project neon materials for discussion pursuant to proposal january 31 st  2009
Table of Contents <ul><li>Industry backdrop </li></ul><ul><li>An overview  of the firms </li></ul><ul><li>Preliminary valu...
part 1  industry backdrop
Industry Timeline project neon
Consumer Home Entertainment Market project neon <ul><li>In 2008, Consumer spending on home entertainment decreased by 5.7%...
part 2  an overview of the firms
<ul><li>Americas largest online retailer </li></ul><ul><li>Founded in 1994 </li></ul><ul><li>Ticker: A**N </li></ul><ul><l...
<ul><li>Founded in 1997, it  is America’s largest provider of online movie rental services </li></ul><ul><li>Market Cap: $...
Industry trends project neon Neon  predicts conventional  DVD   rentals to peak in  2013 .  At that time   the number of p...
Direct Competitors  project neon NB the streaming market is estimated to be worth $1.5 billion
Industry trends (cont’d) project neon <ul><li>Major growth expected to come from online video via growth in content and de...
Neon partners project neon
Neon’s management team & board project neon Name Title Age Total cash comp at Neon Reed Hastings CEO and Chairman of the B...
Future developments project neon <ul><li>Neon forecasts that it will gain an additional 700,000 to 900,000 subscribers in ...
Industry trends (cont’d) project neon “ We named the company “ Neon ” not “DVDs by Mail” because we knew that eventually w...
part 3  preliminary valuation
Main assumptions project neon r f 2.30% r d 6.47% r m 7.00% β 1.07 g 4.00% D/V 3.26% E/V 96.74% CAPM 9.79% WACC 9.60%
Intrinsic value assumptions project neon *All as a percent of revenue, except for revenue growth Historical Assumptions* Y...
Intrinsic Value project neon DCF $350,225.40 Continuing Value $1,719,942.46 Total Value $2,070,167.87 Share Price $35.28
<ul><li>Despite a 5.7% decrease in home entertainment spending per US household in 2008, Netflix continues to show positiv...
Comparables project neon Company Revenue Market-Cap P/E EV/EBITDA Blockbuster $5.48 Billion $256.39 Million 4.16 3.781 1-8...
Multiples Valuation project neon Ratio Mean Median Netflix P/E $20.80 $18.16 $28.36 EV/EBITDA $22.79 $16.89 $41.03
part 4  synergy valuation
Synergies and Growth Opportunities <ul><li>Overseas growth </li></ul><ul><li>Content Offering & Negotiation power </li></u...
Synergy and Growth Assumptions project neon *Percentage of net sales Assumptions*  Year 2009 2010 2011 2012 2013 PV of Syn...
<ul><li>Fulfillment Expenses-  Currently 10% of Neon sales ($149 million) </li></ul><ul><li>International Growth-  46% of ...
Neon value with synergies project neon *Premium based on LP Consulting’s calculation of intrinsic share price  DCF $490,68...
Financing Considerations project neon <ul><li>Argon using Cash vs. debt vs. equity financing </li></ul><ul><ul><li>Abundan...
Recommendation project neon <ul><li>Move forward with the acquisition of Neon </li></ul><ul><li>Reasons </li></ul><ul><ul>...
questions ?
visual presentation by LP CONSULTING
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Fin 798 Project Neon Presentation Slideshare.Pptx

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This was a presentation that we did for our MBA program which set forth the evidence in favor of a merger of two companies.

