22 November 2018

Strictly Private & Confidential

Group A11
Corporate Finance Valuation Project
Table of Contents

1. Company Overview

2. Strategic Assessment

3. Industry Overview

4. Financial Projections and DCF Valuation

5. Comparables Valuation

6. Final Recommendation
1. Company Overview
Disney, The Company Overview (founded 1923)

Disney Acquisitions
 Disney became aggressive in acquisitions when Bob Iger
became the CEO and took the direction of making becoming a
large integrated media conglomerate Integrated Media &
Entertainment California,
 23 key acquisitions done by Disney during 1993- current Conglomerate United States
 Latest pipeline acquisition is of 21st Century Fox worth $52.4bn

Company Strategy
Bob $59.4bn
 Focus on distribution of the world class content created by
Revenue,
media networks and studio entertainment through the
newly created Direct-to-Consumer and International
Iger, 7.2% YoY
business segment. CEO Growth
 Focus on efficiency through synergies – union of Disney’s
Parks & Resorts business segment with Consumer
Products.
P/E: 13.61
NI
Geographic Concentration
Market Margin:
Cap:
 US and Canada are the key markets with 74% revenue $166.4bn 21.2%
 Europe constitutes 12%

 Asia is about 11% and

 LaTam and other markets constitute 3%

1
Disney’s Business Segment

Media Parks, Experiences Studio Direct-to-

Networks & Consumer Entertainment Consumer &
(43% Rev) Products (15%) International
(33% + Rev)
2. Strategic Assessment
Strategic Assessment

STRENGTHS WEAKNESSES

Strong brand recognition Declining subscriber

Diversified products & services Hiccup in overseas business
Solid financial services Rising operating & capital costs

OPPORTUNITIES THREATS
Increase demand for online products Severe competition
New partnership Changes in regulation
Growth in emerging market Piracy issue
3. Industry Overview
Industry Analysis – Porter’s Five Forces
Entertainment industry is consolidating, highly competitive with more DTC product offerings

Supplier’s
Bargaining Power Buyer’s
Substitution Low
Moderate Bargaining Power
High

Threat of Competition
New Entrants High
Low
4. Financial Projections and
DCF Valuation
Financial Projections
Pro Form a P&L - Key Item s  Disney + Fox Assets + Hulu
($mm, Sep-YE) 2018A 2019E 2020E 2021E 2022E 2023E
Disney - Standalone 59,150 60,838 64,349 67,102 70,214 73,780
 Disney Standalone:
% Growth 2.9% 5.8% 4.3% 4.6% 5.1%
Fox Assets 15,143 15,121 15,943 17,272 17,473 17,569 - ~5% revenue CAGR mainly driven by
% Growth (0.1%) 5.4% 8.3% 1.2% 0.5% DTC Streaming business, expected to
Hulu 3,838 5,371 7,096 9,026 11,087 13,255 launch in 2019
% Growth 39.9% 32.1% 27.2% 22.8% 19.6% - EBITDA margin decreasing slightly due
Consolidated Revenue 78,131 81,330 87,388 93,400 98,774 104,604 to the increasing weight of the lower-
% Growth 4.1% 7.4% 6.9% 5.8% 5.9% margin DTC business

Disney - Standalone 17,562 17,550 17,901 18,598 19,398 19,839  Fox Assets:
% Margin 29.7% 28.8% 27.8% 27.7% 27.6% 26.9% - Revenue growth in 2020-2021 driven
Fox Assets 2,346 2,440 2,916 3,204 3,242 3,188 by over-the-top film TV / Film
% Margin 15.5% 16.1% 18.3% 18.6% 18.6% 18.1% distribution
Hulu (1,360) (1,546) (1,417) (1,071) (581) 11
% Margin (35.4%) (28.8%) (20.0%) (11.9%) (5.2%) 0.1% - Broadly flat EBITDA margin after 2020
Synergies 500 1,500 2,000 2,500 2,500 - Include eliminations of Disney/Fox/Hulu
EBITDA 18,548 18,944 20,900 22,731 24,559 25,538 intercompany revenues and margin
% Margin 23.7% 23.3% 23.9% 24.3% 24.9% 24.4% (~$2.5bn / year)
 Hulu: growth driven by increased scale,
profitable by 2023
 Synergies: cost savings of $2.5bn on
run-rate basis

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Disney: A Business Running at 2 Speeds
A 5-Year DCF Leads to Projecting ~$1bn Loss from DTC Streaming in Perpetuity…
Enterprise Value
Discounted Cash Flow ($bn) Discounted Terminal ($bn)
Value ($bn) 259.1
204.3

