Canadian Movie Channels Investment Opportunity March 2012 MOVIES - PowerPoint PPT Presentation

Canadian Movie Channels Investment Opportunity March 2012 MOVIES

Executive Summary SPT Networks is acquiring a significant stake in two Canadian movie channels which will be rebranded Sony Movie Channel (SMC) and AXN Movies • Hollywood Suite (HS) operates 4 HD movie channels: Warner Films, MGM Channel, Hollywood Festival and Hollywood Storm • Founded in 2010, experienced management team lead by Jay Switzer, Jeff Sackman and David Kines • Fully operational with carriage on key operators including Bell and Telus • Channels sold as a standalone $5-$8 bundle to the consumer • SPT Networks will invest $6.1MM for a 46.7% voting interest in Hollywood Festival and Hollywood Storm, which will be rebranded as SMC and AXN Movies • Investment based on total enterprise value of $13.1MM • HS will provide a non-interest bearing loan of up to $3MM (50% of SPT Networks’ investment) to the two channels to fund working capital and marketing needs • 46.7% SPT Networks’ share is the maximum foreign ownership threshold under current Canadian Radio-television Telecommunications Commission (CRTC) regulations • Shared services agreement between HS and Newco – costs shared evenly across all four channels • SPT Networks believes there is an investment opportunity to capitalize on the significant forecasted growth in HD pay TV households in Canada • HD enabled households projected to grow from 5MM - 12 MM 2011-2015, reaching ~80% market penetration • Packaging SMC and AXN Movies with Warner and MGM creates a compelling HD content bundle at a value price to the consumer relative to premium and lower tier content packages currently in market • Projected investment NPV of $4.5MM and IRR of 18% • NPV of $7.4MM and IRR of 22% when including incremental license fees paid to SPT • Newco is forecasted to be EBIT positive in FY15 | 2 • Projected DWM less than $3MM; SPT Networks anticipates no additional capital requirements • FY13 cash impact of ($6.1MM) and EBIT impact of ($1.2MM) is contemplated in the Networks Group FY13 budget

Deal Structure • SPT Networks will make an equity investment in Newco, which will spin off Hollywood Festival and Hollywood Storm, and rebrand as Sony Movie Channel and AXN Movies • SPT Networks will invest $6.1 million for a 46.7% voting share in Newco, based on a total enterprise value of $13.1MM • HS will loan Newco a non-interest bearing loan of up to $3MM (50% of investment proceeds) to fund working capital and marketing • 46.7% SPT Networks’ share is the maximum foreign ownership threshold under current CRTC regulations; handshake agreement in place to buy-up to 50% ownership pending regulatory change NewCo • Shared services agreement between Newco and Hollywood Suite - total costs to be shared equally across all four channels MOVIES • Exit mechanism in place for SPT Networks to pull the channel trademarks based on any dilution below its 46.7% interest, should capital be required and SPT Networks elects not to fund • Mutual agreement over the first year’s business plan and budget (consultation rights on subsequent budgets); consultation rights on the hiring and firing of personnel with compensation deals exceeding $150k; standard minority protections in place in | 3 addition to the above rights

Canada Pay TV Overview HD Household Penetration MM High Pay TV Penetration 16 90% • Canada is one of the most highly penetrated 81% global pay TV markets with approx. 90% 80% 14 penetration; 2.6% annual growth in 2011 73% 70% 12 64% 60% Significant HD Growth 10 55% • 50% Impact of digital transition (currently ~80% 8 45% penetration) will drive significant HD adoption 40% 6 over the next 5 years, projected to grow from 30% 5MM to 12 MM HD HH 2011-2015 (HD 4 20% penetration forecasted to increase from 45%- 2 10% 80% 2011-2015) - 0% Strong Consumer Spend 2011 2012 2013 2014 2015 • Pay TV HH ARPU of approximately $56, HD HH Total TV HH % HD Penetration realizing growth of 6% Y/Y from 2006-2010 Source: Mgmt forecasts, Screen Digest Competitive Position vs. OTT • Relative to the U.S., Canadian operators offer cheaper base packages with more flexible add- programming options • Usage based broadband billing • Operators have strong interest in compelling programming offerings that will differentiate from emerging OTT services (Netflix) | 4

Market Opportunity Premium Services ($15 - $20 price to the consumer) • TMN: Premium series from HBO and Showtime, Pay 1 window movies from U.S. studios; popular series drive seasonal/short-term subscriptions (Approx. 1MM subs) • Super Channel: Offers direct to video movies and basic U.S. cable series less recognizable than TMN (Approx. 350k-450k subs) • High rates of monthly churn, high cost of sale, high cost of retention and marketing HOLLYWOOD SUITE ($5 - $8 price to the consumer) • Movies from trusted Hollywood studios with significant brand recognition to the consumer • No commercial interruptions, no editing or cutting of the film • 100% HD • Brings exceptional value to important, high spend HD customer • Subscriber can access content across all service; TV, On Demand, Online and via wireless Movies Plus ($6-$10 price to the consumer) • Constant commercial interruptions, limited HD offering • Services are not exclusively movie channels, offer series and reality television • Limited SVOD brand extensions • Repeats and cross-scheduling of titles across all | 5 channels

Key Operating Assumptions • SMC and AXN Movies to be distributed with Warner and MGM as a four channel bundle; $5 – $8 bundle price to the consumer, 50/50 rev share between the operator and HS; revenue to be Distribution shared evenly across all four HS channels • Carriage secured on Bell, Telus, Sasktel, MTS, and Eastlink; carriage on other BDUs, including majors Shaw and Rogers, projected within 18 months • No distribution revenue to date – free period on existing carriers ended February 2012 • Base case assumes 255k subscribers by year end FY13, growing to 850k in FY17 • Minimal sponsorship revenue only Ad Sales • Channels have right to carry ads at any time • Revenue to be shared evenly across all four HS channels • HS currently licenses 100 SPT titles to feature on SMC and AXN (20% of total Programmin programming) along with a mix of other 3rd party U.S. studio and native Canadian g content • As 3rd party licenses burn off, SPT Networks can ensure HS ramps up additional SPT content • Estimated $500k - $750k in incremental license fees paid to SPT per year in FY14 and beyond • Programming costs allocated to specific HS channels • Shared services agreement between HS and Newco – all non-programming • CRTC regulations mandate that 35% of content must be native Canadian programming costs to be allocated evenly across all four channels Operations in Y3 and beyond (Y1 - 15%, Y2 - 25%, Y3 -35%) • Lean operating team with 9 total headcount (16 including freelancers) • Provide $1MM - $1.5MM of annual marketing support for SMC/AXN Movies • Encompass handles network operations | 6