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Spider-Man Merchandise Business Update April 2010

Spider-Man Merchandise Business Update April 2010. Key Questions and Working Hypotheses. Questions. Hypotheses. page 1. Disney has significant incentives to continue to support the Spider-Man merchandise business.

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Spider-Man Merchandise Business Update April 2010

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  1. CONFIDENTIAL Spider-Man Merchandise Business Update April 2010

  2. Key Questions and Working Hypotheses Questions Hypotheses page 1

  3. Disney has significant incentives to continue to support the Spider-Man merchandise business • With Marvel leading sales, Spider-Man has become an evergreen retail property, similar to Mickey Mouse • Spider-Man is a consistent Top 5 overall merchandise brand and Top 3 boys merchandise brand • Maintains relevancy and provides retail leverage for the entire portfolio • Spider-Man is critical to Disney’s boys strategy • Growth in boys demo is primary corporate objective for Disney CP • Library of boys properties was primary strategic rationale for Marvel acquisition • S-M is considered premier property in boys category • Disney needs to support the Spider-Man business to justify the Marvel acquisition price • Substantial piece of Marvel’s current business (62% of overall EBITDA, 69% of total licensing EBITDA) • Marvel acquisition premium suggests aggressive growth targets • Disney has the opportunity to extract substantial incremental value from the Spider-Man merchandise business through its CP engine, particularly in international regions • 52/48 domestic/international split vs. 40/60 for Disney CP • Eliminate 25% commissions through shift from international agents to Disney sales force page 2

  4. The Spider-Man merchandise business accounts for a majority of both Marvel’s licensing and overall profits 2007-09 MVL Avg. EBITDA (1,2) MVL 2007-09 Avg. Licensing EBITDA Mix $260.9 Film Production, $39.2 S-M Merch. & Film Participations Other Licensing Other Publishing, $23.2 Other Licensing, $62.9 S-M Film Participations, $8.0 S-M Publishing, $23.2 MVL 2007-09 Avg. Total EBITDA Mix (2) Total S-M, $162.3 Total S-M Licensing, $139.1 S-M - MVL Share of S-M Merch. EBITDA Post Audit, $131.1 Total S-M Business Other Other, ($26.8) Note: * S-M merchandise numbers based on SPE internal data. (1) MVL Total EBITDA defined as EBITDA less SPE’s share of film merchandise. MVL recognizes SPE share as minority interest, whereas other studios' shares of license royalty income is recorded within SG&A expense. (2) Assumes S-M publishing is 50% of Total Publishing or $23.2MM. page 3

  5. Disney is likely to drive upside in Spider-Man merchandise revenues Approximate Annual Revenue Forecast to SPE Assumptions Source: MPG and CorpDev analysis. page 4

  6. SPE Share of Spider-Man Merchandise Rights Valuation A deal at $300-$400 M is inline with what we would receive without a deal and avoids downside risk We need to determine whether a deal would include a premium ? +$34 +$102 -$32 Downside Base Case Disney Int’l and Retail Eliminate Int’l Commissions Premium Scenarios Upside Potential Source: SPCP and CorpDev analysis. Note: DCF based on perpetuity growth rate of 2.0%, discount rate of 9.0% 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. page 5

  7. Premium Included in Disney’s Acquisition of Marvel +8.1% +30% +31% Comparable Company Multiples* Marvel Pre-Deal Trading Multiple** Disney/MarvelBid Multiple** Disney/Marvel Acquisition Multiple** Superior growth prospects for all Marvel properties Disney control + synergies Disney stock price run-up Driver of Premium Source: SEC filings and CorpDev analysis. Note: * Multiples based off LTM EBITDA for entertainment, CP, licensing, and publishing comparables ** Multiples based off trailing 3-yr. avg. Marvel EBITDA ($273.1MM) less trailing 3-yr. avg. SPE share of film merchandise ($12.2MM) or $260.9MM page 6

  8. SPE may only be able to argue for a portion of the control premium Disney paid for Marvel page 7

  9. Disney is likely to insist on adjustments to SPE retail protections, which we would consider if they are exchanged for a premium and we are comfortable with the impact Negotiating Dynamics SPE Asks Potential Sources of Premium Off the Table • Payment for audit • Payment for value of growth drivers • International growth • Disney retail growth • Eliminate commissions • Premium • Sale of 100% of our S-M merchandise participation • Increase Marvel participation in retail promotion for Film merchandise • Ease Classic “black-out” window • Ease or lift certain food category constraints • Restrictions on ability for SPE to promote film (independent of merchandise at retail) • Increased SPE commitment to release new films (already committed to release to retain rights) • Increase Marvel participation in Spider-Man films page 8

