investment committee review: hbo latin america divestiture opportunity january 20, 2010

INVESTMENT COMMITTEE REVIEW:HBO Latin America Divestiture Opportunity

January 20, 2010

-- Confidential -- p. 2

Background

• In October, SPE provided the Investment Committee with a preliminary review of a potential sale of all or a portion of our 29.4% interest in HBO Latin America Group (LAG) to Time Warner Entertainment (TWE)

• The proposed transaction was the result of SPE revisiting its global channels portfolio with the goal of rebalancing the mix towards channels that are majority owned and operated

• As negotiations were preliminary at the time of our last review, SPE proposed the following next steps– Secure approval to delegate the decision for a potential transaction to the CFO, subject to certain conditions– Determine if regulatory reviews would be required– Finalize negotiations with TWE on key terms and present to the Investment Committee– Seek final approvals and close

• Delegation to the CFO was granted by the GEC on October 7, 2009, subject to two conditions– The transaction being made at a 100% valuation of not less than $680MM– Selling SPE’s entire stake or, if SPE decides to hold a 10% interest, retaining a board seat

• SPE has reached agreement with TWE on material terms and is now seeking approval for the proposed transaction

• Based on the proposed structure, SPE legal has determined that a non-suspensory competition filing is required in Brazil


Proposed Matters to be Deliberated for CFO Approval

• SPE is seeking approval to complete the sale of 21.2% of HBO LAG and certain voting rights to TWE and enter into a put agreement for the 8.2% of HBO LAG retained by SPE after this transaction

– SPE believes TWE’s desire to consolidate HBO LAG makes this the right time to monetize

– SPE distribution and content license relationships will continue to be protected contractually

– While SPE holds the 8.2% equity stake, it will retain a board seat to provide ongoing visibility into a key region

• Transaction effectively meets the conditions set forth under the delegation of approval to the CFO granted by the GEC

– Transaction will be made at a 100% valuation of $950MM, exceeding the $680MM valuation floor

– SPE will retain a board seat in conjunction with the 8.2% equity stake of HBO LAG being retained

• Pending approval by the CFO, the sale of 21.2% of HBO LAG is targeted to close by mid March

• Sale of certain SPE voting rights is expected to close after the competition filing in Brazil is approved, which is expected by early FYE 11


Background HBO LAG and Proposed Transaction

Background on HBO LAG

Background on Transaction / Rationale

• Programs, operates, and distributes HBO and Cinemax channels across Latin & South America

• Owned by TWE (58.8%), SPE (29.4%) and Ole Communications (11.8%)

• Has a significant operational and financial relationship with SPE– HBO LAG distributes and provides services for SPE channels in the region (SET / AXN / Animax)– SPE licenses $40-50MM of content annually to HBO LAG– SPE provides ad sales for HBO and Cinemax channels in Brazil

• TWE has been actively seeking opportunities to increase its ownership in HBO global channels with the goal of full consolidation

– Purchased SPE and Universal’s stake in HBO Asia in CY08– Acquired Disney’s 29.4% stake in HBO LAG in CY08– Signed definitive documents to acquire SPE’s and Disney’s share in HBO CE (expected to close Q4 FYE10)

• TWE’s strong desire to consolidate allows SPE to:– Immediately monetize a significant portion of our HBO LAG stake at an attractive valuation (above the

valuation range identified by our advisor)– Retain a stake for continued visibility into the region and an opportunity to benefit from any further

increases in valuation


Summary of Deal Structure and Material Terms

SPE Sells 21.2% Equity Interest

• TWE will acquire a 21.2% interest in HBO LAG from SPE for $201.4MM (100% valuation of $950MM)• SPE will retain 8.2% equity interest and board seat with minority protections• TWE will bear regulatory risk on the acquisition of the 21.2% equity interest• If TWE acquires Ole Communications’ equity stake in the next year at a 100% valuation greater than $950MM, SPE’s

sale price will be adjusted to reflect the higher valuation

SPE Receives a Put on its Remaining Equity Stake

• SPE will receive a put option on its remaining 8.2% equity stake• Put will be valued at $62.3MM (8.2% x $950MM - $15.6MM), escalating 5% per year for 5 years• After 5 years, put is valued at 6.6% of Fair Market Value (2)

