EXHIBIT (C)(2)
Project Hollywood
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Presentation to the Board of Directors
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December, 1999
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Table of Contents
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Section 1 Transaction Overview
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Section 2 Industry Overview
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Section 3 Company Overview
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Section 4 Public Market Performance
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Section 5 Preliminary Valuation Overview
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Tab A Summary
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Tab B Comparable Company Trading Analysis
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Tab C Precedent Transaction Analysis
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Tab D Discounted Cash Flow Analysis
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Tab E Leverage Buyout Analysis
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Appendix A Comparable Companies
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Appendix B Precedent Transactions
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Appendix C Weighted Average Cost of Capital
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Appendix D Draft Fairness Opinion Letter
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Section 1
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Transaction Overview
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Transaction Overview
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Summary of Key Terms
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Transaction: Acquisition of VDI MultiMedia by Xxxx Capital
Consideration: $15.00/share in cash (82% premium to
unaffected)/(1)/
Management and possibly unaffiliated shareholder up
to 10-12% to rollover for recap purposes
Equity Value: $145.6MM
Aggregate Value: $174.9MM
Structure: Proxy merger; recap accounting expected (not a
condition)
Purchase Price Multiples: 1999E P/E 19.0x
2000E P/E 14.9x
AV/LTM EBITDA 9.8x
Financing: Senior Secured Term Loan (CSFB) $65MM
Senior Secured Revolving Facility (CSFB) $17.5MM
Senior Subordinated Facility (CSFB) $40MM
Equity (Xxxx Capital)
Equity (Rollover)
Closing: Anticipated February-March 2000
Reps and Warranties: No Survival
Standard for public company
Covenants: Conduct of business
Notes
1. Based on unaffected prices of $8.25 as of 7/23/99
2
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Transaction Overview
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Summary of Key Terms (continued)
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Conditions: No material adverse change
Financing "out" - limited to senior debt and senior
subordinated debt; relatively tight commitment letters
from CSFB (no due diligence out)
Xxxx-Xxxxx-Xxxxxx
Key Management
VDI shareholder approval - controlling shareholders
have entered into a voting agreement
No shop provisions: Precludes solicitation or response unless Board
believes "superior offer" has been received
Termination Provisions: Termination fee of $4.5 million (one-half payable
within 20 business days of termination and one-half
payable in the event of closing a "competing" proposal
or entering into a definitive agreement within a
certain time frame)
Expenses capped at $1.0 million (if termination within
45 days) or $1.5 million (if termination thereafter)
Other: No per-share adjustments for existing earn-out, VDI
expenses or amount of VDI debt
Continued indemnification, D&O insurance for former
directors
Non-compete from controlling shareholder; no rollover
of his shares
Employment agreements for key management
Non-compete from Xxxxxx Xxxxx
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Transaction Overview
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Transaction Timeline
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. July 26 VDI announced that it had hired MSDW to explore
strategic alternatives
. August - September 10 MSDW contacted over 50 potential buyers. 22
potential buyers signed a confidentiality
agreement and received an offering memorandum
. September 13 Six first-round bids were submitted; six potential
buyers were invited to meet management and
participate in due diligence (data room and site
visit)
. October 29 Xxxx Capital submitted a second-round bid of
approximately $14.00 per share
. November 3 - November 9 Xxxx Capital completed due diligence
. November 10 Xxxx Capital indicated a revised bid of $14.25 -
$14.50 per share
. November 11 MSDW, KS, Xxxx Capital and KE met to discuss
outstanding issues
. November 15 Xxx Xxxxx attended a Xxxx Capital partner's
meeting in Boston; Xxxx Capital revised bid upward
to $15.00 per share and identified remaining deal
issues
. November 22 - November 23 MSDW, KS, Xxxx Capital and KE met to continue
discussing outstanding issues
. December 2 - December 3 MSDW, KS, Xxxx Capital and KE met to continue
discussing outstanding issues
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Transaction Overview
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Auction Participants
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Contacted OM Sent Preliminary Bid Final Bid
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Financial Buyers: 37 Financial Buyers: 19 Financial Buyers: 6 Financial Buyers: 1
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Strategic Buyers: 21 Strategic Buyers: 3
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Total: 58 Total: 22 Total: 6 Total: 1
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Transaction Overview
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Offer History
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Price Per Share
$
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[GRAPH OF OFFER HISTORY]
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Section 2
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Industry Overview
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Industry Overview
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Market Overview
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. VDI provides services to all market segments
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Total Worldwide Post-Production Revenue by Market Segment
(Estimated $8Bn)
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[CHART OF TOTAL WORLDWIDE POST-PRODUCTION REVENUE BY MARKET SEGMENT]
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Source: MPAA, U.S. Dept. of Commerce, Radio Advertising Bureau, Television
Bureau of Advertising, Jupiter Communication and management estimates.