  10. Easing the “Black-out” will not work for either party if the outcome is a significant reduction of Film merchandise at retail Easing the “Black-out” may be workable for both parties if Disney / Marvel is satisfied Provide administrative and financial benefit by allowing Classic characters to maintain shelf presence; (particularly helpful for small licensees that cannot afford cost of Film merchandise) Allow introduction of non-Film merchandise with new looks to further expand the franchise and seed product; increase continuity during non-Film years Allow Disney/Marvel to allow new Spider-Man merchandise types drag along on Film promotion SPE is protected A minimum percentage of retail presences that is dedicated to Film merchandise On a practical basis, SPE has made exceptions allowing Classic merchandise in the past and Disney/Marvel have strong incentives to satisfy retailer and customer demand for Film merchandise Potential Path Forward on the Classic Merchandise “Black-out” page 9

  11. Increasing Marvel’s role in retail promotion for Film merchandise will not work for either party if it divorces retail promotion from Film creative Increasing Marvel’s role may be workable for both parties if Disney / Marvel is satisfied Move Disney/Marvel to a leadership position in discussions with retailers about retail merchandise promotional campaigns and elements Allow Disney/Marvel to better coordinate discussions with retails about Spider-Man promotion and other character promotion SPE is protected Promotional elements relate specifically to Spider-Man films; no co-mingling of other characters and no co-mingling of Classic merchandise (effectively a creative “black-out) SPE retains control of creative direction (style guide) and creative execution SPE retains the right to be in the room for discussions with retailers Potential Path Forward on Promotion of Film Merchandise page 10

  12. Negotiating Milestones • Commence discussion late May • Agree on common base of financials in June • Trade on key terms (Jul, Aug, Sep) • Target completion prior to arbitration ruling (Sep/Oct+; may depend on whether Disney desires to complete in their fiscal year end) Source: SPE Legal. Note: (1) Disney’s fiscal year ended on October 3 in 2009, September 27 in 2008, and September 29 in 2007. page 11

  13. Initial Contact Interplay between Ike Perlmutter and Bob Iger Tone of Initial Conversation Driven by current animosity and implication that Marvel appears to want SPE out Start with the premise that we seek to better monetize for both Ongoing Negotiations Is Disney willing to pay a premium for our protections Ike will clearly be involved, need to monitor his motivations Personal desire to “fix” the last deal vs. opportunity to utilize “Disney’s money” to secure what he wants Should be less sensitive to price than when he was Marvel’s owner or than if he had an earn-out Disney corporate used as a counter-point for SPE Corporate Development to ensure “rational” negotiations What role does Andy Mooney play in negotiations Negotiating Considerations page 12

  14. Next Steps Preview findings with key constituents Determine in more detail if key controls can be modified rather than eliminated (with G. Leon and R. Toll) Refine approach to negotiating strategy (based on today’s discussion) Broader meeting on April 27, 2010 page 13

  15. APPENDIX A Summary of Marvel Deal CONFIDENTIAL page 14

  16. Disney / Marvel Deal Summary Transaction Analysis I. Perlmutter Considerations • Based on public filings, it appears that Perlmutter has an employment contract with an estimated $19.4MM cash severance paid on early termination (within 12 months following the closing date) • No reported earn-out structure from merger documents or news runs • At Disney, Perlmutter will be the most senior executive running the licensing and publishing businesses but not the film production business • Received approximately $1.6BN in stock and cash from the transaction Source: SEC filings and SPE CorpDev analysis. Note: (1) Adjusted EBITDA defined as Total EBITDA less SPE share of film merchandise page 15

  17. Disney / Marvel Deal Mechanics • Disney’s stock price rose between bid and close; thus the value delivered to Marvel shareholders rose as Disney’s stock price rose between bid and close Deal Mechanics Fixed Exchange Ratio & Ownership Split with No Cap Note: (1) Disney share price x exchange ratio (2) If the stock consideration falls below 40% of the total consideration, the following adjustment will be made: for each 0.0001 increase to the exchange ratio that is made, the amount of cash paid per share of Marvel common stock will be reduced by the product of 0.0001 multiplied by the average of $26.84 and the closing date price (3) Marvel shares outstanding x exchange ratio page 16

