India Investment Opportunity
ETV Regional Channels
July 18, 2011
Privileged Attorney-Client Communication
Executive Summary – Deal Rationale

TV Networks are a key contributor to SPE’s overall profitability and
growth, driven in large part by the success of Indian Networks

SPE’s portfolio of Indian Networks primarily targets Hindi and English
speaking audiences in Northern India

Regional language channels in Southern India are forecast to have the
fastest growth in ad revenues

Expanding into regional language channels would:

−
Give SPE’s networks a national footprint and improve competitive positioning
−
Facilitate further growth in revenues
−
Enable the Sony brand to better connect with 40% of the Indian population
SPE has an opportunity to acquire a controlling stake in ETV, the second
largest group of regional channels in Southern India
2
Executive Summary – Deal and Approval Process

Reliance is willing to sell a controlling interest in ETV, at a $755MM enterprise value, which
SPE believes is an acceptable maximum transaction value but is further negotiating
− $755MM valuation is near the high-end of the third party valuation, including assumed synergies
to be achieved post-acquisition
− Assuming Reliance maintains a minority stake, they have requested an exit via an IPO or, failing
that, an uncapped put to SPE
− SPE will not accept a deal with an uncapped put
•
Deal structures currently under consideration include:
− Acquire 68% of ETV with Reliance retaining 32%
− Acquire of 62% or 68% of ETV with a private equity firm retaining 38% or 32%
− Acquire 100% of ETV with an installment payment plan that limits cash outlay in FYE12

SPE will seek the Board’s approval to acquire a stake in ETV with the following conditions:
− Controlling stake of 62% or more acquired
− Enterprise valuation not to exceed $755MM
− Exit mechanism for minority partners does not include an uncapped put
− FYE12 cash outlay for the acquisition does not exceed $515MM
3
Networks Importance to SPE Earnings and Growth
•
Diversifies revenue and profit base with higher growth and margins than content business lines
•
Provides steady cash flow from dual revenue streams of subscriber fees and advertising revenue
•
Delivered 10-year CAGR of 17% for revenue and 43% for EBIT, with current EBIT margins of 21%
•
Further exposes the Sony brand and builds long-term asset value
1,000
250
SPT Networks Revenue and EBIT growth 2002-2010
900
($MMs)
800
200
700
600
150
500
400
100
300
200
50
100
0
0
FYE02
FYE03
FYE04
FYE05
FYE06
Revenue
FYE07
FYE08
EBIT
FYE09
FYE10
FYE11
4
India’s Importance to Networks Earnings and Growth
•
•
MSM: has two of the top five Hindi GE channels, making MSM a compelling offering for advertisers,
and the two channels combined offer the same Gross Rating Points (GRPs) as the #1 channel
–
SET: MSM India’s flagship channel has doubled its ratings over the last 18 months; SET
fluctuates between being the #3 and #4 ranked general entertainment channel
–
SAB: #1 channel among the tier 2 general entertainment channels (overall #5 position) and has
taken over all of its competitors (Imagine TV, Star One, Sahara One)
–
SET MAX: Consistently ranked the #1 movie channel in India
–
PIX: Executing on a strategy to move from #3 to #2 by maximizing on a new output deal with SPT
Distribution: Bouquet makes MSM highly desirable to cable operators
MSM Financial Performance ($MM)
700
Revenue
EBIT
100
600
$621
$91
80
500
60
$65
400
200
40
$397
300
$360
20
$261
$16
0
100
($13)
0
-20
FYE09
FYE10
FYE11
FYE12 Bud
FYE09
FYE10
FYE11
FYE12 Bud
5
Growth in the Indian Market
•
Strong economic growth
–
India is expected to be among the top 3 economies in the world by 2050
–
As GDP grows, consumers are attaining higher levels of disposable income
–
India is the largest youth market in the world, comprised of approximately 340MM individuals under the age of 15
High growth potential for TV market
–
Media Industry grew at a 12% CAGR for the last five years
–
With an expected 10% revenue CAGR through 2015, Television is expected to be a primary driver of media growth
–
India represents the third largest television audience in the world
–
Today, of the 212MM households in India, 61% (130MM) are television households, leaving room for further penetration
Indian Media Revenues
Growth of Television Households
250
200 180
Millions
•
150`
185
190
102
109
112
2004
2005
2006
195
115
200
205
119
123
2008
2009
210
128
212
130
100
50
0
2007
Households
Source: PWC Report – Indian entertainment and media outlook 2010,
FICCI-KPMG India Entertainment and Media Report
2010
2011
TV Households
6
Indian Regional Language Channels Represent an Opportunity to
Drive Further Growth in SPE’s Indian Networks Business

