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UNITED STATES TAX COURT - TRIAL

ESTATE (OF MICHAEL J. JACKSON DECEASED)

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EXECUTORS: JOHN G. BRANCA. AND JOHN MCCLAIN

COMMISSIONER OF INTERNAL REVENUE (IRS)

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February 13th 2017

Presiding Judge Mark V. Holmes

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Jacksons estate is represented by Avram Salkin, Charles Paul Rettig, Steven Richard Toscher, R
obert S. Horwitz, Edward M. Robbins Jr., Sharyn M. Fisk and Lacey E. Strachan of Hochman Sa
lkin Rettig Toscher & Perez PC, Paul Gordon Hoffman, Jeryll S. Cohen and Loretta Siciliano of

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Hoffman Sabban & Watenmaker and Howard L. Weitzman of Kinsella Weitzman Iser Kump &
Aldisert LLP.
The
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IRS is represented by its attorneys Donna F. Herbert, Malone Camp, Sebastian Voth, Jordan Mus
en and Laura Mullin.
--------------------------------------------
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ALAN WALLIS
Media & Entertainment Valuations
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Court Clerk: MR. WALLIS: sworn in.

Court Clerk: And would you please state your name and address for the record? MR. WALLIS:
Alan Wallis, ..

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Court Clerk: Thank you.

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Mr. Salkin: Your Honor, it's my understanding you have not yet ruled on the admissibility of the
2016 transactions. Is that correct?

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Judge Holmes: That would be reserved for briefing afterwards. So yes.
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Mr. Salkin: May Mr. Wallis' report then be introduced subject to the ....
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Judge Holmes: Yes.

Mr. Salkin: .... ability to disregard the portions that relate to that transaction?
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Judge Holmes: Correct.

Mr. Salkin: All right.

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DIRECT EXAMINATION
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Mr. Salkin:
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Q. Mr. Wallis, the Clerk has handed you three documents .... or is handing you three
documents. And with the exception of the cover sheets that identify the case, are you familiar
with those three documents?
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A. Yes.

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Q. Okay. And they're marked P .... 643-P, 644- P, and 645-P.

Mr. Camp: Your Honor, I don't believe the exhibits have been marked yet. Can we clarify the
numbering?

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Court Clerk: Exhibit 644-P is marked for identification. It is the rebuttal report of Mr. Wallis.

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Court Clerk: And Exhibit 645-P is marked for identification, and it is the supplemental report
of Mr. Wallis.

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Mr. Salkin: May those be admitted into evidence, Your Honor?
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Judge Holmes: They may.
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Mr. Salkin:
Q. Mr. Wallis, have you had a recent engagement where you have valued a music publishing
catalog?
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A. Yes.

Q. Could you give us an example of a recent engagement?

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A. So Paul McCartney's catalog of songs in his own personal songs, the songs he wrote.
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Q. What type of a proceeding was that involved in?

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A. It was divorce matrimony proceedings.

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Q. Have you had occasion recently to appraise the value of a music publishing company?

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A. Yes.

Q. Can you give us an example of that?

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A. EMI Music Publishing.

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Q. Could you explain to the Court the difference between a music publishing catalog and a
music publishing company?

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A. I can. I think the way I like to think of it is a music publishing business like Sony/ATV. It has
within it a catalog of record .... of music publishing assets. But it also is a wider business and has
an A &R function and looks to A&R to sign new writers as well and release new .... produce
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new music. So a catalog tends to be much smaller and focused on probably a few key copyrights.
And there the owners of that catalog are more focused on the depth of exploiting those new
catalogs as best they can. So the .... it's the breadth of the business and the scale of the business
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where music publishing business is much different to a publishing company .... a publishing .... a
catalog.

Q. Is there any difference in the way you would value a music publishing company as
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compared to a music publishing catalog?

A. Yeah. I think you need to go to the fundamentals really of value. And for me, when you look
at a music publishing business or catalog, you'll .... interest in .... fundamentally for valuation of
the value of .... the future value of .... the net present value of the future income .... the royalties
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are being driven by that catalog. So for a music publishing business, you have got the catalog of
songs and the new releases that are made that you have got to take into account so you use an
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income approach. It'd be the main methodology. And I say that same approach should be used
also for valuing a music catalog.
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Q. If you would do the market approach, would there be a difference in the way you would
value the two types of assets?
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A. Yes.

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Q. How would that vary?

