Valuation of Intangible Assets

Transcription

1 Valuation of Intangible Assets within the PPA of Arrow Corporation for consolidation within Kinetic s Corporation Financial Statements Valuation Results Ileana Gavrilă

2 Contents A Executive Summary B Accounting and Valuation Pronouncements Considered C Cost of Capital D Valuation Results E Balance Sheet Restatement

3 Executive Summary

4 Executive Summary Valuation Results Objective => Identification, Recognition and Valuation of the main intangible assets that Kinetic Corporation should consolidate within its financial statements in the context of the purchase price allocation of Arrow TV All amounts are stated in Euro ths Current Identified Intangible Asset Number Remaining Useful Life (years) Fair Value 1 Order backlog Broadcasting licenses Contracts with CaTV providers 8 2,170 4 Contracts with affiliated TV stations Programme Library Accounting policy 2,598 6 Brand Indefinite 4,000 7 Workforce Indefinite 450 Arrow Company was acquired by Kinetic Corporation on 28 th February 2006 Kinetic Corporation acquired 100% of Arrow Corporation Deal Value Euro 12.8 million Page 4

5 Accounting and Valuation Pronouncements Considered

6 Accounting and Valuation Pronouncements Considered International Accounting Standards Board (IASB) IFRS 3 Business Combinations IAS 27 Consolidated and Separated Financial Statements IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IAS Framework for the Preparation and Presentation of Financial Statements Exposure Draft of Proposed Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IAS 19 Employee Benefits ; Exposure Draft of Proposed Amendments to IFRS 3 Business Combinations ; and Exposure Draft of Proposed Amendments to IAS 27 Consolidated and Separate Financial Statements. Financial Accounting Standards Board (FASB) SFAC 7, "Using Cash Flow Information and Present Value in Accounting Measurements"; and SFAS 157 Fair Value Measurements. American Institute of Chartered Public Accountants (AICPA) AICPA Practice Aid, "Assets Acquired in a Business Combination to Be Used in Research and Development Activities: A Focus on Software, Electronic Devices, and Pharmaceutical Industries" (AICPA s IPR&D Practice Aid); AICPA Exposure Draft, Proposed Statement on Standards for Valuation Services, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, 30 March International Valuation Standards Committee (IVSC) International Valuation Standards (IVS), 2005 Page 6

7 Cost of Capital

8 Cost of Capital Nominal Euro figures Calculation Euro Premium Asset Debt/Equity Target Equity EMRP Cost Tax Debt Cost Post-Tax Risk-Free for Beta Ratio Gearing Beta of Equity Shield Margin of Debt WACC Rate Country Risk (D/E) (D/D+E) (%) (%) (%) Media - TV 3.7% 0.88% % 23.3% % 10.9% 16% 1.3% 4.9% 9.5% Notes: 1. Long term nominal risk-free rate for the Euro, derived from the yield on a Euro denominated Germany Government bond maturing on 15/02/ Country Risk Premium for Romania derived from Fitch long term foreign currency ratings and bond spreads analysis. This assumes full country risk premium is applicable for each sector. 3. Asset beta selected as an average from the global comparators for each sector. 4. Debt/Equity ratio selected as the median of Debt/Equity ratios of the global comparators in each sector. 5. An equity premium for illiquidity reflects the premium investors are likely to require because of exit difficulties associated with private equity holdings. If the target company is publicly floated this figure will be 0%. The model currently assumes the figure is 0%. 6. Cost of Equity from International CAPM formula =[1+((1+Rf)*(1+CRP)-1)+(Equity Beta * EMRP)] * [(1+ LP)] For the provisional view we have allowed for tax relief on debt interest in the above calculations at marginal corporation tax rate in Romania of 16%. This calculation assumes full utilisation of the tax shield on debt. 8. WACC formula = [(Ke * (1-gearing)] + [Kd *gearing]. Source: Bloomberg data Asset WACC Business WACC 9.5% Intangible assets -Brand 11.0% - Terrestrial licenses 10.0% - Contracts with TV cable companies 10.5% - Contracts with affiliated TV stations 10.5% - Order backlog 6.5% - Movie library 8.0% Tangible assets -Cash 3.7% - Working capital 4.5% - Fixed assets 6.5% Page 8