• If SPE exercises the put, SPE’s distribution agreement will be extended 5 years from exercise of the put with a further 5 year extension at SPE’s option

(1) SPE to retain voting rights relating to distribution of its basic channels and other standard minority protections(2) 6.6% is equivalent to SPE’s 8.2% remaining equity interest less the 1.6% that was implicitly paid for SPE’s voting rights ($15.6MM / $950MM)

SPE Sells Certain Voting Rights

• TWE will commit to acquire certain voting rights (including hiring/firing CEO and budgetary approvals) for $15.6MM (1)

• Purchase of the voting rights will close once competition filing in Brazil is approved


• SPE expects to receive $201MM in proceeds in FYE 10

• SPE’s preliminary view is that an estimated gain of $172MM associated with the sale of the equity interest will be recognized in FYE 10

• FYE 10 gain will depend on final accounting treatment of the sale of SPE voting rights– A portion of the $172MM gain from the sale of the 21.2% equity interest could be deferred until TWE completes their

purchase of certain SPE voting rights, although SPE believes this is unlikely

• Proceeds will create a US book tax of approximately 40%, but based on forecasts there is no expected current US cash tax cost due to larger Sony US tax group losses, loss carryforwards, and tax credits

– The small portion of the gain attributable to the partial sale of a Venezuelan entity, HBO Ole Producciones, will be subject to a cash tax of 34%

($MM USD)Equity

InterestVotingRights

Put on Remaining Stake

SPE Equity Interest Sold 21.2% NA 8.2%

Proceeds from Sale (a) $201.4 $15.6 $62.3

Estimated Book Value of Amount Sold (b), (c) $29.8 $2.3 $9.2

Estimated Gain $171.6 $13.3 $53.1

(a) $62.3MM is the initial floor on the put; will increase 5% per year for 5 years regardless of any potential decline in FMV(b) Book value estimated as of 1/31/2010 ($36.3MM as of 12/31/09 plus $5MM from SPE's share of Net Income from Dec '09 and Jan '10 operations; excludes any potential Q4 CY09 dividend which has not yet been declared)(c) Final allocation of Book Value is being determined

Estimated Cash and Gain


• Currently, SPE recognizes 29.4% of HBO LAG’s Net Income as EBIT

• After the sale of the 21.2% stake, SPE would no longer recognize a portion of HBO LAG’s Net Income as EBIT; however, SPE’s share of dividends based on its retained 8.2% interest may be treated as income

• Estimates provided below are independent of gains to be recognized on sale of SPE’s 21.2% equity interest, voting rights, or put on remaining 8.2% equity stake

Ongoing EBIT Impact from Sale

($MM USD) FYE 09 (actual) FYE 10 (est.) FYE 11 (est.) FYE 12 (est.)

HBO Net Income - Mgmt Estimates (1) $51.9 $38.1 $54.2 $72.6

No SaleSPE Share of Net Income (29.4%) $17.7 $11.2 $15.9 $21.4

SPE One-Time Payment (2) $45.0 $0.0 $0.0 $0.0Total SPE Net Income $62.7 $11.2 $15.9 $21.4

If Sold

SPE Share of Net Income (3) $17.7 $10.2 $0.0 $0.0

SPE One-Time Payment (2) $45.0 $0.0 $0.0 $0.0Total SPE Net Income $62.7 $10.2 $0.0 $0.0

EBIT Variance (excluding gain from sale) $0.0 ($1.0) ($15.9) ($21.4)

(1) FYE 10-12 based Net Income of $50MM in CY10, $66MM in CY11, and $92MM in CY12 converted to SPE fiscal year basis(2) FYE 09 included $45MM one-time payment for SPE not exercising its right to buy-up as part of the TWE/Disney transaction(3) FYE 11-12 is before SPE share of dividends which may be accounted for as net income following the transaction


$950MM Transaction Value Exceeds Outside Advisor’s Valuation

Series1$500

$600

$700

$800

$900

$1,000

Equi

ty V

alue

($M

M)