A. I .... well, it drives back to the income approach that if you look at a music publishing
business, what you have got there, you're looking at the income that's being driven by that

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catalog from looking at it across the breadth and the wide range they operate over a global basis.
So they're operating in a wide number of territories, and they have the resources to exploit that
catalog on a wide basis.

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Q. Would you use different metrics for the two difference assets?

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A. Yes.

Q. And how would they vary?

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A. Well, for valuing a catalog, you can look at this as if it was a few songs. Can I just have a
minute? When you value a music publishing business, you're looking at the income that's being
driven from that catalog across a wide range of territories. So you're going for breadth. When
you value a music publishing catalog, you're looking at date exploitation of a few songs. So
when .... for a music business where they have got resources across a wide range, you need a lot
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of people and resources to actually exploit the catalog. When you're valuing a publishing catalog,
you have got fewer songs in the catalog and you're more focused on how you exploit that. So
what that means is that when you use a - - an approach, you can't look at it on the basis of
income. But .... you can look at income, but you can't look at it on the basis of net publisher's
share, which people use for catalogs because you can't get rid of the costs. And those costs you
cannot take into .... you cannot just get rid of the costs in a major music publishing business. So
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therefore, the use of a net publishing measure, which is sometimes used and I refer to in my
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report, is not a good measure for valuing a music publishing business where you cannot .... you
need .... you cannot just get rid of a wide range of costs.
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Q. But would that be used to value a music publishing catalog?

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A. People do use it as a .... and some people use it as their main method. I think it's a good
crosscheck to the main method of an income approach, but I still think it's a back check rather
than a primary method.

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Q. Once you have the metric of EBITDA or a net publisher's share, would you tend to take a
multiple of that?

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A. For a music publishing business, I would use EBITDA. And yes, you would take a multiple
of those based on transactions in marketplace.

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Q. All right. We have marked for identification Exhibit 643 .... 646, I'm sorry .... P, which I
believe you have in front of you.

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Court Clerk: Exhibit 646-P is marked for identification. Its pages 21, 22, and 23 and 24 of the
estate of Michael Jackson and the Horizon Trust II .... by Mr. Anson.
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Mr. Salkin:
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Q. All right. Are you familiar with these pages?

A. Yes.
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Q. And you'll note that if you look at the second full paragraph, it starts with the first step in
determining the appropriate market multiple applicable to a hypothetical sale ....

Mr. Camp: Objection, Your Honor. I believe this is Mr. Anson's rebuttal report, and so this
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would be rebuttal testimony.

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Mr. Salkin: This is dated October 11, which I believe is the initial report.
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Mr. Camp: Regardless, it's rebuttal testimony, Your Honor.

Judge Holmes: I'll let it in nevertheless.

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Mr. Salkin:

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Q. Figure 8, which I refer you to ....

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A. Yeah,

Q. .... is a list of transactions. Are you familiar with those transactions?

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A. I am.

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Q. In determining the fair market value of the Sony/ATV Music Publishing, LLC, in your
opinion, are any of these appropriate multiples to consider in valuing the company?
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A. I would actually say none of them are for different reasons. For instance, the first BMG
Music Publishing, which was acquired by Universal, that's a business of comparable size to
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Sony/ATV, and I would say that is comparable on .... in terms of status and size of the business.
However, the reason why I would question its appropriateness is because, as you'll see, the
valuation date is in 2006 before the financial crisis. So therefore, I think it's difficult to imagine
the transaction multiples would have been the same after the financial crisis.
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Q. In your opinion, how would the multiples vary between 2006 and 2009?

A. I .... it's difficult because you haven't got a transaction. But if you were to look at, for
instance, I think, this S&P, how markets have moved and multiples have moved between the two
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dates, the multiples would probably fall to somewhere between .... around seven times based on
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that market movement.

Q. Now, how about the second one, Famous Music Publishing?

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A. Famous Music Publishing is smaller. But on the other hand, I would consider it as
potentially comparable on the basis that it was actually acquired by Sony/ATV who formed part
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of the catalog that we're required to value .... or business we're required to value .... excuse me.
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And I think it represents about 30 percent of total NPS of Sony/ATV. So in that sense because it's
part of their transaction, I would say it's potentially comparable. But for the same reason as BMG
Music Publishing, it - - the transaction occurred prior to the financial crisis.

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Q. Are any of the remaining five items helpful in valuing Sony/ATV Music Publishing?