9 Valuation Results

10 Valuation Results Order Backlog Assumptions Economic life - years 1.0 Cost of capital Order Backlog 6.5% Growth rate Profilo % Growth rate Profilo after % Corporate Tax Rate Romania 16.0% TAB step up factor Order Backlog Valuation Methodology MEEM Main Steps Considered: Sales for the remaining 10 months Budgeted EBITDA margin Deduct contributory asset charges Deduct taxes Discount after tax earnings Adjust to reflect TAB Derive Fair Value => Euro 190 ths 10 mths '000 EUR Advertising revenue 8,940 Out of it allocated Order backlog 6,966 Advertising revenue w/o order backlog 1,974 Advertising revenue attributable to Order Backlog 6,966 EBITDA Order Backlog 23% EBITDA 1,593 Charge on Brand name (Royalty Rate - % from sales) -2.5% Charge on Workforce (% from sales) -0.5% Charge on Film Library (% from sales) -16.8% Charge on Fixed Assets (% from sales) -0.2% Total charge (% from sales) -20.0% Total charge -1,396 EBT 197 EAT 166 Discount period in months 5 Discount Factors (Cost of Capital for Order Backlog 6.5% Present Value of Cash Flow Page 10

11 Valuation Results Broadcasting Licenses via Terrestrial Frequencies Assumptions Economic life - years 16.0 Cost of capital Terrestrial License 10.0% Growth rate Profilo % Growth rate Profilo after % Corporate Tax Rate Romania 16.0% TAB step up factor Terrestrial License Valuation Methodology MEEM Main Steps Considered: Allocate forecasted revenues based on viewer s split Business plan EBITDA margin Deduct contributory asset charges Deduct taxes Discount after tax earnings Adjust to reflect TAB Derive Fair Value => Euro 350 ths. Year Year Year Year Year Year Year Year Year YearResidual up to Year 10 mths _ 2020 '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR Advertising revenue 8,940 11,560 13,091 14,588 15,444 16,216 17,027 17,878 18,772 19,710 20,105 growth rate 14.84% 13.24% 11.43% 5.87% 5.00% 5.00% 5.00% 5.00% 5.00% 2.00% Out of it allocated Order backlog 6,966 Advertising revenue w/o order backlog 1,974 11,560 13,091 14,588 15,444 16,216 17,027 17,878 18,772 19,710 20,105 % of viewers Cable 83.1% 83.1% 83.1% 83.1% 83.1% 83.1% 83.1% 83.1% 83.1% 83.1% 83.1% % of viewers Terrestrial 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% % of viewers Affiliates 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% 8.6% Advertising revenue attributable Terrestrial Licenses ,087 1,211 1,282 1,346 1,413 1,484 1,558 1,636 1,669 EBITDA Margin Terrestrial 23% 25% 29% 31% 31% 32% 33% 34% 35% 35% 35% EBITDA Charge on Brand name (Royalty Rate - % from sales ) -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% Charge on Workforce (% from sales) -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% Charge on Film Library (% from sales) -17.0% -18.9% -19.2% -18.9% -19.0% -19.0% -19.0% -19.0% -19.0% -19.0% -18% Charge on Film Library Charge on Fixed Assets (% from sales) -7.2% -7.2% -7.2% -7.2% -7.2% -7.2% -7.2% -7.2% -7.2% -7.2% -7.2% Total charge (% from sales) -27.2% -29.1% -29.4% -29.1% -29.2% -29.2% -29.2% -29.2% -29.2% -29.2% -28.4% Total charge EBT EAT Discount period in months Discount Factors (Cost of Capital - Terrestrial Licens 10.0% Present Value of Cash Flow TAB Fair Valu 350 Page 11