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Industry Overview
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Market Overview
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Total US Post-Production Industry
(Estimated $4Bn)
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[CHART OF TOTAL US POST-PRODUCTION INDUSTRY]
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Source: Management estimates
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Share of Domestic Outsourced Business
(Estimated $1.6Bn)
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[CHART OF SHARE OF DOMESTIC OUTSOURCED BUSINESS]
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Source: Company financial disclosures
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Industry Overview
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Industry Consolidation Overview
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. Content producers are increasingly consolidating their outsourcing to
companies such as VDI
. Customers have a strong preference for companies that meet all post-production
and distribution needs
. Small companies are increasingly unable to compete on a global scale and
cannot afford emerging technologies
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Major Content ===========> Full Service
Producers ===========> Post-Production
Outsourcing
===========> Specialty
Post-Production
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Industry Overview
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Competition Overview
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[CHART OF COMPETITION OVERVIEW]
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Industry Overview
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Competition Overview
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Aggregate Value (market value plus net debt) LTM EBITDA Margin
($MM) %
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[GRAPH OF COMPETITION OVERVIEW]
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Section 3
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Company Overview
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Company Overview
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Business Overview
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. VDI provides asset management for the motion picture, television and
advertising industries
. VDI provides "one-stop" shopping for post-production services
--------------------------------------------------------------------------------
---------------- -------------- --------------
| Motion Picture | | Television | | Ad Agencies/ |
| Studios | | Producers/ | | Corporations |
| | | Distributors | | |
---------------- -------------- --------------
| | |
| | |
\|/ \|/ \|/
------------------------------------------------------------------------------
| |
| --------- ----------- ------------- ----------- |
| | Editing | | Mastering | | Duplication | | Archiving | |
| --------- ----------- ------------- ----------- |
| |
| ----------------------- --------------- ------------------------- |
| | Physical Distribution | | [LOGO OF VDI] | | Electronic Distribution | |
| | | | VDI | | | |
| ----------------------- | MULTIMEDIA | ------------------------- |
| | --------------- | |
| | | |
---------------+------------------------------------------------+---------------
| |
| ---------------------|
| | |
\|/ \|/ \|/
-------------------- ----------------- -----------------
| Broadcast Stations | | Cable Providers | | Other End Users |
| | | | | |
-------------------- ----------------- -----------------
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Company Overview
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Facility Overview
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. Nine facilities nationwide
. Five major markets
- Los Angeles, New York,
Chicago, San Francisco,
Dallas
[MAP OF FACILITY OVERVIEW]
. Approximately 2MM original
content masters archived in
vaults
. Approximately 700 orders
and 10,000 clones processed
daily
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Company Overview
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Business Mix
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Revenue by Services
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[CHART OF REVENUE BY SERVICES]
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Gross Margin by Services
% Estimated Gross Margin
[GRAPH OF GROSS MARGIN BY SERVICES]
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Company Overview
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Customer Mix
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Revenue by Customer Type
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[CHART OF REVENUE BY CUSTOMER TYPE]
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Major Studio Customers
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. Disney
. Warner Brothers
. Sony*
. 20th Century Fox*
. Universal*
. MGM
. Paramount
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* Indicates preferred vendor relationship
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Major Advertising Customers
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. Xxx Xxxxxxx
. Ogilvy & Xxxxxx
. Saatchi & Saatchi
. TBWA/Chiat Day
. Young & Rubicam
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Company Overview
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Historical and Projected Financials
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Revenue Annual Growth
$MM %
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[GRAPH OF REVENUE AND ANNUAL GROWTH]
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Net Income Margin
$MM %
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[GRAPH OF NET INCOME AND MARGIN]
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EBITDA Margin
$MM %
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[GRAPH OF EBITDA AND MARGIN]
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EPS
$
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[GRAPH OF EPS]
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Notes
1. Projections provided by management. All figures exclude future acquisitions,
restructuring, merger and one-time charges, and extraordinary charges.
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Section 4
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Public Market Performance
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Public Market Performance
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Stock Market View of VDI
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. Positive reaction to recent financial performance
. Recovering from disappointing 1998 financial performance
. Integration problems related to 1998 acquisitions have delayed expected
synergies
. Changing technology may threaten existing duplication business
. Recent transactions significantly strengthen competitors
. Awaiting results from review of strategic alternatives
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Public Market Performance
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Stock Price and Volume Analysis Since IPO
February 1997 - Present
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. Before missing its earnings expectations, VDI reached values close to
$20/share; however, during the past 52 weeks, the stock has traded below
$5/share
. An offer price of $15.00/share represents a 82% premium to the unaffected
stock price of $8.25 on 7/23/1999
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Price Volume
$
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[GRAPH OF PRICE AND VOLUME]
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Public Market Performance
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Annotated Stock Price and Volume Analysis
January 1999 - Present
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Price Volume
$
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[GRAPH OF PRICE AND VOLUME]
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Public Market Performance
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Indexed Stock Price Performance Analysis
January 1999 - Present
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. Four Media and Todd AO
have announced deals with
Liberty Media
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Stock Price Performance
Indexed to 100
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[GRAPH OF STOCK PRICE PERFORMANCE]
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Public Market Performance
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Indexed Stock Price Performance Analysis
January 1999 - Present
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. While significantly under-
performing the S&P 500
Index for the first half of
1999, VDI has regained much
of the lost ground in the
second half of the year
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Stock Price Performance
Indexed to 100
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[GRAPH OF STOCK PRICE PERFORMANCE]
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Notes
1. Comparable post-production companies include Four Media, Todd AO, Applied
Graphics and DG Systems.