11.6 11.4
10.7 11.1
9.6

213.9 271.2

11.1 11.7 12.5 11.9

10.1
Disney ex DTC Streaming
(i.e. Disney + Fox)
~4% Revenue CAGR 19-23E (0.5) (0.5) (0.9) (0.5)
+$14bn Avg. Free Cash Flow
(0.6) (9.6) (12.1)
2019 2020 2021 2022 2023

Disney ex DTC Streaming DTC Streaming Disney Total

B …But DTC Streaming Will Be Profitable by 2026 and Is Actually Worth $30bn+ !
Enterprise Value ($bn)
• NPV of DTC Streaming
Assets Worth -$6.6 per
+31 302
Share with 5-Year DCF
271 vs. +$16.8 per Share
with 11-Year DCF

• $16.8 per share = 15%

upside
DTC Streaming Business
~100%+ Revenue CAGR 19-23E
-$1bn Avg. Free Cash Flow
Disney ex DTC Streaming DTC Streaming Disney Total
2
DCF Summary
DCF Valuation Pointing Upwards!

DCF  DCF based on Disney + Fox –

WACC 8.0% DTC Streaming Assets =
PGR 2.0%
Mid-year Convention (Y/N) Y $271bn EV
($mm, Sep-YE) 2019E 2020E 2021E 2022E 2023E TY
Free Cash Flow 10,445 12,510 14,223 16,306 16,832 18,080
+
% Growth -- 19.8% 13.7% 14.6% 3.2% 7.4%
Years to Discount 1 2 3 4 5 5
 NPV of Streaming Assets =
Mid-year Convention 0.5 1.5 2.5 3.5 4.5 4.5 $31bn
Discount Factor 96% 89% 83% 76% 71% 71%
Discounted Cash Flow s 10,051 11,149 11,739 12,463 11,914 =
Terminal Value 302,236
Implied Exit EV / EBITDA (x)
Discounted Terminal Value
11.6x
213,925
 $301bn EV / $138.34 per
share with 18% UPSIDE
Enterprise Value Equity Value
Discounted Cash Flow s 57,316 Bridge to Equity (PF 2019 YE) (49,253)
Terminal Value 302,236 - Net Financial Debt (32,018)
Discounted Terminal Value 213,925 + Associates & JV's 4,392
% Enterprise Value 79% - Minorities (19,213)
Disney ex DTC Enterprise Value 271,241 - Net Pension Liabilities (2,414)
NPV of DTC 30,639 Im plied Equity Value 252,627
Enterprise Value 301,880 Fully Diluted PF NOSH (m) 1,826
Implied EV / EBITDA 19E 15.9x Im plied Equity Value per Share 138.34
Prem ium / (Discount) to Spot Price 18% _________________________
Im plied Share Price Upside / (Dow nside) to Current Price
 WACC vs. PGR Sensitivity
PGR PGR
1.75% 2.00% 2.25% 1.75% 2.00% 2.25%
points to upside ranging from
7.75% $139.38 $145.60 $152.38 7.75% 19% 24% 30% 7% to 30%
WACC 8.00% $132.64 $138.34 $144.54 WACC 8.00% 13% 18% 23%
8.25% $125.64 $130.82 $136.43 8.25% 7% 12% 16%

2
5. Comparables Valuation
Overview of Comparable Companies

Equity Enterprise 2018

Company Business Description Value ($m) Value ($m) Sales ($m)
Multinational mass media and entertainment
Disney $176,884 $263,108 $59,434
conglomerate
Commercial broadcast television and radio
CBS 21,447 31,118 14,679
network
Discovery American mass media company 16,626 35,654 10,787
British media company and commercial television
ITV 7,612 9,053 4,169
network
American regional cable and satellite television
MSG Networks 1,933 2,861 697
network and radio service
Netflix International media-services provider 126,491 131,760 15,818
Vivendi French mass media conglomerate 30,173 31,041 15,576
21st Century Fox Multinational mass media corporation 89,565 103,510 30,400
UK telecommunications company that provides
Sky 38,098 46,684 17,864
television and broadband internet services
Lionsgate
American entertainment company 2,712 6,398 3,896
Entertainment
Trading Multiples Output

Company EV / EBITDA EV / EBIT P/E

Year 2019 2019 2019

Disney 13.9x 17.0x 17.8x

CBS 8.8x 9.5x 10.1x

Discovery 7.7x 11.2x 7.0x
ITV 8.9x 9.4x 10.0x
MSG Networks 8.6x 8.7x 10.0x
Netflix 45.1x 45.4x 60.6x
Vivendi 14.2x 17.1x 19.9x
21st Century Fox 13.9x 15.1x 23.9x
Sky 14.1x 21.9x 20.0x
Lionsgate Entertainment 9.8x 15.2x 8.0x
Average 14.6x 17.1x 18.9x
Median 9.8x 15.1x 10.1x
 Implied Valuation