12 Valuation Results Contracts with CaTV Providers Assumptions Economic life - years 8.0 Cost of capital CaTV contracts 10.5% Growth rate Profilo % Growth rate Profilo after % Corporate Tax Rate Romania 16.0% TAB step up factor CaTV contracts Valuation Methodology MEEM Main Steps Considered: Allocate forecasted revenues based on viewer s split Estimate a churn rate for CaTV ctr s Business plan EBITDA margin Deduct contributory asset charges Deduct taxes Discount after tax earnings Adjust to reflect TAB Derive Fair Value => Euro 2,170 ths. Year Year Year Year Year Year Year Year Year Year Residual up to Year 10 mths _ perpetuity '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR Advertising revenue 8,940 11,560 13,091 14,588 15,444 16,216 17,027 17,878 18,772 19,710 20,105 growth rate 14.84% 13.24% 11.43% 5.87% 5.00% 5.00% 5.00% 5.00% 5.00% 2.00% Out of it allocated Order backlog 6,966 Advertising revenue w/o order backlog 1,974 11,560 13,091 14,588 15,444 16,216 17,027 17,878 18,772 19,710 20,105 % of viewers Cable 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% % of viewers Terrestrial 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% % of viewers Affiliates 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% churn % - CaTV Contracts 0% 0% 10% 20% 30% 50% 50% 50% 50% 50% 50% Advertising revenue attributable CaTV contracts 1,641 9,610 9,794 8,731 6,470 3,397 1, EBITDA Margin CaTV contracts 23% 25% 29% 31% 31% 32% 33% 34% 35% 35% 35% EBITDA 378 2,402 2,840 2,707 2,006 1, Charge on Brand name (Royalty Rate - % from sales) -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% -2.5% Charge on Workforce (% from sales) -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% Charge on Film Library (% from sales) -17.0% -18.9% -19.2% -18.9% -19.0% -19.0% -19.0% -19.0% -19.0% -19.0% -18.2% Charge on Fixed Assets (% from sales) -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% Total charge (% from sales) -20.2% -22.1% -22.4% -22.1% -22.2% -22.2% -22.2% -22.2% -22.2% -22.2% -21.4% Total charge ,123-2,190-1,929-1, EBT EAT Discount period in months Discount Factors (Cost of Capital for CaTV contracts 10.5% Present Value of Cash Flow ,851 TAB Fair Value 2,170 Page 12

13 Valuation Results Contracts with Affiliated TV Stations Assumptions Economic life - years 16.0 Cost of capital Contracts with affiliates 10.5% Growth rate Profilo % Growth rate Profilo after 2.0% Corporate Tax Rate Romania 16.0% TAB step up factor Contracts with affiliates Valuation Methodology MEEM Main Steps Considered: Allocate forecasted revenues based on viewer s split Estimate a churn rate for CaTV ctr s Business plan EBITDA margin Deduct contributory asset charges Deduct taxes Discount after tax earnings Adjust to reflect TAB Derive Fair Value => Euro 700 ths. Year Year Year Year Year Year Year Year Year Year Residual up to Year 10 mths _ 2020 '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR Advertising revenue 8,940 11,560 13,091 14,588 15,444 16,216 17,027 17,878 18,772 19,710 20,105 growth rate 14.84% 13.24% 11.43% 5.87% 5.00% 5.00% 5.00% 5.00% 5.00% 2.00% Out of it allocated Order backlog 6,966 Advertising revenue w/o order backlog 1,974 11,560 13,091 14,588 15,444 16,216 17,027 17,878 18,772 19,710 20,105 % of viewers Cable 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% 83% % of viewers Terrestrial 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% 8% % of viewers Affiliates 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% churn % - Affiliates Contracts 0% 0% 0% 10% 0% 15% 15% 15% 0% 0% 0% Advertising revenue attributable to Contracts with affiliates ,122 1,125 1,191 1, EBITDA Margin Contracts with Affiliates 23% 25% 29% 31% 31% 32% 33% 34% 35% 35% 35% EBITDA Charge on Brand name (Royalty Rate - % from sales) -3% -3% -3% -3% -3% -3% -3% -3% -3% -3% -3% Charge on Workforce (% from sales) -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% -0.5% Charge on Film Library (% from sales) -17.0% -18.9% -19.2% -18.9% -19.0% -19.0% -19.0% -19.0% -19.0% -19.0% -18% Charge on Fixed Assets (% from sales) -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% Total charge (% from sales) -20.2% -22.1% -22.4% -22.1% -22.2% -22.2% -22.2% -22.2% -22.2% -22.2% -21.4% Total charge EBT EAT Discount period in months Discount Factors (Cost of Capital for Contracts with affiliat 10.5% Present Value of Cash Flow TAB Fair Value 700 Page 13