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  • Fin 798 Project Neon Presentation Slideshare.Pptx

    1. 1. project neon materials for discussion pursuant to proposal january 31 st 2009
    2. 2. Table of Contents <ul><li>Industry backdrop </li></ul><ul><li>An overview of the firms </li></ul><ul><li>Preliminary valuation </li></ul><ul><li>Synergies </li></ul><ul><li>Next steps </li></ul>
    3. 3. part 1 industry backdrop
    4. 4. Industry Timeline project neon
    5. 5. Consumer Home Entertainment Market project neon <ul><li>In 2008, Consumer spending on home entertainment decreased by 5.7%. </li></ul><ul><li>Q4 spending alone dropped 15% from 2007 </li></ul><ul><li>Comcast reported that sales for its premium cable packages have dropped. </li></ul><ul><li>Blockbuster reported a drop in revenues and lost market share to rival Neon </li></ul><ul><li>However, 2008 was an optimistic year for some… </li></ul><ul><li>Neon and Argon continued to grow revenues and expand customer base </li></ul><ul><li>Revenues from Internet delivered video content doubled for movie studios </li></ul>
    6. 6. part 2 an overview of the firms
    7. 7. <ul><li>Americas largest online retailer </li></ul><ul><li>Founded in 1994 </li></ul><ul><li>Ticker: A**N </li></ul><ul><li>Market Cap: $21 Billion </li></ul><ul><li>P/E: 34.06 </li></ul><ul><li>2007 Revenue: $18.14 Billion </li></ul><ul><li>Cash Reserves: $2.32 B Sells anything from books to furniture </li></ul><ul><li>Has a large international footprint which extends to Asia and Europe </li></ul><ul><li>Powers and operates sites for other internet retailers including Target and Sears Canada </li></ul>Argon-Overview project neon
    8. 8. <ul><li>Founded in 1997, it is America’s largest provider of online movie rental services </li></ul><ul><li>Market Cap: $2.11 Billion </li></ul><ul><li>P/E Ratio: 30.02 </li></ul><ul><li>2008 Revenues: $1.36 Billion </li></ul><ul><li>Distributes more than 1.5 million DVD’s per day </li></ul><ul><li>Catalog of over 120,000 titles </li></ul><ul><li>Sophisticated proprietary software results in over half of subscribers giving 5-star rating to recommended movies </li></ul><ul><li>Partners with multiple electronics companies to stream content to their products </li></ul>Neon-Overview project neon
    9. 9. Industry trends project neon Neon predicts conventional DVD rentals to peak in 2013 . At that time the number of people watching online video content will have grown to 941 million globally.
    10. 10. Direct Competitors project neon NB the streaming market is estimated to be worth $1.5 billion
    11. 11. Industry trends (cont’d) project neon <ul><li>Major growth expected to come from online video via growth in content and devices. </li></ul><ul><li>Partnerships are becoming the standard for the digital delivery market </li></ul><ul><li>Estimates project that the online subscription market will expand to over 20 million customers in the next four to six years </li></ul><ul><li>Worldwide online video revenue is expected to reach $70 billion by 2012 </li></ul><ul><li>By 2012, 39% of adults in the US are expected to have purchased or rented online video, 90% of US households will have access to broadband and 94% of those individuals will be watching video online. </li></ul>
    12. 12. Neon partners project neon
    13. 13. Neon’s management team & board project neon Name Title Age Total cash comp at Neon Reed Hastings CEO and Chairman of the Board 47 $850,270 USD W Barry McCarthy Jr CFO 54 $706,764 USD Leslie J Kilgore Other Executive Officer 42 $706,930 USD Ted Sarandos Other Executive Officer and DVP 43 $823,430 USD Neil Hunt Other Executive Director 46 $677,020 USD Patty McCord Other Executive Officer 54 Unavailable Name Title Age Affiliation Gregory S Stanger Director 43 Venture Partner at Technology Crossover Ventures Jay C. Hoag Director 49 General Partner at Technology Crossover Ventures Charles H. Giancarlo Director 50 Managing Director at Silver Lake Timothy M. Haley Director 53 Founder and Managing Director at Redpoint Ventures A. George Battle Director 64 Former Chairman & CEO of Ask.com Richard N. Barton Director 40 CEO & Chairman of Zillow Inc.