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Public Market Performance
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EPS Results vs. Analyst Expectations
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EPS
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[GRAPH OF EPS]
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Public Market Performance
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Forward P/E Analysis
April 1997 - Present
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One Year Forward P/E
x
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[GRAPH OF ONE YEAR FORWARD P/E]
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Public Market Performance
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Summary of Analyst Commentary
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EPS
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1999 2000
Firm Date Rating $ $
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I/B/E/S 12/21/99 - 0.79 1.01
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Prudential 11/1/99 Accumulate 0.79 1.01
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Oppeheimer 5/5/99 Strong Buy 0.75 0.92
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Summary of Commentary from 11/1/99 Prudential Report
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. We have remained on the sidelines with these shares due in part to low
visibility and lack of consistency. Acquisition integration issues have been a
chronic issue at VDI
. If VDI can produce consistency and hit the next couple of quarters, we expect
these share to respond. At this point, however, we believe it's premature to
extrapolate two quarters of performance into our forecast especially given the
current outlook of 3Q.
. The Company's lack of consistency and lower visibility has been an issue.
Another quarter of demonstrated performance would go a long way to ease our
concerns about the sustainability of VDI's business and help indicate that the
Company is back on track.
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Public Market Performance
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Price/Volume Analysis
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Price
$
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[GRAPH OF PRICE/VOLUME ANALYSIS]
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Notes
1. 1999 YTD through December 21, 1999
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Public Market Performance
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Overview of Shareholders
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Value
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Institution/Individual Shares Unaffected Price (1) Offer Price (2) % of Total Shares
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Xxxx Xxxxxxxx 5,311,400 $43,819,050 $79,671,000 57.7%
Xxxxxx Xxxxx 49,044 404,613 735,660 0.5%
Xxxxxx Xxxxxx 8,000 66,000 120,000 0.1%
Xxxxxx Xxxxxx 5,000 41,250 75,000 0.1%
Xxxxxx Xxxxxx 5,000 41,250 75,000 0.1%
Xxxxxx Xxxxxxxx 4,000 33,000 60,000 0.0%
Xxxxxx Xxxxx 2,500 20,625 37,500 0.0%
Xxxxxx Xxxxxx 1,750 14,438 26,250 0.0%
Insiders 5,386,694 $44,440,226 $80,800,410 58.5%
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MFS Investment Management 711,333 5,868,495 10,669,991 7.7%
Brandywine Asset Management, Inc. 134,300 1,107,975 2,014,500 1.5%
First Capital Group 130,800 1,079,100 1,962,000 1.4%
Dimensional Fund Advisors, Inc. 98,500 812,625 1,477,500 1.1%
New Jersey Division of Investment 80,000 660,000 1,200,000 0.9%
Barclays Global Investors, N.A. 72,844 600,963 1,092,660 0.8%
CIBC World Markets Corp. 65,515 540,499 982,725 0.7%
Xxxxxx & Xxxxxx Asset Management, Inc. 19,600 161,700 294,000 0.2%
Mellon Private Asset Management 13,900 114,675 208,500 0.2%
Xxxxx, Xxxx & Xxxxx, L.L.C. 9,500 78,375 142,500 0.1%
Denver Investment Advisors LLC 4,500 37,125 67,500 0.0%
Lord, Xxxxxx & Company 3,500 28,875 52,500 0.0%
Total Institutional 1,344,292 $11,090,407 $20,164,376 14.6%
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Public 2,472,408 $20,397,368 $37,086,125 26.9%
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Total 9,203,394 $75,928,001 $138,050,910 100.0%
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Notes
1. Based on closing price of $8.25 as of 7/23/99, the day before the strategic
alternatives announcement.
2. Based on $15.00 offer price.
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Section 5
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Preliminary Valuation Overview
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Preliminary Valuation Overview
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Preliminary Valuation Summary
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Valuation Assumptions:
. Comparable Company Analysis:
- 1999E P/E: 10x - 14x
- 2000E P/E: 8x - 12x
- LTM EBITDA: 6x - 8x
. Precedent Transaction Analysis:
- One year forward P/E: 16x - 20x
- LTM EBITDA: 8.6x - 9.1x
. Discounted Cash Flow Analysis:
- Discount Rates: 11.5% - 13.5%
- EBITDA Exit Multiple: 5.5x - 7.5x