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A. I considered all those transactions when I was undertaking my work. And on the basis of
size, status, and the transaction detail, and the nature of the transactions, I would say they're not
comparable.

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Q. Could you turn to Page 23, which is the third page of this exhibit?

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A. Yep.
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Q. At the end of the first full paragraph, there's indication that Mr. Anson has relied on the
media multiple of 10.7 times. Do you see that?
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A. Yes.

Q. And could you go back to Figure 8 on the first page and explain to us how it appears that Mr.
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Anson arrived at that multiple?

A. It looked like he's taken the .... removed the top three and the bottom three multiples, and
10.7 is what's left in the middle.
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Q. Is that called a median?

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A. Yeah.
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Q. And you would, what, take the highest off and the lowest off and what's left?
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A. Yes.

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Q. Even though you have transactions here where the NPS is much smaller than Sony/ATV's?

A. For Mr. .... so can .... are you asking me what ....

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Q. Would you normally do a median where you have a comparison like this between different
sizes?

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A. No. And also, I would want to understand why there was a big difference in the transaction
multiples as well because there's a big difference between the Chrysalis transaction, which is a

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little under eight times, and Rodgers and Hammerstein, which is nearly 12 times. I would
want .... there's a 50 percent difference. I would want to understand that.
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Q. Okay. Could you turn to the second page, which is Page 22?
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Mr. Camp: Your Honor, again, I renew my objection regarding this line of questioning. I mean,
the direct testimony of Mr. Wallis is supposed to be in regards to his own report, not Mr. Anson's
report.
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Judge Holmes: Mr. Salkin?

Mr. Salkin: Yes, Your Honor. These have been compressed, unfortunately. I understood we had
20 minutes to present whatever we thought was appropriate for the Court to consider. And I only
have one more line of questioning, and then I'll be done.
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Judge Holmes: Fair enough.

Mr. Salkin:
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Q. All right. If you can turn to Page 22.

A. Yep.
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Q. The last full paragraph indicates that he has .... Mr. Anson has disregarded the EMI music
transaction. Are you familiar with that transaction?

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A. I am.

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Q. How did you become familiar with it?

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A. I was actually involved after the acquisition of EMI by Terra Firma. I led the team that was
responsible for doing some financial accounting evaluations for reporting purposes, a purchase
price allocation, which included valuing the catalog, and also then subsequently undertaking

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impairment reviews of the catalogs and looking at the businesses as well.

Q. Can you explain the sale process that took place ....
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A. Yeah. By the way ....
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Q. .... from Citibank?

A. .... sorry. I should also mention I was part of the vendor due diligence team that was for Sony
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.... for Citibank, sorry .... when they disposed of the asset.

Q. Can you explain the process that Citibank undertook to make the sale?
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A. Yeah. It goes back to late 2010 when, because of issues of the amount of debt that had been
put into the structure and Terra Firma were having quite difficulties meeting their requirements to
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service that debt and meet covenants, Citibank asked EMI, the CEO, and the finance director.
They were concerned whether it would actually be a going concern by the March of 2011. And
the answer came back .... and this is public record .... the answer came back that it was unlikely
that they would be able to meet their debts when fell due, which meant there was no value in the
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equity at that point in time. So Citi took the CCSF from Terra Firma.
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Q. Did they subsequently sell the asset?

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A. Before they did that, they went through a process of a pre-pack administration in February of
2011. And as part of that, a lot of the debt was written off. So the business was in a much better,

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much stronger financial position by .... after February 2011. Then they were under no
compunction to sell. As a bank, I think it's fair to say they weren't in the music business, and they
were not going to hold this asset forever in a day. But they were .... my understanding, they were
under no pressure to sell it very quickly and have a fast sale. But what happened was, in the May

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of 2011, Warner Music was sold to Access, and there was quite a lot of interest in that asset at
that point in time. And Citi saw an opportunity that maybe there was an opportunity to sell EMI
sooner than they had probably thought possible.

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Q. From what you saw, in your opinion, was this a distressed disposition on the sale from
Citibank to the ....

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A. No. ae
Q. .... other buyers? And what's the basis of your reasoning for that?
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A. I .... because the underlying business at that point in time was not .... was .... it was
financially very secure by then, having written off that debt. So it was a more appropriate level of
debt from the business that was there then. And there was a lot of interest in the assets when they
were put up for sale, which was to sell the recorded music and the music publishing business
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separately.