    14. 14. Future developments project neon <ul><li>Neon forecasts that it will gain an additional 700,000 to 900,000 subscribers in Q1 2009 </li></ul><ul><li>Neon continues to reduce the cost of acquiring new subscribers </li></ul><ul><li>Continues to seek partners to deliver Video On Demand </li></ul><ul><li>Plans to spend more money with movie studios and license as much content as possible </li></ul><ul><li>Eventually sees the majority of revenue coming from online content </li></ul>
    15. 15. Industry trends (cont’d) project neon “ We named the company “ Neon ” not “DVDs by Mail” because we knew that eventually we would deliver movies directly over the Internet. DVDs will be around a long time, but we're building for the day when they're not .” Neon CEO
    16. 16. part 3 preliminary valuation
    17. 17. Main assumptions project neon r f 2.30% r d 6.47% r m 7.00% β 1.07 g 4.00% D/V 3.26% E/V 96.74% CAPM 9.79% WACC 9.60%
    18. 18. Intrinsic value assumptions project neon *All as a percent of revenue, except for revenue growth Historical Assumptions* Year 2007 2008 2009 2010 2011 2012 2013 Rev Growth 20% 13% 12.00% 11.00% 11.00% 10.00% 10.00% Margin 34% 33% 34.00% 34.00% 34.00% 34.00% 34.00% Total Operating Expense 27% 27% 26.00% 26.00% 25.00% 25.00% 25.00% Other Income & Expense 1.68% 1.68% 1.50% 1.50% 1.50% 1.50% 1.50% Taxes 40% 40% 40.00% 40.00% 40.00% 40.00% 40.00%
    19. 19. Intrinsic Value project neon DCF $350,225.40 Continuing Value $1,719,942.46 Total Value $2,070,167.87 Share Price $35.28
    20. 20. <ul><li>Despite a 5.7% decrease in home entertainment spending per US household in 2008, Netflix continues to show positive trends </li></ul>Neon’s Resiliency project neon
    21. 21. Comparables project neon Company Revenue Market-Cap P/E EV/EBITDA Blockbuster $5.48 Billion $256.39 Million 4.16 3.781 1-800-FlOWERS $931.61 Million $192.52 Million 6.89 6.362 Comcast $33.51 Billion $44.15 Billion 14.88 5.956 DIRECTV $19.26 Billion $23.38 Billion 12.83 5.488 Argon $18.14 Billion $21.4 Billion 34.72 18.592 Mean $15.46 Billion $17.88 Billion 14.70 8.035 Median $18.14 Billion $21.4 Billion 12.83 5.956 Neon $1.31 Billion $2.16 Billion 20.04 14.464
    22. 22. Multiples Valuation project neon Ratio Mean Median Netflix P/E $20.80 $18.16 $28.36 EV/EBITDA $22.79 $16.89 $41.03
    23. 23. part 4 synergy valuation
    24. 24. Synergies and Growth Opportunities <ul><li>Overseas growth </li></ul><ul><li>Content Offering & Negotiation power </li></ul><ul><li>Cross Promotion capabilities </li></ul><ul><li>Possible increase in DVD salvage value </li></ul><ul><li>Consolidation of existing distribution centers </li></ul><ul><li>Online movie viewing </li></ul>project neon
    25. 25. Synergy and Growth Assumptions project neon *Percentage of net sales Assumptions* Year 2009 2010 2011 2012 2013 PV of Synergies (thousands) Fulfillment Synergies 1.75% 1.75% 1.75% 1.75% 1.75% $124,486 Growth Synergies -0.50% 0.00% 1.00% 2.00% 3.50% $86,486 Marketing Synergies 0.25% 0.25% 0.25% 0.25% 0.25% $17,784 Technology Synergies 1.00% 1.00% 1.00% 1.00% 1.00% $71,135
    26. 26. <ul><li>Fulfillment Expenses- Currently 10% of Neon sales ($149 million) </li></ul><ul><li>International Growth- 46% of Argon revenue came from abroad ($8.9 billion) </li></ul><ul><li>Marketing Synergies- 15% of Neon sales is spent on Marketing (about $200 million) </li></ul><ul><li>Technology Synergies- 6.5% of Neon sales (about $90 million) </li></ul>Synergy justifications project neon
    27. 27. Neon value with synergies project neon *Premium based on LP Consulting’s calculation of intrinsic share price DCF $490,680.52 Continuing Value $2,641,474.81 Total Value $3,227,009.17 Share Price $55.00 Premium*: 55.88% Actual Share Price $36.14 Premium on Actual 52.19%
    28. 28. Financing Considerations project neon <ul><li>Argon using Cash vs. debt vs. equity financing </li></ul><ul><ul><li>Abundant cash level, $2.32 Billion </li></ul></ul><ul><ul><li>Low debt level </li></ul></ul><ul><ul><li>$45.18/share @25% premium </li></ul></ul><ul><li>Argon should use a 15/85 combination of cash and debt </li></ul><ul><ul><li>Avoid using all-cash, considering economic conditions </li></ul></ul><ul><ul><li>Debt rating upgrade will lower cost of borrowing </li></ul></ul><ul><ul><li>Netflix has a low debt level as well </li></ul></ul>
    29. 29. Recommendation project neon <ul><li>Move forward with the acquisition of Neon </li></ul><ul><li>Reasons </li></ul><ul><ul><li>Argon’s distribution network </li></ul></ul><ul><ul><li>The Netflix brand and customer base </li></ul></ul><ul><ul><li>Amazon’s technology capabilities </li></ul></ul><ul><ul><li>Ability to use size and resources to your advantage </li></ul></ul><ul><ul><li>Cross-promotional abilities </li></ul></ul>
    30. 30. questions ?
    31. 31. visual presentation by LP CONSULTING

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