. Leverage Buyout Analysis:
- Required rate of return of 25% - 30%
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Price Per Share
$
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[GRAPH OF PRELIMINARY VALUATION SUMMARY]
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Preliminary Valuation Overview
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Preliminary Valuation Summary
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Public Valuation Share Value with
Metric Range Share Value 30% Control Premium
Valuation ------------- ---------------- -------------------
Methodology Metric Low High Low High Low High
----------- ------ --- ---- ----- ------ ------- --------
------------------------------
Comparable Company Analysis
------------------------------
1999E P/E $0.79 10.0 x 14.0 x $7.90 $11.06 $10.27 $14.38
2000E P/E 1.01 8.0 12.0 8.08 12.12 10.50 15.76
LTM EBITDA 17.9 6.0 8.0 8.49 12.38 11.03 16.09
--------------------------------------------------
Mean $8.16 $11.85 $10.60 $15.41
Median 8.08 12.12 10.50 15.76
--------------------------------------------------
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Precedent Transaction Analysis
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One Year Forward P/E $0.99 16.0 x 20.0 x $15.87 $19.83
LTM EBITDA 17.9 8.6 9.1 13.54 14.52
--------------------------
Mean $14.70 $17.17
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Discounted Cash Flow Analysis ------ ------ -------
(without synergies) Discount Rate 11.5% 12.5% 13.5%
------------------------------ ------ ------ -------
Terminal 5.5 x $11.90 $11.01 $10.19
EBITDA 6.5 13.35 12.34 11.42
Multiple 7.5 14.79 13.68 12.65
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Range $10.19 $14.79
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LBO Analysis IRR
------------------------------ --------------------
25% 30%
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Range $15.35 $11.85
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Preliminary Valuation Overview
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Valuation Matrix
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Price/Earnings Aggregate Value/EBITDA
Premium to Premium Equity Aggregate -------------------- ----------------------------------
Price Unaffected(1) to Current(1) Value(2) Value(3) 1999E(4) 2000(5) LTM(5) 1999E(6) PF 1999E(7)
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$8.25 $12.38 $0.79 $1.01 $17.9 $22.0 $26.3
$8.00 -3.0% -35.4% $75.5 $104.8 10.1 x 7.9 x 5.9 x 4.8 x 4.0 x
8.25 0.0% -33.3% 78.0 107.3 10.4 8.2 6.0 4.9 4.1
8.50 3.0% -31.3% 80.5 109.8 10.8 8.4 6.1 5.0 4.2
9.00 9.1% -27.3% 85.5 114.8 11.4 8.9 6.4 5.2 4.4
9.50 15.2% -23.2% 90.5 119.8 12.0 9.4 6.7 5.5 4.6
10.00 21.2% -19.2% 95.5 124.8 12.7 9.9 7.0 5.7 4.7
10.50 27.3% -15.2% 100.5 129.8 13.3 10.4 7.3 5.9 4.9
11.00 33.3% -11.1% 105.5 134.8 13.9 10.9 7.5 6.1 5.1
11.50 39.4% -7.1% 110.6 139.9 14.6 11.4 7.8 6.4 5.3
12.00 45.5% -3.0% 115.6 144.9 15.2 11.9 8.1 6.6 5.5
12.50 51.5% 1.0% 120.6 149.9 15.8 12.4 8.4 6.8 5.7
13.00 57.6% 5.1% 125.6 154.9 16.5 12.9 8.7 7.0 5.9
13.50 63.6% 9.1% 130.6 159.9 17.1 13.4 8.9 7.3 6.1
14.00 69.7% 13.1% 135.6 164.9 17.7 13.9 9.2 7.5 6.3
14.50 75.8% 17.2% 140.6 169.9 18.4 14.4 9.5 7.7 6.5
15.00 81.8% 21.2% 145.6 174.9 19.0 14.9 9.8 8.0 6.6
15.50 87.9% 25.3% 150.6 179.9 19.6 15.3 10.1 8.2 6.8
16.00 93.9% 29.3% 155.6 184.9 20.3 15.8 10.3 8.4 7.0
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Notes
1. Based on unaffected price of $8.25 as of 7/23/99, the closing price the day
prior to the strategic alternatives announcement; current price as of
12/21/99.
2. Based on 9.2MM shares and 0.8MM options with an average exercise price of
$5.72.
3. Based on net debt of $29.3MM.
4. Based on I/B/E/S median estimates.
5. LTM figures are unaudited as of 9/30/99.
6. Based on actual results for the first three quarters of 1999 and management
estimates for the fourth quarter.
7. Based on pro forma adjustments of $4.5MM.
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Preliminary Valuation Overview
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Comparable Company Trading Analysis
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1999E P/E Mean = 13.3x
x
--------------------------------------------------------------------------------
[GRAPH OF 1999E P/E]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
2000E P/E Mean = 10.6x
x
--------------------------------------------------------------------------------
[GRAPH OF 2000E P/E]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LTM EBITDA Mean = 7.4x
x
--------------------------------------------------------------------------------
[GRAPH OF LTM EBITDA]
--------------------------------------------------------------------------------
Notes
1. Based on unaffected price of $8.25 as of 7/23/99.
2. Based on current price.
3. Based on I/B/E/S median EPS estimates. LTM figures as of most recent public
financial statements.
4. Stock prices, EPS estimates and LTM statistic for Four Media and Xxxx XX are
based on their respective unaffected price dates (one month prior to
acquisition announcements).