  18. APPENDIX B Additional Detail CONFIDENTIAL page 17

  19. Valuation of SPE Share of Merchandise Business: Comparable Company Analysis Comparable Company Analysis Source: SEC filings and Wall Street research. page 18

  20. Gain If Sold at New Values Partial Sale Full Sale Source: MPG. page 19

  21. General Assumptions 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 Spider-Man Merch Rights Valuation: Key Assumptions Revenue Projections including Disney Quantifiable Uplift General Assumptions • 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 • 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 DCF Assumptions • Disney WACC of 9.0% • Disney effective tax rate of 36.2% • Perpetuity growth rate ranges from 2.0% - 3.0% (implied exit multiple of 14.3x - 16.7x) • Terminal year revenue = 5-year average of Spider-Man Film and Classic merch (FY16-FY20) plus other increases Revenue Projections excluding Disney Quantifiable Uplift Source: SPE Consumer Products and SPE CorpDev estimates. page 20

  22. SPE Share of Worldwide Spider-Man Merchandise Revenue:Historical Performance (FY02-FY10) Source: SPCP, SPE Legal and SPE CorpDev analysis. Notes: 1. Marvel paid on Nov. to Nov. qtr. calendar schedule; these calendar pmts. were shifted back by 1-mo. to estimate qtr. allocations to the traditional and fiscal calendars. 2. Current audit includes multi-character advance claim of $27 M + other claims of $550 K from FY05-FY09. 3. FY09 spike is due to Marvel having received a large advance for its renewal of the Hasbro license. page 21

  23. SPE Share of Worldwide Spider-Man Merchandise Revenue:Projected Performance (FY11-FY20) Source: SPCP, SPE Legal and SPE CorpDev analysis. Notes: 1. Marvel paid on Nov. to Nov. qtr. calendar schedule; these calendar pmts. were shifted back by 1-mo. to estimate qtr. allocations to the traditional and fiscal calendars. 2. Current audit includes multi-character advance claim of $27 M + other claims of $550 K from FY05-FY09. 3. FY09 spike is due to Marvel having received a large advance for its renewal of the Hasbro license. page 22

  24. Valuation Expectations – Post-Audit Numbers 25%-30% However, SPE’s initial negotiating position will be for the 15.9x DIS/MVL multiple at close Note: * Trailing calendarized 3-yr avg. SPE share of merchandise revenues (post audit) = $43.7MM page 23

  25. Valuation Expectations – Pre-Audit Numbers 25%-30% However, SPE’s initial negotiating position will be for the 15.9x DIS/MVL multiple at close Note: * Trailing calendarized 3-yr avg. SPE share of merchandise revenues (pre-audit) = $36.9MM page 24

  26. Spider-Man 3 Lifetime Film Revenues by Category Source: SPCP and SPE CorpDev analysis. page 25

  27. Spider-Man 3 Lifetime Implied Classic Revenues by Category Source: SPCP and SPE CorpDev analysis. Note: Assumed Classic merch has similar dynamic to Film merch. page 26

  28. SPE Share of Worldwide Spider-Man Merchandise Revenue:Historical Performance (FY02-FY10) Indicates Release Year FCST HISTORICAL (Includes Estimated Audit Adjustments) 1 2 2 Average 3 $35.4 M $9.5 3 S-M 1 S-M 2 S-M 3 Source: SPCP, SPE Legal and SPE CorpDev analysis. Note: 1. Historical Classic merch represents what SPE believes SPE should have received per 2004 audit, which includes what Marvel paid + SPE asserted underpayments of $1.5 M in FY02, $5.1 M in FY03 and $8.6 M in FY04. FY05-FY06 figures include current claims from current audit totaling $27.1 M. 2. Film merch for S-M1 and 2 include toy biz merch. 3. FY02-FY10 avg excludes SPE claim for $9.5M in FY09 against advance Marvel received for Hasbro license renewal. page 27

  29. SPE Share of Worldwide Spider-Man Merchandise Revenue:Projected Performance (FY11-FY17) Indicates Release Year PROJECTED Average $40.9 M S-M 4 S-M 5 Source: SPCP, SPE Legal and SPE CorpDev analysis. Note: Film merch revenue represents figures net of int’l commissions/taxes/bank. page 28

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