Q. Okay.
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Mr. Salkin: I have no further questions.

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Judge Holmes: Okay. Cross .... and I'll let you do cross on whatever you want in any of the
three reports.
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Mr. Camp: Thank you, Your Honor. CROSS-EXAMINATION

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Mr. Camp:

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Q. Good morning, Mr. Wallis.

A. Hello, Mr. Camp. How are you?

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Q. Very well, thank you. Nice to see you again. You have only valued one U.S. music company,
correct?

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A. I have only valued one music .... no.

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Q. Peermusic?
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A. Peermusic is one that I have valued. I have valued other .... BOK Music ...... There are
others.
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Q. But in the United States .... based in the United States?

A. Well, BOK is based in L.

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A. .

Q. But Peer was not a major music company like Warner-Chappell?

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A. No.
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Q. And in your experience, is it correct that there is generally substantial demand for music
publishing assets due to the scarcity of the asset's nature?
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A. Well, for small catalogs.

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Q. In general.

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A. There are not many. In my report, I said there is a scarcity assets and there tends to be quite
high demand for assets, yes.

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Q. So that's a yes?

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A. Yes.

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Q. And is it correct that the level for demand of music publishing assets is generally correlated
to the quality of the underlying catalog and copyrights?

A. Yes.
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Q. And hypothetically, if a catalog contained premier compositions, such as the Beatles catalog,
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would you expect to see interest from multiple parties if that asset were available for sale?

A. I think you have got to temper that because if you're going to have a big .... if you're talking
about major, that's going to require a lot of (inaudible) in terms of finance. And we can't ignore
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the fact that at our valuation date we had a credit crunch. No one was securitizing assets or
looking as that as a way of financing anymore. And I think for a big transaction .... and I know
personally from the EMI experience, the concern was with the market share whether there would
be ability to get .... such a big transaction would require finance.
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Q. But hypothetically, if I'm talking about a catalog that has one of these premier assets .... I
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believe you called them trophy assets?

A.
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A. .... yeah.
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A. trophy asset .... yeah.

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Q. So if that's the case, if this is a catalog with a trophy asset, you would expect to see a
potential bidding war over this asset.

A. It .... let's put it this way. If you look at a small catalog that had a trophy asset .... let's think

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of something like (inaudible). Then I can totally accept your .... the premise of your question. I
think we have got to put it into context for Sony/ATV, and the Lennon-McCartney ....

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Q. But I was asking a hypothetical, though.

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A. Okay.

Q. So in a hypothetical situation, a catalog with a trophy asset ....

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A. Not if it was .... if it was a relatively small part of the overall catalog, I'm not sure I would,
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necessarily. See, it would create a bit more demand, but they may not want the rest of the
catalog. I think you have got to look at the catalog overall.

Q. When you have bids from multiple parties, it drives up the purchase price of an asset, yes?
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A. Usually, yes.

Q. And historically, have cash flows from music publishing been relatively stable?
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A. Relative for record music, so yeah.

Q. Yes? Would these stable cash flows provide an opportunity for potential investors to hedge
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or diversify risk in a turbulent economy such as in 2009?

A. Potentially.
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Q. Are you aware of numerous institutional investors who acquired music publishing assets in
or around 2009?

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A. Numerous? Would you like to define what you mean by numerous? I'm aware of ....

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Q. Multiple?

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A. More than one is multiple, I suppose. Yeah.

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Q. So you are aware of them.

A. Of course. ae
Q. Let's turn to the methodology a little bit. Am I correct that you used an EBITDA multiple in
valuing Sony/ATV?
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A. I used an income approach cross .... and then used EBITDA multiples as the secondary
method or ....
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Q. And hypothetically, if two music publishing companies had equivalent revenues but one had
higher margins, would one be valued higher than the other using an EBITDA multiple?

A. Depends on the growth. It's not as simple as that. You can have lower margins, but it
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depends on the growth and why the margins were lower. If the margins were lower because of
inefficiency of running the business, I could see the company with the higher margin would be
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more valuable. But it depends on the reasons of margin.

Q. Well, is it correct that in 2009 maximizing profitability of Sony/ATV was not the primary
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objective of Sony's management?

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A. Maximizing profitability, that .... at that stage they were looking to grow the catalog .... to
grow the business. Sorry.

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Q. So that's a yes then?

A. Yeah.

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Q. And to facilitate this growth, did the company's expenditures increase?

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A. Yes.