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Preliminary Valuation Overview
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Multiples Paid in Selected Precedent Transactions
--------------------------------------------------------------------------------
--------------------------------------------------
Aggregate Value/LTM EBITDA
x
--------------------------------------------------
[GRAPH OF AGGREGATE VALUE/LTM EBITDA]
--------------------------------------------------
--------------------------------------------------
One Year Forward P/E
x
--------------------------------------------------
[GRAPH OF ONE YEAR FORWARD P/E]
--------------------------------------------------
--------------------------------------------------
Aggregate Value/Forward EBITDA
x
--------------------------------------------------
[GRAPH OF AGGREGATE VALUE/FORWARD EBITDA]
--------------------------------------------------
--------------------------------------------------
Premium to Unaffected (Price 30 days prior to
announcement) %
--------------------------------------------------
[GRAPH OF PREMIUM TO UNAFFECTED]
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Preliminary Valuation Overview
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Discounted Cash Flow Model Assumptions
--------------------------------------------------------------------------------
. Revenue growth of 10% in 2000, 9.5% in 2001, 9% in 2002, and 8.5% in 2003
. EBITDA margins expand from 25.2% in 1999 to 25.9% in 2000, 26.5% in 2001 and
2002 and level off around 26% thereafter
. SG&A as a % of revenues held constant at 21%
. Capital expenditures of $9.5MM in 2000, $11.0MM in 2001 and $6.0MM thereafter
. Discount rates of 11.5% to 13.5%
. Terminal EBITDA multiples of 5.5x to 7.5x
. $4.3MM of annual pre-tax synergies
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Preliminary Valuation Overview
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Discount Cash Flow Analysis
Valuation as of 11/30/99
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------------------------- ------------------------- -------------------------
EBITDA Multiple (x) 5.5 6.5 7.5
------------------------- ------------------------- -------------------------
Discount Rate 11.5% 12.5% 13.5% 11.5% 12.5% 13.5% 11.5% 12.5% 13.5%
------- ------- ------- ------- ------- ------- ------- ------- -------
Present Value of
Cash Flows - Year 1 $0.3 $0.3 $0.3 $0.3 $0.3 $0.3 $0.3 $0.3 $0.3
Cash Flows - Years 2-10 64.0 61.3 58.8 64.0 61.3 58.8 64.0 61.3 58.8
Terminus 79.6 73.4 67.7 94.0 86.7 80.0 108.5 100.0 92.3
------- ------- ------- ------- ------- ------- ------- ------- -------
Aggregate Value $143.9 $135.0 $126.8 $158.4 $148.3 $139.1 $172.8 $161.7 $151.4
====== ====== ====== ====== ====== ====== ====== ====== ======
Cash $0.5 $0.5 $0.5 $0.5 $0.5 $0.5 $0.5 $0.5 $0.5
Total Debt (29.8) (29.8) (29.8) (29.8) (29.8) (29.8) (29.8) (29.8) (29.8)
------- ------- ------- ------- ------- ------- ------- ------- -------
Equity Value $114.6 $105.7 $97.5 $129.1 $119.0 $109.8 $143.5 $132.4 $122.1
====== ====== ====== ====== ====== ====== ====== ====== ======
Price Per Share (1) $11.90 $11.01 $10.19 $13.35 $12.34 $11.42 $14.79 $13.68 $12.65
Premium/(Discount) to Unaffected (2) 44.3% 33.5% 23.6% 61.8% 49.6% 38.5% 79.3% 65.8% 53.3%
Terminal Value Analysis
% Value in Terminus 55.3% 54.4% 53.4% 59.4% 58.5% 57.5% 62.8% 61.9% 61.0%
% Value in Cash Flows 44.7% 45.6% 46.6% 40.6% 41.5% 42.5% 37.2% 38.1% 39.0%
Implied Terminal Multiples
Perpetual Growth Rate 2.3% 3.2% 4.1% 3.6% 4.5% 5.4% 4.6% 5.5% 6.4%
Sales Multiple 1.3x 1.3x 1.3x 1.6x 1.6x 1.6x 1.8x 1.8x 1.8x
EBITDA Multiple 5.5 5.5 5.5 6.5 6.5 6.5 7.5 7.5 7.5
EBIT Multiple 7.0 7.0 7.0 8.3 8.3 8.3 9.6 9.6 9.6
Net Income Multiple 10.5 10.5 10.5 12.4 12.4 12.4 14.3 14.3 14.3
------------------------- ------------------------- -------------------------
Notes
1. Based on 9.2MM common shares outstanding on 05/12/99 and .8MM options at an
average exercise price of $5.72.
2. Based on closing share price of $8.25 as of 07/23/99.
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Project Hollywood
--------------------------------------------------------------------------------
Preliminary Valuation Overview
--------------------------------------------------------------------------------
Discount Cash Flow Analysis (With Synergies)
Valuation as of 11/30/99
--------------------------------------------------------------------------------
-------------------------- ------------------------- ---------------------------
EBITDA Multiple (x) 5.5 6.5 7.5
-------------------------- ------------------------- ---------------------------
Discount Rate 11.5% 12.5% 13.5% 11.5% 12.5% 13.5% 11.5% 12.5% 13.5%
------- -------- ------- ------- ------- ------- ------- -------- --------
Present Value of
Cash Flows - Year 1 $0.5 $0.5 $0.5 $0.5 $0.5 $0.5 $0.5 $0.5 $0.5
Cash Flows - Years 2-10 78.4 75.2 72.2 78.4 75.2 72.2 78.4 75.2 72.2
Terminus 88.4 81.5 75.2 104.4 96.3 88.9 120.5 111.1 102.5
------- -------- ------- ------- ------- ------- ------- -------- --------
Aggregate Value $167.3 $157.2 $147.9 $183.4 $172.1 $161.6 $199.4 $186.9 $175.3
======= ======== ======= ======= ======= ======= ======= ======== ========
Cash $0.5 $0.5 $0.5 $0.5 $0.5 $0.5 $0.5 $0.5 $0.5
Total Debt (29.8) (29.8) (29.8) (29.8) (29.8) (29.8) (29.8) (29.8) (29.8)
------- -------- ------- ------- ------- ------- ------- -------- --------
Equity Value $138.0 $127.9 $118.6 $154.1 $142.8 $132.3 $170.1 $157.6 $146.0
======= ======== ======= ======= ======= ======= ======= ======== ========
Price Per Share (1) $14.24 $13.23 $12.31 $15.84 $14.71 $13.67 $17.45 $16.19 $15.04
Premium/(Discount) to Unaffected (2) 72.6% 60.4% 49.2% 92.0% 78.3% 65.7% 111.5% 96.3% 82.3%
Terminal Value Analysis
% Value in Terminus 52.8% 51.8% 50.8% 56.9% 56.0% 55.0% 60.4% 59.5% 58.5%
% Value in Cash Flows 47.2% 48.2% 49.2% 43.1% 44.0% 45.0% 39.6% 40.5% 41.5%
Implied Terminal Multiples
Perpetual Growth Rate 2.1 % 3.0 % 3.8 % 3.4 % 4.3 % 5.2 % 4.4 % 5.3 % 6.3 %
Sales Multiple 1.5 x 1.5 x 1.5 x 1.7 x 1.7 x 1.7 x 2.0 x 2.0 x 2.0 x
EBITDA Multiple 5.5 5.5 5.5 6.5 6.5 6.5 7.5 7.5 7.5
EBIT Multiple 6.8 6.8 6.8 8.1 8.1 8.1 9.3 9.3 9.3
Net Income Multiple 10.0 10.0 10.0 11.8 11.8 11.8 13.6 13.6 13.6
-------------------------- ------------------------- ---------------------------
Notes
1. Based on 9.2MM common shares outstanding on 05/12/99 and .8MM options at an
average exercise price of $5.72.