14 Valuation Results Programme Library Valuation Methodology Review of Book Value Depreciation For programmes with 2 runs: 60% first run, 40% second run For programmes with 3 runs: 55% first run, 35% second run, 10% third run Remaining Useful Life: according to Kinetic accounting policy Fair Value => Euro 2,598 ths. USD '000 EUR '000 GBV Amortization NBV GBV Amortization NBV Programmes not run yet 2,105-2,105 1,588-1,587 Programmes with two runs left Programmes with one run left 1,490 1, , Serials Programmes with no run left Total foreign production 5,259 1,890 3,369 3,967 1,426 2,540 Local production Total local production Total programme library 5,653 2,207 3,446 4,264 1,664 2,598 Page 14

15 Valuation Results Brand Assumptions Royalty Rate 2.5% Economic life - years indefinite Cost of capital Brand 11.0% Growth rate Profilo % Growth rate Profilo perpetuity 2.0% Corporate Tax Rate Romania 16.0% TAB step up factor Brand Valuation Methodology Relief from royalty Main Steps Considered: Forecast revenues based on the business plan Apply an estimated royalty rate to projected revenues Deduct taxes Discount after tax earnings Adjust to reflect TAB Derive Fair Value => Euro 4,000 ths. Valuation Brand Arrow TV Budget First stage growth Perpetuit y (February 28th 2003) XX+ '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR '000 EUR Sales 8,940 11,560 13,091 14,588 15,444 16,216 17,027 17,878 18,772 19,710 20,105 Growth % 13.2% 11.4% 5.9% 5.0% 5.0% 5.0% 5.0% 5.0% 2.0% Royalty Rate (before tax) 2.5% Earnings Brand (before tax) Corporate tax 16.0% Earnings Brand Prima (after tax) Year Discount Periods in Months Discount Factors 11.0% Present Value of Free Cash Flow ,771.4 Present Value of all Free Cash Flows 3,677 (Step-Up Factor Tax Amortisation Benefit) Tax Amortisation Benefit 323 Fair Value 4,000 Page 15

16 Valuation Results Workforce Valuation of Workforce at Feb. 28th, 2006 Category Number of Employees (1) Average monthly Salary per Employee Social, Health, Pension benefits Other Benefits Average monthly Compensati on per Employee Recruit. Cost Training Cost Cost of Start- Up-Period Total Avoided Cost # EUR % % EUR '000 EUR '000 EUR '000 EUR '000 EUR Management 10 2,000 58% 3, Staff - professionals 32 1,000 66% 1, Staff - support % # considered for valuation 287 Total Avoided Cost (EUR) 538 Total Corporate Taxes 16.0% -86 Fair Value of Workforce (EUR) 450 (1) after restructuring plan Category Months to full productivity Starting productivity Average efficiency during startup period Average inefficiency upon hire Start-up time (% of Year) Recruitment Cost / emply. Training Cost / emply. Management % 75.0% 25.0% 20.8% 4, Staff - professionals % 75.0% 25.0% 10.4% 2,400 1,000 Staff - support % 87.5% 12.5% 2.1% Average efficiency during start-up period is: Start-up time is: Cost of Start-up (100%+ Efficiency at Hire)/2 (1-Average Efficiency) * (# of Months in Training/12) Start-up time x total compensation Page 16

17 Balance Sheet Restatement

18 Balance Sheet Restatement Restated Balance Sheet as at 28th February 2006 Euro ths Book Value Adjustments Fair Value Goodwill 0 2,875 2,875 Order backlog Broadcasting licenses Contracts with CaTV providers 0 2,170 2,170 Contracts with affiliated TV stations Brand 0 4,000 4,000 Programme rights 2, ,598 Property, plant and equipment Other long term assets Total long term assets 2,766 10,285 13,051 Accounts receivable 1, ,623 Other current assets Cash and cash equivalents Total current assets 2, ,014 Accounts payable Other current payables Other short term liabilities Total current liabilities 1, ,367 Long-term debt Net assets 2,515 10,285 12,800 financed by Paid in capital 1, ,354 Net income Accumulated earnings -1, ,457 Goodwill 22% Deal Value Source: Arrow Trial Balance as at the Valuation Date and Appraisal Estimates Page 18

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