MarketMultiples

Comparable Transactions

(controlling interest)

Comparable Transactions

(minority interest)

DiscountedCash Flow

$783

$615

$841

$683

$831

$693

$888

$699

• SPE engaged an outside advisor (Houlihan Lokey) to perform an independent valuation of HBO LAG as of October 31, 2009

• Houlihan Lokey estimated the 100% value on a non-marketable, minority interest basis to range from$615MM to $888MM (see below)

HBO LAG 100% Valuation (non-marketable minority interest) *

* Source: Houlihan Lokey, 2009

$950MM transaction value


Sale of Our Stake Will Provide an Attractive Return

Based on Sale of21.2% Stake and

Voting Rights($MM USD)

Acquisition of Equity by SPE ($45.0)(FYE95-FYE04)

SPE Share of Operational Funding ($17.6)(FYE95-FYE00)

Total Dividends Received by SPE $119.5 (a)

(FYE96-FYE10)

Proceeds from Disney Buy-In $37.1(FYE97-FYE00)

Proceeds from TWE/Disney Transaction $45.0 (b)

(FYE09)

SPE Sale of 21.2% Stake & Voting Rights to TWE $217.0(FYE10)

Net Cash to Date $356.0 (c)

IRR 27.4% (d)

Notes(a) Excludes potential Q4 CY09 dividend (not yet declared)(b) One-time proceeds for SPE not to exercise its right to buy-up as part of the Disney/TWE transaction(c) Excludes SPE content license fees received from HBO LAG to date(d) IRR increases to 28.5% assuming full sale of 29.4% interest at $950MM valuation


Potential Risks & Mitigations

Risks

Operational

• HBO distributes SPE channels in region

• HBO licenses $40-50MM of content from SPE annually

• SPE provides ad sales for HBO channels in Brazil

Approvals

• Overall deal requires TWE and Ole Communications approval

• Transaction requires non-suspensory competition filing in Brazil

Mitigations

• Following closing, SPE’s content license and distribution relationships with HBO LAG will be essentially the same

– Content license agreement extends through 3/2014, SPE has option to renew for 4 years through 3/2018

– Distribution agreement extends through 12/2014

– If put exercised, distribution agreement will be extended 5 years from put date with a further 5 year renewal at SPE’s option

• Ole Communications has an incentive to approve the transaction as it increases their leverage with TWE

• TWE to assume risk that competition approval is not granted


Timing & Next Steps

• Secure Sony and SPE approvals

• Secure Ole Communications and TWE approvals

• Sign definitive documents with TWE and close the sale of the 21.2% equity interest in FYE 10

• Complete sale of certain SPE voting rights, likely by early FYE 11

• SPE would return to the CFO for approval should it ultimately decide to exercise the put on its remaining 8.2% equity interest


Appendix


Historical Equity Build as of 12/31/2009

Notes (1) FYE97, FYE99, and FYE00 reflect proceeds from Disney buy-in; FYE09 is proceeds from one-time payment to SPE for not exercising its right to buy-up as part of TWE/Disney transaction

(2) Other values of $7.2MM (FYE97), $9.2MM (FYE99), and $9.5MM (FYE00) reflect gain on investment from Disney's buy-in; $5.3MM (FYE01), $5.4MM (FYE 03), and $1.3MM (FYE 04) represent payments made by SPE to buyout TVA's stake; $45MM (FYE09) represents gain from one-time payment to SPE for not exercising its right to buy-up as part of TWE/Disney transaction

(3) Does not include ~$5MM from SPE's share of Net Income from Dec '09 and Jan '10 operations that will be recognized in Jan '10 and Feb '10, respectively, or potential Q4 CY09 dividend that has yet to be declared

As of 12/31/2009(000s USD)