2. Based on closing share price of $8.25 as of 07/23/99.
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Project Hollywood
--------------------------------------------------------------------------------
Preliminary Valuation Overview
--------------------------------------------------------------------------------
LBO Analysis (with synergies)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Consideration
--------------------------------------------------------------------------------
Unaffected Price (As of 07/23/99) $8.25
Premium Paid 43.6%
Offer Price $11.85
-------
Total Shares Out (9.2+0.8)(MM) 10.0
-------
Purchase of Equity $118.7
=======
Opt. Proc. (Ex. Price=$5.72) (4.7)
Adjusted Equity Value 114.1
Net Debt 29.3
-------
Aggregate Value $143.4
=======
--------------------------------------------------------------------------------
Transaction Summary
--------------------------------------------------------------------------------
Sources Uses
------------------------------------------ -------------------------------------
Sources Amount % Rate Uses Amount %
----------- ------ ------ ------ ------------------ ------ ------
Senior Debt 73.7 47.4% 9.50% Purchase of Equity $118.7 76.4%
Sub. Debt 24.6 15.8% 13.00% Option Proceeds (4.7) -3.0%
Common Eq. 57.1 36.8% Refinancing Debt 29.8 19.2%
------ ------ Advisory Fees 10.0 6.5%
Total $155.4 100.0% Financing Fees 1.5 0.9%
====== ====== ------ ------
------------------------------------------- Total $155.4 100.0%
Valuation ====== ======
-------------------------------------------
AV/LTM EBITDA 8.0 X
--------------------------------------------------------------------------------
Pro Forma Financial Results and Credit Statistics
--------------------------------------------------------------------------------
Paydown PF LTM PF 1999 2000 2001 2002
--------- ------ ------- ----- ----- -----
Total Debt 9.6 Yrs $98.2 $98.2 $98.1 $96.5 $94.3
Senior Debt 8.4 Yrs 73.7 73.7 73.5 71.9 69.7
Sub. Debt 9.6 Yrs 24.6 24.6 24.6 24.6 24.6
---------
EBITDA $17.9 $24.6 $27.2 $30.0 $31.8
Cash Interest Expense 10.2 10.2 10.2 10.1 9.9
Total Interest Expense 10.2 10.2 10.2 9.9 9.4
Total Debt/EBITDA 5.5 x 4.0 x 3.6 x 3.2 x 3.0 x
Senior Debt/EBITDA 4.1 3.0 2.7 2.4 2.2
EBITDA/Cash Interest 1.8 2.4 2.7 3.0 3.2
(EBITDA-CapEx)/Cash Interest 1.0 1.9 1.7 1.9 2.6
(EBITDA-CapEx-WC-Taxes)/Int. 0.3 1.0 1.2 1.2 1.2
--------------------------------------------------------------------------------
IRR Analysis (Exit in 5 Years)
--------------------------------------------------------------------------------
Trailing
EBITDA Equity Return to
Multiple Value Sponsor
-------- ------ ---------
7.0 x $176.4 25.3%
7.5 194.3 27.7%
8.0 212.2 30.0%
------------------------------------------
8.5 230.2 32.1%
------------------------------------------
9.0 248.1 34.1%
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Project Hollywood
--------------------------------------------------------------------------------
Preliminary Valuation Overview
--------------------------------------------------------------------------------
LBO Analysis (with synergies)
--------------------------------------------------------------------------------
-------------------------------------------
Consideration
-------------------------------------------
Unaffected Price (As of 07/23/99) $8.25
Premium Paid 86.1%
Offer Price $15.35
--------
Total Shares Out (9.2+0.8) (MM) 10.0
--------
Purchase of Equity $153.8
========
Opt. Proc. (Ex. Price=$5,72) (4.7)
Adjusted Equity Value 149.2
Net Debt 29.3
--------
Aggregate Value $178.5
========
---------------------------------------------------------------------------------------------------
Transaction Summary
---------------------------------------------------------------------------------------------------
Sources Amount % Rate Uses Amount %
------------ -------- --------- ------- ------------------- -------- --------
Senior Debt 73.7 38.7% 9.50% Purchase of Equity $153.8 80.8%
Sub. Debt 24.6 12.9% 13.00% Option Proceeds (4.7) -2.5%
Common Eq. 92.2 48.4 Refinancing Debt 29.8 15.7%
-------- --------- Advisory Fees 10.0 5.3%
Total $190.5 100.0% Financing Fees 1.5 0.8%
======== ========= -------- --------
-------------------------------------------------- Total $190.5 100.0%
Valuation ======== ========
--------------------------------------------------
AV/LTM EBITDA 10.0x
-----------------------------------------------------------------------------------------------------------
Pro Forma Financial Results and Credit Statistics
-----------------------------------------------------------------------------------------------------------
Paydown PF LTM PF 1999 2000 2001 2002
----------- -------------- -------------- ----------- ----------- -----------
Total Debt 9.7 Yrs $98.2 $98.2 $98.1 $96.5 $94.3
-----------
Senior Debt 8.4 Yrs 73.7 73.7 73.5 71.9 69.7
-----------
Sub. Debt 9.7 Yrs 24.6 24.6 24.6 24.6 24.6
-----------
EBITDA $17.9 $24.6 $27.2 $30.0 $31.8
Cash Interest Expense 10.2 10.2 10.2 10.1 9.9
Total Interest Expense 10.2 10.2 10.2 9.9 9.4
Total Debt/EBITDA 5.5x 4.0x 3.6x 3.2x 3.0x
Senior Debt/EBITDA 4.1 3.0 2.7 2.4 2.2
EBITDA/Cash Interest 1.8 2.4 2.7 3.0 3.2
