53x
8.9x
10.5x
LeapFrog Enterprises Inc.
JAKKS Pacific Inc.
LICENSING
Note: Market data as of April 2, 2010
=Excluded from range
Source:
SEC filings and Wall Street research.
ATTORNEY-CLIENT PRIVILEGED
page 22