$mm, Sep-YE)
($mm, Sep-YE) 2019E 2019E
2020E 2020E
($mm, Sep-YE)
($mm, Sep-YE) 2019E 2019
202
BITDAEBITDA 18,944 18,944
20,900 20,900
Net Income
Net Income 11,983 11,98
13,3
eers EV / EBITDA
Peers MultipleMultiple
EV / EBITDA 14.6x 14.6x
12.2x 12.2x
Peers PPeers
/ E Multiple
P / E Multiple 18.9x 18.9
16
nterprise Value Value
Enterprise 276,116276,116
255,349255,349
Equity Value
Equity Value 225,941225,94
217,7
ess: Debt
Less: Debt 78,818 78,818
78,818 78,818
Plus: Debt
Plus: Debt 78,818 78,81
78,8
lus: Cash
Plus:Balance
Cash Balance 46,800 46,800
46,800 46,800
Less: Cash
Less:Balance
Cash Balance 46,800 46,80
46,8
ess: Net Pension
Less: Liabilities
Net Pension 2,414 2,414
Liabilities 2,414 2,414
Plus: Net Pension
Plus: Liabilities
Net Pension 2,414 2,41
Liabilities 2,4
ess: Minority InterestsInterests 19,213 19,213
Less: Minority 19,213 19,213
Plus: Minority InterestsInterests 19,213 19,21
Plus: Minority 19,2
lus: Unconsolidated Assets Assets
Plus: Unconsolidated 4,392 4,392
4,392 4,392
Less: Unconsolidated Assets Assets
Less: Unconsolidated 4,392 4,39
4,3
quity Value
Equity Value 226,863226,863
206,096206,096
Enterprise Value Value
Enterprise 275,194275,19
266,9
ro-Forma EoP Shares
Pro-Forma (m)
EoP Shares 1,826 1,826
(m) 1,826 1,826
Pro-Forma EoP shares
Pro-Forma EoP shares 1,826 1,82 1,8
mpliedImplied
Share Price
Share($) Price ($) 124.23 124.23
112.86 112.86
ImpliedImplied
Share Price
Share($)Price ($) 123.73 123.7
119
Multiples Sensitivity Analysis

EV/EBITDA EV/EBIT P/E

Multiple Share Price ($) Multiple Share Price ($) Multiple Share Price ($)
-1.0x 13.6x 114.01 16.1x 109.86 17.9x 117.17
Average 14.6x 124.39 17.1x 118.36 18.9x 123.74
+1.0x 15.6x 134.76 18.1x 126.85 19.9x 130.30
6. Final Recommnedation
Valuation Summary
DCF-Based Recommendation: BUY – Target Price: $138.34 / 18% upside to current price

 All intrinsic and relative valuation

Im plied Im plied Avg.
methodologies point to Disney being
EV / EBITDA 2019E Upside / (Dow nside)
(Mid-point) vs. Current Price undervalued

 10% upside on average, with 14.5x

52-Week Low / High $97.68 $120.20 13.1x (7.0%) EV / EBITDA 2019E as average
multiple

 DCF as primary valuation

DCF - PGR $125.64 $152.38 16.0x 18.7% methodology – consistency between
PGR and Multiple methodologies

 Relative valuations generally lower

DCF - Multiple $123.00 $150.53 15.8x 16.8% due to effect of streaming business
projected to be loss-making in
perpetuity

EV / EBITDA 19E $113.86 $134.61 14.6x 6.1%  Recommendation BUY: Target

Price of $138.34, with 18% UPSIDE

EV / EBIT 19E $109.35 $126.33 14.0x 0.6%

P / E 19E $117.17 $130.29 14.5x 5.7%

Current Price

$70 $100 $130 $160 14.5x 10% Avg.

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Appendix
WACC Calculation
Bottom-up WACC = ~8.0%

Equity Risk Premium 6.0%

 Equity Risk Premium = 6.0%

Risk Free Rate 3.1%

 Risk-Free Rate = 3.1% - Yield
on 10Y UST

Market Cost of Equity

Equity  Unlevered Beta from Peers =
9.1%
/(D+E)= 0.9x
80%
Levered Beta Effect (@ 1.05x) 0.2%  E / ( D + E ) = 80%

 Disney’s Relevered Beta =

Disney Cost of Equity 9.3% 1.05x

Cost of Debt Pre Tax 3.5%

 Pre-Tax Cost of Debt: 3.5%
Debt
Tax Shield @ 20% /(D+E)=  Marginal Tax Rate: ~20%
(0.7%)
20%  D / ( D + E ) = 20%
Cost of Debt Post Tax 2.8%

WACC 8.0%