(EBITDA-CapEx)/Cash Interest 1.0 1.9 1.7 1.9 2.6
(EBITDA-CapEx-WC-Taxes)/Int. 0.3 1.0 1.2 1.2 1.8
--------------------------------------------------
IRR Analysis (Exit in 5 Years)
--------------------------------------------------
Trailing
EBITDA Equity Return to
Multiple Value Sponsor
----------------- ------------ --------------
9.0x $245.9 21.7%
9.5 263.8 23.4%
--------------------------------------------------
10.0 281.7 25.0%
--------------------------------------------------
10.5 299.5 26.6%
11.0 317.4 28.0%
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Appendix A
--------------------------------------------------------------------------------
Comparable Companies
--------------------------------------------------------------------------------
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Project Hollywood
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Comparable Companies
--------------------------------------------------------------------------------
Comparable Company Analysis
--------------------------------------------------------------------------------
Price/Earnings(2) Aggregate Value(3)/LTM
Equity Aggregate ------------------ -------------------------------
Company Price(1) Value Value(3) 1999 2000 Revenues EBITDA EBIT
------- -------- ------ --------- ---- ---- -------- ------ ----
VDI MultiMedia $12.38 $113.9 $143.7 15.7 x 12.3 x 1.9 x 8.0 x 11.8 x
Four Media Company 5.00 98.5 272.9 10.1 10.7 1.4 5.9 14.7
XXXX-XX Corp. 11.00 106.6 148.3 13.8 11.7 1.3 7.3 18.5
Applied Graphics 9.28 208.6 572.8 16.0 9.3 1.1 8.9 16.9
DG Systems 5.91 157.3 165.0 NM NM 3.7 NM NM
---------------------------------------------------------------------------
Median(4) 13.8 x 10.7 x 1.3 x 7.3 x 16.9 x
Mean(4) 13.3 10.6 1.2 7.4 16.7
High(4) 16.0 x 11.7 x 1.4 x 8.9 x 18.5 x
Low(4) 10.1 9.3 1.1 5.9 14.7
---------------------------------------------------------------------------
Notes
1. Stock prices as of 12/21/99; Four Media stock price and estimates as of
10/01/99; Xxxx XX stock price and estimates as of 06/30/99.
2. Aggregate value defined as market equity plus net debt.
3. Based on I/B/E/S median EPS estimates.
4. Median, mean, high and low statistics excludes DG Systems.
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Appendix B
--------------------------------------------------------------------------------
Precedent Transactions
--------------------------------------------------------------------------------
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Project Hollywood
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Precedent Transactions
--------------------------------------------------------------------------------
Precedent Transaction Analysis
--------------------------------------------------------------------------------
Forward EPS
Equity Aggregate ---------------- Premium to
Announced Target/Acquiror Value Value LTM EBITDA 1999E EBITDA 1 Year 2 Year Unaffected
--------- --------------- ------ --------- ---------- ------------ ------ ------ ----------
1/19/1999 Four Media/Warburg Pincus $157.5 $360.1 8.6 x NA x 11.4 x 9.5 x 16.4%
7/30/1999 Xxxx XX/Liberty Media $143.5 $185.1 9.1 NA 18.5 15.7 41.9%
11/1/1999 Four Media/Liberty Media $246.6 $421.0 9.1 8.1 25.2 26.7 150.4%
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Appendix C
--------------------------------------------------------------------------------
Weighted Average Cost of Capital
--------------------------------------------------------------------------------
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Project Hollywood
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Weighted Average Cost of Capital
--------------------------------------------------------------------------------
WACC
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Predicted Unlevered
Equity Total Debt/ Total Debt/ Preferred/ (Asset)
Company Beta(1) Market Value(2) Market Cap(2) Market Value(2) Beta
------------------------- --------- --------------- ------------- --------------- ---------
XXXX-XX Corp. 0.837 27.2% 21.4% 0.0% 0.72
Four Media Company 1.008 74.0% 42.5% 0.0% 0.70
Video Services Corporation 0.626 117.8% 54.1% 0.0% 0.37
VDI Media 1.124 25.2% 20.1% 0.0% 0.98
-----------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Cost of Capital
---------------------------------------------------------------
Debt
Total Debt/ Total Preferred/ Relevered ---------------------------- Weighted
Market Value Market Value Beta (pre-tax) (after-tax)(3) Preferred Equity Average
------------ ---------------- --------- --------- -------------- --------- ------ --------
10.0% 0.0% 1.04 7.0% 4.1% 8.0% 13.9% 13.0%
15.0% 0.0% 1.07 7.0% 4.1% 8.0% 14.1% 12.8%
20.0% 0.0% 1.09 7.0% 4.1% 8.1% 14.3% 12.6%
25.0% 0.0% 1.12 7.0% 4.1% 8.1% 14.5% 12.4%
30.0% 0.0% 1.15 7.0% 4.1% 8.1% 14.7% 12.3%
35.0% 0.0% 1.18 7.0% 4.1% 8.1% 14.9% 12.1%
40.0% 0.0% 1.21 7.0% 4.1% 8.2% 15.2% 12.0%
45.0% 0.0% 1.24 7.0% 4.1% 8.2% 15.4% 11.9%
50.0% 0.0% 1.27 7.0% 4.1% 8.2% 15.6% 11.8%
55.0% 0.0% 1.30 7.0% 4.1% 8.2% 15.8% 11.7%
-------------------------------------------------------------------------------------------------------------------