High growth market: Highest forecast growth in ad revenues and combined viewership greater than
the Hindi market

Diversification: Expanding footprint into regional language channels taps into a growing local
advertising market that is different and more stable than the national market

Distribution: Strengthens MSM’s OneAlliance distribution bouquet by adding regional channels and
making it a compelling offering in all parts of the country

Efficiencies: Ad sales, distribution infrastructure, and management services to be provided by MSM

Sony brand exposure: Re-branding channels with the Sony name would allow Sony to better
connect with over 40% of the Indian population, many of whom are striving to own higher-end brands

Competitive positioning: SPE’s Indian Network holdings are at a competitive disadvantage without a
larger portfolio of regional channels
7
ETV Investment Opportunity
• SPE has an opportunity to acquire a
controlling stake in ETV, the second largest
group of regional channels in Southern India
MSM
SPE/ETV
ETV
• ETV has 6 general entertainment channels
which all rank in the top 3 in each of its
markets, including Telugu, the second largest
regional ad market
• All channels have successfully converted to
subscription channels and generate dual
revenue streams
8
ETV Financial Summary
FYE09
FYE10
FYE11
FYE12
Post-Acq(a)
FYE12
FYE13
FYE14
FYE15
FYE16
(Stub Peri od)
Ad Revenue
56.9
Growth
Subscription Revenue
18.8
Growth
Total Revenue
76.4
Growth
EBITDA
23.5
Growth
EBITDA Margin
Depreciation
Purchase Price Amortization
EBIT
EBIT Margin
61.3
66.5
79.7
7.7%
8.5%
19.8%
25.7
28.1
34.2
36.9%
9.3%
21.7%
87.2
94.9
114.2
14.1%
8.8%
20.3%
33.2
35.2
37.5
41.1%
5.9%
6.7%
30.8%
38.1%
37.1%
32.9%
2.7
1.8
1.6
33.2
14.3
47.6
15.6
99.3
120.1
140.2
161.3
24.6%
20.9%
16.8%
15.0%
40.1
45.4
49.8
54.7
17.2%
13.0%
9.8%
9.8%
139.7
165.7
190.3
216.3
22.3%
18.6%
14.8%
13.7%
53.8
71.2
85.5
101.7
43.4%
32.4%
20.1%
18.9%
32.9%
38.5%
43.0%
45.0%
47.0%
2.6
2.2
1.4
0.6
0.0
26.0
58.0
42.0
27.0
23.0
(b)
20.8
31.4
33.6
37.5
(12.9)
(6.4)
27.9
57.9
78.7
27.3%
36.0%
35.4%
32.9%
-27.2%
-4.6%
16.8%
30.4%
36.4%
(0.5)
34.3
42.6
50.9
63.5
Cash Flow
All figures for fiscal years ending March 31 st in Indian GAAP
(a)
Assumes December 1, 2011 close and excludes $5MM in estimated transaction costs
(b)
Fair value analysis in-progress. Purchase price amortization is estimated and may vary by >10%
9
Reliance Deal Structure
• Proposed acquisition of 68% of ETV’s general entertainment channels for
currently discussed price of $513MM, with Reliance retaining 32%
– Based on enterprise valuation of $755MM, or implied ~21x trailing EBITDA and ~20x estimated
forward EBITDA
– Exit mechanism for Reliance involves an IPO
o An IPO initiated by SPE after the 3rd anniversary of closing and concluded by the 5th anniversary of
closing
o Reliance has required that if an IPO does not close by end of year 5, Reliance can put its shares to SPE
at the higher of fair market value on exercise and the value based on today’s enterprise valuation
o Strike price is uncapped and could require potential $650MM-$700MM for Reliance’s remaining 32%,
bringing SPE’s total cash outlay for ETV to ~$1.2BN
o SPE will not pursue this deal unless the put can be eliminated or capped
– SPE to use good faith efforts to facilitate discussions for Reliance with other Sony companies
o Potential 4G partnership with Sony Electronics
o Potential relationship with MSM for Reliance’s sports businesses
10
Private Equity Deal Structure
• Proposed acquisition of 62% - 68% of ETV’s general entertainment channels for
currently discussed price of $468MM - $513MM, with PE firm retaining 38% - 32%