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Q. Is it correct that the expenditures related to Sony/ATV's growth strategy caused their
margins to decline? ae
A. Their margins were lower.
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Q. So yes.

A. Yes.
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Q. Yes. Would the margins in 2009 be indicative of Sony's expected long-term profitability?

A. You have got to understand why their margins were lower. Their margins were lower
because they were in a phase of growth. So they were probably running with a slightly higher set
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of expenses because they were looking to acquire new writers and new catalogs. And therefore,
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they needed to be able to service that addition .... that additional business.

Q. So they would not be indicative of their long-term profitability.

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A. No.
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Q. Is it correct that if a hypothetical buyer were to acquire 100 percent interest in Sony/ATV,
the various operating expenses that were in place at the time of Michael Jackson's death could be
eliminated and/or reduced?

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A. On his date of death, if the strategy .... it depends on the strategy of the buyer. So
hypothetically, I suppose you're right. But that wouldn't be for the long-term growth of the

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business.

Q. Thank you. Would this include the $7.5 million per year administration fee paid to Sony?

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A. That was really part of the financing, but that would go.

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Q. In preparing your report, did you rely in any way on David Dunn of Shot Tower Capital?
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A. Yes. Rights for the information and clarification of matters.
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Q. Were you aware that David Dunn testified last week that, and I quote, "The Sony admin fee
is a fee that Sony takes every year that doesn't necessarily have any justification. They don't
really provide any services for it"?
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A. I said it was my understanding it was there to service the financing .... the interest.

Q. So then knowing that, a hypothetical buyer would continue to make that payment each year.

A. Yeah.
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Mr. Camp: One minute, Your Honor.

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Judge Holmes: Sure.

Mr. Camp:
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Q. Mr. Wallis, is it correct that margins are significantly lower for catalog administration than
an owned catalog?

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A. Yes.

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Q. Is catalog administration riskier than the operations associated with a known catalog?

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A. Risky in the sense that you haven't got these .... you haven't got the rights for long periods of
time; therefore, they can stop, yes.

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Q. Hypothetically, if all else were equal, would a music publishing catalog .... I'm sorry. Let me
rephrase this. Hypothetically, if all else were equal, would a music publishing company need
additional overhead for catalog administration services?
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A. No. That .... the whole idea of why a major takes on administration is .... you got to
understand it has a pipe. It has the resources across a lot of territories ....
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A. &R, back office, collection. And in the phase of growth that Sony were in, it could put more
through the pipe .... there was capacity to put more through the pipe. So in those circumstances,
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it would be a good business sense to actually take on more admin because it's producing cash
flow, regardless necessarily of the margin.

Q. I believe you called it a cash cow, correct?

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A. It can be a cash cow, yes.

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Q. If a hypothetical buyer disbanded the catalog administration segment of the business, would
they be able to significantly reduce the overhead expenses of Sony/ATV?
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A. I don't know if they would .... in the .... my assumption would be that it probably would be
able to because of the amount of the administration, yes.
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Q. Is it correct to say that from a multiples perspective, small catalogs are more valuable than
larger ones?

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A. No.

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Q. Hypothetically, if the owner of a large publishing catalog could maximize value by splitting
up the catalog and selling it into pieces, smaller pieces, would they?

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A. No.

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Q. Small independent catalogs generally know their catalog better than a major company,
correct?
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A. They would have more depth. They would know probably the .... how the catalog was made
up and be more familiar with the songs in the catalog than a major that's got a million songs in it.
That's probably true.
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Q. Is the disparity in valuation multiples between large and small catalogs based on the ability
to effectively understand and manage the collection of owned songs?
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A. I would put it this way. The reason that you have higher multiples .... if you look at a music
publishing catalog, the reason .... when a buyer comes to make the acquisition, there are two
things they do. They look at how the assets have been exploited, and they'll form their own view
on how they can better exploit the catalog under their ownership, which may mean when
reregistering the catalogs, they may get an increase just from finding sources of income that
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weren't there before and they may make some adjustment uptake for that. And they also will ....
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they may look and decide that they can exploit the catalog in .... more effectively and increase
synchronization income. So in their cash flows and in their income, they will make those
assumptions and include in their forecast of future cash flows. On the other hand, they will also
recognize that they won't necessarily need to take on the costs. So again, they will take those
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costs out and .... so the incremental cash flows will be higher, which means that when you look at
it you have got a much higher multiple of historic earnings because of .... because of you .... of
that uplift.
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Q. Let's turn to the comparable transactions you use. In your market approach analysis you only
rely on transactions which occurred approximately two years after the date of Michael Jackson's

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death, correct?

