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CCL M&A Exercise | Slide Templates

CCL M&A Exercise | Slide Templates.

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CCL M&A Exercise | Slide Templates

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  1. CCL M&A Exercise | Slide Templates Note: The following slides provide examples of discussions topics and slide templates (based on Electronic Arts and Take Two merger) which may be adapted for the CCL M&A screening exercise. Please note these slides are slightly more content-heavy since used as background-briefing rather than boardroom presentation.

  2. Transaction Rationale (Template) Acquirer Rationale (Electronic Arts) Target / Seller Rationale (Take-Two) Acquisition of Take-Two ($2.4bn EV) by Electronic Arts ($13.1bn EV) Base Case: 25% Premium | 50/50 Cash / Shares | 2018 Accretion of 3.7% Post-Synergies EBITDA Multiples: Electronic Arts (13.1x) and Take-Two (12.3x pre-premium / 15.4x post-premium)

  3. While EA has overcome recent challenges and had a notably successful FY 2014, EA could unlock further potential with the addition of TTWO’s AAA title franchises, strong gamer following and international market share EA Strategic Objectives (Template) Strengthen Core Console Segment through TTWO High Valuation & Market Leadership in Video Games (Console) Low Profits & Strong Competition Poor AAA Titles & Low Customer Satisfaction M&A Strategy into Mobile & Online Cost Control & Strong Financial Performance High Share Price & Valuation Multiple 2008: Financial crisis resulted in poor performance for global publishers 2014: Good performance in traditional core franchises with FIFA 14 and Battlefield 2012-2013: EA voted as worst company by consumers for poor product releases and excessive charges for add-on content Titles: TTWOwould provide EA with most successful open world role play franchise GTA and other valuable franchises Growth: TTWO is a growth company and GTA franchise has untapped potential which would match EA's stock profile Market Share: Combined with TTWO, EA would reclaim its #1 position in console segment and overall games market Asia: EA could take advantage of TTWO’s relationships in Asia to expand outside of core North American market Accretion: 2018 accretion of 3.7% to 13.2% possible based on synergies from shared processes Acquisition of TTWO 2009-2011: Acquisitions of PopCap Games and Playfish allowed EA to increase revenue mix to 45% digital 2012: Star Wars: The Old Republic failed to be the game-changer EA hoped for despite the estimated $500m budget 2014: Cost reductions and shift to digital delivery led to EBITDA margin +42% YoY in 2014

  4. Valuation Analysis (Template) Following lumpy cashflows and modest share price recovery after the financial crisis, EA and TTWO are now trading at 5-year highs but would benefit from strategic and operational synergies to support their valuations EA & TTWO Stock Price Performance • EA & TTWO Operating Performance Acquirer Valuation (Electronic Arts) Target Valuation (Take-Two) • Proven, high-quality franchises provide visibility and fanbase • GTA Online with ongoing micro-transactions as near-term driver • Expansion initiatives into vast and still untapped Asian market • Major reliance on GTA with long-dated release cycles • Lacks consistent positive cashflowsdespite strong franchises • Minimal exposure to growing mobile, social and casual gaming • Improved margins from shift to digital revenue mix and fewer titles • High industry growth in mobile, social and casual gaming • Continued cost-cutting initiatives, which have proven successful • Inconsistent success of AAA titles and customer satisfaction • Competition from consolidated competitors with stronger titles • EA’s market leadership primarily in console games segment • Acquisition of TTWO: Maintaininghigh multiple of 13.1x (EV/EBITDA 2015E) relies on achieving an ambitious forecast and strong growth in AAA franchises which could be augmented by TTWO • Acquisition by EA: Currentmultiple looks rich at 12.3x (EV/EBITDA 2015E) on back of GTA V release in 2014 but integration with EA could enhance risk pooling, cost savings and ongoing digital revenues

  5. EA could derive near-term cost synergies from shared overhead costs and potential revenue synergies from integrating TTWO’s content into its mobile platform Synergies Forecast (Template) • Limitations Revenue Synergy Drivers Cost Synergy Drivers • TTWO Margin: TTWO EBITDA % has lagged EA by 15% in FY13 and 5% in FY14 (GTA) • TTWO Marketing and G&A: Shared overhead • TTWO Cost of Revenues: TTWO can deliver more content via EA digital platform to avoid manufacturing costs and third-party fees • Combined AAA Focus: Focus on fewer but only AAA titles to boost profitability • TTWO Culture: Head-count and budget reductions phased in to retain positive culture • TTWO Quality: Core of TTWO success and fan loyalty based on consistent high quality, costly and non-rushed game development • Manufacturing: Third-party contracts limit savings to some improved bargaining power • Marketing: Franchise-specific campaigns limit savings to certain overhead functions • EA New Digital Segments: TTWO could benefit from EA platforms such as free-to-play downloads / mobile / social / casual • EA Monetization: TTWO could adopt EA model with shorter game development cycles and expanded ongoing revenue models • TTWO Asia Focus: EA could benefit from TTWO’s focus and strategic distribution partnerships in Asia • SYNERGY FORECAST ASSUMPTIONS • Revenue and margin improvements are expressed as % of TTWO revenues • Forecast shows full potential optimistic case that could be reasonably estimated • Revenue (2%, modest) • Cost of Revenues (1%, modest) • Marketing and Sales (2%, moderate) • General & Administrative (5%, large) • Significant discount applied to base case to get to reasonably expected outcome • Marketing and Sales (1%, modest) • General & Administrative (3%, moderate) • Reflects 2-year ramp up for all synergiesexcept 3-year ramp up for Cost of Revenues

  6. Base Transaction Parameters (Template) • EA could use 50% shares and 50% cash/debt to fund the $3.5bn acquisition of TTWO (net of cash held by target) which would result in moderate accretion of 3.7% by 2018 assuming a partial synergies base case forecast • Note: Current share prices as of 09 January 2015.

  7. Buy-in from TTWO shareholders and TTWO private equity management vehicle ZelnickMedia as well as establishing a strong synergy forecast to satisfy valuation concerns of EA shareholders will be instrumental Implementation Strategies (Template) Tactical Approach and Considerations • Alternative Advice to EA: Targets in growing mobile and social gaming segment are available at 7-8x EV/EBITDA and smaller sizes

  8. Take-Two Management Structure (Template) Private equity firm ZelnickMedia controls TTWO through active roles in management and the board ZelnickMedia Owns 2.1% of stock and equivalent of ~1% stock in vesting RSUs Take-Two Interactive • Management Services • Management Fee $3 million • Maximum annual bonus of $4.8 million Ownership & Compensation Key Events ZelnickMedia History • Founded in 2001 by Strauss Zelnick alongside Ben Feder, with Karl Slatoff joining shortly after as Vice President • Acts as an unconventional private equity firm focused on active investment within the media and communications industry • Zelnick opposed EA in 2008 and received $50m golden parachute provisions in the event of a takeover • Management agreement with ZelnickMedia is in place until March 13, 2019 • ZelnickMediaholds 2.1% of TTWO’s common stock • ZelnickMedia also has ~1% RSUs which will vest through 2015 including some that will vest contingent on TTWO performing in the top quartile of the NASDAQ • March 2007: ZelnickMedia stages a takeover of TTWO alongside the major shareholders (Oppenheimer [25%], D.E. Shaw [9%], SAC Capital [8%], and Tudor Funds [5%]. TTWO Share price $20.27 at the time • April 2007: TTWO replaces five of the seven board members, electing Strauss Zelnick as new Chairman • January 2011: Ben Feder steps down from CEO position replaced by Strauss Zelnick • May 2011: TTWO extends management service agreement with until May 2015

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