– Based on enterprise valuation of $755MM, or implied ~21x trailing EBITDA and ~20x estimated
forward EBITDA
– Private equity investors will be Blackstone, Providence Equity Partners, or both
– In addition to ETV investment, PE partner will also replace the current MSM India minority
shareholders
o Grandway/Atlas currently own 32.4% of MSM India and Capital International owns 5.6% of MSM India
– It is not certain if private equity investors would replace just Grandway/Atlas’s or the entire
minority stake
– Private equity investors would hold equal stakes in ETV and MSM India
– Exit mechanism for PE partner(s) involves an IPO
o An IPO of their stakes in both ETV and MSM India after the 5th anniversary
o Sony will have the option to purchase minority stake at IPO price
11
Potential Alternative ETV Deal Structures
• Other deal options are also being explored in order to further minimize FYE12
cash outlay or to purchase 100% of ETV
– SPE buys current MSM 38% - 32% minority shareholders with an installment plan and sells
to private equity firm who pays in full at close. Private equity firm also buys 38% of ETV.
o This reduces SPE’s FYE12 cash outflow and improves the deal IRR
– SPE buys current MSM 38% - 32% minority shareholders with an installment plan and sells
to private equity firm who pays in full at close. SPE buys 100% of ETV.
o This allows SPE to own all of ETV and not exceed $513MM of FYE12 cash outflow
– SPE buys 100% of ETV paying current owners under an installment plan
o This allows SPE to own all of ETV and not exceed $513MM of FYE12 cash outflow
12
Third Party Valuation
Note: Valuations Are Preliminary
• Deloitte Touche Tohmatsu (D&T) was engaged to value ETV
• MSM India will manage ETV, represent its advertising and distribution sales
– This creates embedded synergies in the forecast of ETV’s financial results
• As a result, D&T prepared three valuations:
– A fair market valuation which represents the value of ETV to a an average buyer
– An investment valuation which represents the value to a strategic buyer, specifically SPE, using the market
cost of debt
– An investment valuation which represents the value to a strategic buyer, specifically SPE, using Sony’s cost
of debt
Fair Market Value (excluding synergies, market cost of debt)
Method
Low
Mid
High
DCF - 13% WACC
471
507
548
Public Companies
439
488
537
Recent Transactions
593
659
717
Weighted Value
489
533
578
Investment Value (including synergies, market cost of debt)
Method
Low
Mid
High
DCF - 12% WACC
689
746
811
Public Companies
589
652
716
Recent Transactions
593
659
717
Investment Value (including synergies, Sony cost of debt)
Method
Low
Mid
High
DCF - 11% WACC
811
888
979
Public Companies
589
652
716
Recent Transactions
593
659
717
Weighted Value
Weighted Value
667
711
778
733
800
889
13
Financial Returns
Note: IRR’s are Preliminary
Structure
Enterprise
Value
SPE
Cash
Outflow
Reliance Partnership
$755MM
$513MM
12.8%
14.4%
Private Equity Partnership
$755MM
$468MM
12.8%
14.4%
IRR
Low
High
14
Goodwill and Intangible Assets
• Due to SPE purchasing a majority, controlling stake, ETV’s financial
statements will be consolidated by SPE
• Goodwill and intangibles are still being assessed, and are currently
estimated to be ~$700MM
• Intangible assets are estimated to be $280MM and will likely be 65%
amortized in the first 5 years
15
Next Steps
• Complete due diligence and fair value assessment of ETV assets and liabilities
• Complete partner negotiations
• Review with Group Executive Committee
• Review with Board of Directors
• Complete and execute long form agreements
• Obtain regulatory approval
• Close
16