Initial Investment Cap Call

Disney

Transactions (1) Other (2) Equity Income Dividends Change

FYE'95 $33,000 $2,597 $0 $0 $2,600 $0 $38,197FYE'96 $0 $0 $0 $0 $6,143 ($4,183) $1,960FYE'97 $0 $9,229 ($12,117) $7,200 $8,300 ($7,501) $5,111FYE'98 $0 $2,507 $0 $0 $300 ($7,979) ($5,172)FYE'99 $0 $0 ($12,374) $9,174 $2,100 ($5,405) ($6,505)FYE'00 $0 $3,303 ($12,652) $9,462 $3,500 ($4,971) ($1,358)FYE'01 $0 $0 $0 $5,333 $6,600 ($3,087) $8,846FYE'02 $0 $0 $0 $0 $2,500 ($4,229) ($1,729)FYE'03 $0 $0 $0 $5,366 $5,800 ($11,483) ($317)FYE'04 $0 $0 $0 $1,341 $9,900 ($12,305) ($1,064)FYE'05 $0 $0 $0 $0 $3,000 ($4,934) ($1,934)FYE'06 $0 $0 $0 $0 $5,261 ($6,648) ($1,387)FYE'07 $0 $0 $0 $0 $9,975 ($8,560) $1,415FYE'08 $0 $0 $0 $0 $15,583 ($14,998) $585FYE'09 $0 $0 ($45,000) $45,000 $17,680 ($12,738) $4,942

FYE'10 (3) $0 $0 $0 $0 $5,210 ($10,465) ($5,255) $33,000 $17,636 ($82,143) $82,876 $104,452 ($119,486) $36,335


Detailed P&L

NOTE: Free cash flow based on net income plus depreciation

Actuals Re-Estimate 5-Year PlanValues in $MM USD 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Revenue $187.2 $222.9 $271.5 $323.9 $340.8 $365.6 $399.6 $434.2 $464.4 $496.1Y/Y Growth 19% 22% 19% 5% 7% 9% 9% 7% 7%

Operating Expenses:

Programming (81.2) (96.4) (109.3) (142.2) (150.7) (165.0) (175.1) (179.1) (191.3) (198.2) Cost of Licensing - - - (1.0) (2.5) (3.8) (3.8) (3.8) (3.8) (3.8) Sales (1.4) (1.6) (3.9) (4.1) (4.8) (9.0) (9.3) (5.8) (6.5) (7.5) Marketing (9.0) (12.3) (15.4) (16.8) (18.0) (20.0) (21.6) (23.2) (24.6) (25.9) Network Operation (11.5) (11.3) (10.8) (11.8) (11.5) (13.0) (13.0) (13.0) (11.0) (11.0) General & Administrative (7.5) (7.9) (9.1) (10.9) (10.3) (11.6) (12.3) (13.4) (14.5) (15.5) Bad Debt Expense 0.6 0.8 (0.1) (0.1) - - - - - - Staff Expenses (32.6) (36.5) (42.5) (50.0) (48.1) (49.7) (50.4) (51.7) (51.7) (51.7) VAT, Property, and other Taxes (1.9) (1.8) (2.7) (2.6) (2.2) (2.3) (2.4) (2.6) (2.7) (2.9) Leasing Expenses (0.6) (0.4) (0.3) (0.4) (0.3) (0.2) (0.1) - - -

Total Operating Expenses (145.1) (167.4) (194.1) (239.9) (248.4) (274.6) (288.0) (292.6) (306.1) (316.5)

EBITDA $42.1 $55.5 $77.4 $84.0 $92.4 $91.0 $111.6 $141.6 $158.3 $179.6% of Revenue 22% 25% 29% 26% 27% 25% 28% 33% 34% 36%

Depreciation (7.4) (6.4) (5.8) (6.2) (7.0) (9.3) (9.0) (9.1) (8.6) (7.1) EBIT $34.7 $49.1 $71.6 $77.8 $85.4 $81.7 $102.6 $132.5 $149.7 $172.5

Other (Income) Expenses 1.8 3.1 4.9 1.2 1.3 1.3 1.3 1.3 1.3 1.3

EBT 36.5 52.2 76.5 79.0 86.7 83.0 103.9 133.8 151.0 173.8

Codecine, W/H and Income (18.5) (25.0) (25.4) (34.8) (36.7) (32.6) (37.7) (41.5) (44.9) (48.3) Net Profit or (Loss) $18.0 $27.2 $51.1 $44.2 $50.0 $50.4 $66.2 $92.3 $106.1 $125.5