Notes
1. Source: Barra, U.S. Equity Betas as of 11/11/99.
2. Based on closing prices on 11/11/99.
3. Based on after-tax cost of debt assuming marginal tax rate of 41.0%.
4. Risk free rate based on current yield on a 10 year government bond as of
11/11/99.
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Project Hollywood
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Appendix D
--------------------------------------------------------------------------------
Draft Fairness Opinion Letter
--------------------------------------------------------------------------------
XXXXXX XXXXXXX XXXX XXXXXX
December 24, 1999
Board of Directors
VDI MultiMedia
0000 Xxxxxxxxx Xxxxxxxxx
Xxxxxxxxx, Xxxxxxxxxx 00000
Members of the Board:
We understand that VDI MultiMedia (the "Company"), VDI MultiMedia, Inc., a
wholly owned subsidiary of the Company ("Company Sub"), and VMM Merger Corp.
("Merger Sub"), a wholly owned subsidiary of Xxxx Capital, Inc. ("Buyer"),
propose to enter into an Agreement and Plan of Merger, dated December 24, 1999
(the "Merger Agreement"), which provides, among other things, for the merger of
the Company into Company Sub, followed by the merger of Merger Sub with and into
Company Sub (together, the "Mergers"). Pursuant to the Mergers, the Company will
become a subsidiary of Buyer and each outstanding share of common stock, no par
value per share (the "Common Stock"), of the Company prior to the Mergers, other
than shares held in treasury or held by Merger Sub or any affiliate of Merger
Sub or as to which dissenters' rights have been perfected, will be converted
into the right to receive $15.00 per share in cash. We also note that shares of
the Common Stock held by certain holders (the "Rollover Shareholders") will be
exchanged for shares of the Surviving Corporation in the Mergers. The terms and
conditions of the Mergers are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the consideration to be received in
the Mergers by the holders of shares of Common Stock pursuant to the Merger
Agreement is fair from a financial point of view to such holders (other than the
Rollover Shareholders).
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning the Company prepared by the management
of the Company;
(iii) reviewed certain financial projections prepared by the management of
the Company;
(iv) discussed the past and current operations and financial condition and
the prospects of the Company with senior executives of the Company;
(v) reviewed the reported prices and trading activity for the Common
Stock;
(vi) compared the financial performance of the Company and the prices and
trading activity of the Common Stock with those of certain other
comparable publicly traded companies and their securities;
(vii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(viii) participated in discussions and negotiations among representatives
of the Company, Merger Sub, Buyer and their financial and legal
advisors;
(ix) reviewed the execution form of the Merger Agreement and certain
related documents;
(x) reviewed the commitment letters provided to Buyer by Credit Suisse
First Boston; and
(xi) performed such other analyses and considered such other factors as
we have deemed appropriate.
We have assumed and relied upon without independent verification the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the financial projections, we have assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of the Company. In
addition, we have assumed that the Mergers will be consummated in accordance
with the terms set forth in the Merger Agreement. We have not made any
independent valuation or appraisal of the assets or liabilities of the Company,
nor have we been furnished with any such appraisals. Our opinion is necessarily
based on financial, economic, market and other conditions as in effect on, and
the information made available to us as of, the date hereof.
We have acted as financial advisor to the Company in connection with this
transaction and will receive a fee for our services. In the past, Xxxxxx Xxxxxxx
& Co. Incorporated and its affiliates have provided financial advisory and
financing services for Buyer and its affiliates and have received fees for the
rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this letter may be included in its entirety
in any filing with the Securities and Exchange Commission in connection with the
Mergers.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the consideration to be received in the Mergers by the holders of
shares of Common Stock pursuant to the Merger Agreement is fair from a financial
point of view to such holders (other than the Rollover Shareholders).
Very truly yours,
XXXXXX XXXXXXX & CO. INCORPORATED
By:
-----------------------------
Xxxx X. Xxxxxxxxxxxx
Principal