% of Revenue 10% 12% 19% 14% 15% 14% 17% 21% 23% 25%

Operating Cash Flow $57.0 $59.7 $75.2 $101.4 $114.7 $132.6


Details on Independent Valuation

HBO Latin AmericaDetailed Summary of Valuation Approaches

Market Multiple Discounted Cash Flow Approach Controlling Interest Transactions Minority Interest Transactions Approach

($MM in USD) Low High Low High Low High Low High

Enterprise Value Indication from Operations $665 $757 $925 $1,018 $740 $833 $947 $1,077

Add: Control Premium, "Full Control" 25.0% 166 189 NA NA NA NA NA NA

Add: Control Premium, "Partial Control" (1) 8.8% NA NA NA NA 65 73 NA NA

Add: Marketability Premium (2) 11.1% - 16.7% NA NA NA NA 134 101 NA NA

EV from Operations, on Controlling Marketable Interest Basis $831 $946 $925 $1,018 $939 $1,007 $947 $1,077

Add: Excess Cash (3) 20 20 20 20 20 20 20 20

Less: Total Debt as of 9/30/2009 0 0 0 0 0 0 0 0

Equity Value, on Controlling Marketable Interest Basis $851 $966 $945 $1,038 $959 $1,027 $967 $1,097

VALUATION OF SONY INTEREST

Equity Value, on Controlling Marketable Interest Basis $851 $966 $945 $1,038 $959 $1,027 $967 $1,097

Less: Discount for Lack of Control (4) 10% - 15% $128 $97 $142 $104 $144 $103 $145 $110

Marketable, Minority Equity Value $724 $870 $803 $934 $815 $924 $822 $987

Less: Discount for Lack of Marketability 10% - 15% 109 87 120 93 122 92 123 99

Non-Marketable, Minority Equity Value $615 $783 $683 $841 $693 $831 $699 $888

Concluded Non-Marketable Minority Equity Value (rounded) $615 $783 $683 $841 $693 $831 $699 $888

Footnotes:EV = Enterprise Value.(1) Assumes a Partial Control Premium of 16.25% was paid in the transactions (35% discount to the Full Control Premium of 25%). As such, a partial control premium of 8.75% (25%-16.25%) must be used to gross-up the indicated value to a full control basis. Selected 35% discount to Full Control Premium per 2009 Business Valuation Review, American Society of Appraisers. See Control Premium pages for more details.(2) Marketability Premium of 11.1% (high) to 16.7% (low) calculated as the inverse of the selected Discount for Lack of Marketability of 10% to 15% (Discount for Lack of Marketability = Marketability Premium/(1+ Marketability Premium). Marketability Premium has been applied to the sum of EV Indication from Operations and Control Premium. (3) Includes estimated excess cash after special dividend distributions, per Sony management. (4) Discount for lack of control and lack of marketability based on a range of 10% (high) to 15% (low).

Source: Houlihan Lokey

Comparable Transaction Approach


Balance Sheet as of 11/30/2009

ASSETS (000s USD)Current Assets

Cash $59.9Accounts Receivable $40.2Inventory $0.5

Total Current Assets $100.6

Non-Current AssetsProperty, Plant, & Equipment, Net $26.4Deferred Charge $15.9Investments in Related Companies $3.5

Total Non-Current Assets $45.8

Total Assets $146.4

LIABILITY & EQUITY (000s USD)Current Liabilities

Accounts Payable $3.1Accrued Expenses $21.4Taxes $2.4Programming $89.8Deferred Credit $2.1Current Portion of Long Term Lease Liability $1.7

Total Current Liabilities $120.5

Long Term LiabilitiesEquipment Lease $2.7Deferred Compensation Liability $3.5

Total Long Term Liabilities $6.3

Total Liabilities $126.8

EquityInvestment $51.5Cash Distribution ($392.7)Cumulative Profit / (Loss) $360.8Current Translation Adjustment ($0.1)

Total Equity $19.6

Total Liabilities & Equity $146.4

investment committee review: hbo latin america divestiture opportunity january 20, 2010

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