A. Yes.

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Q. If both transactions relied upon, in your analysis, occurred after the date of Michael
Jackson's death, wouldn't it also be reasonable to consider the sale of the estate's interest in

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Sony/ATV, which occurred after the date of death?

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A. I think .... seven years .... I think you have got to look at the circumstances and what has
happened in the market and the business. And I would say seven years is a .... is stretching that.

Q. You valued EMI, correct?

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A. I have.
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Q. And EMI was one of the only two comparable companies relied upon in your analysis.
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A. Yeah.

Q. Prior to the sale, was EMI seized by creditors after defaulting on loans?
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A. Yeah.
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Q. What was the entity that sold EMI in the transaction you relied upon?
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A. Which entity sold EMI .... Citibank.

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Q. And Citibank or Citigroup, they were not a strategic investor in the music publishing
industry, correct?

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A. No. No.

Q. Is it possible that a hypothetical purchaser of the estate's interest in Sony/ATV would not be

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a U.S. corporation?

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A. Yes.

Q. Is it possible that a hypothetical buyer of Sony/ATV would end up with 100 percent of the

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company?

A. Yes.
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Q. Isn't that what happened in the 2016 sale? MR. SALVIN: Your Honor, I have a continuing
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objection on the 2016 transaction.

Judge Holmes: That's noted. As I said, I'm reserving the ruling on whether that can be .... MR.
SALVIN: Thank you.
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Judge Holmes: .... referred to.

Mr. Camp: I'm sorry. Could I clarify? Did the witness answer that question?
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A. No, I didn't.

Judge Holmes: He did not. But answer.

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Mr. Camp: Q. Sorry, can you ask it again? Yes. I .... the question I asked before was is it
possible that a hypothetical buyer of Sony/ATV would end up with 100 percent of the company,
and you said yes. And then I said isn't that what happened in the 2016 sale.

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A. Yes.

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Q. Yes. In your opinion, NPS would only be appropriate to use when valuing a Peermusic
publishing catalog?

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A. I would only ever use it as a back check, but you .... for small catalogs, yes, as a (inaudible)
check.

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Q. And in your opinion, EBITDA should be used to value an operating music publishing
company. ae
A. Yes.
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Q. NPS does not factor in expenses.

A. No.
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Q. EBITDA factors in actual expenses.

A. Yes.
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Q. Even if those expenses are higher than the industry average?

A. Yes.
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Q. And Sony/ATV's expenses were higher than the industry average.

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A. Yes, but there were good reasons for that.

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Q. Is there a difference between maximizing growth and maximizing profitability?

A. Short-term profitability, yeah.

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Q. And Sony was trying to maximize growth in 2009?

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A. Yes.

lJa
Q. Is it possible that the hypothetical buyer of Sony/ATV would want to maximize
profitability?

A. If you're acquiring 100 percent, yes.

ae
Q. Were you aware of the 2016 report prepared by Shot Tower for the estate sale of their
ich
interest?

A. I wasn't at the time. I am now.

mM

Q. Were you aware that Shot Tower used an NPS multiple in that report?

A. Yes.
a

Q. Were you aware that Shot Tower adjusted the expenses of the company lower to reflect that
Te

Sony/ATV's expenses were higher than the industry averages?

A. Yes.
w.

Mr. Camp: Your Honor, may we take a quick five-minute break, and I'll see if I have any more
ww

questions for the witness?

 om
Judge Holmes: We'll go off the record.

n.c
Mr. Camp: Thank you, Your Honor.

so
RECESS..

Mr. Camp: Respondent has no further cross for this witness.

ck
Judge Holmes: Any redirect, Mr. Salkin?

lJa
Mr. Salkin: Yes, please.

Judge Holmes: Go ahead.

ae
ich
REDIRECT EXAMINATION

Mr. Salkin:
mM

Q. Mr. Wallis, counsel mentioned the $7.5 million administrative expense.

A. Yeah.
a

Q. When you did your projected cash flow, did you treat that as an expense of the business?
Te

A. No.
w.

Q. Why not?
ww
 om
A. Because it was treated as a financing cost .... as part of the financing of the debt, and we
were valuing on the basis of free cash flows before financing.

n.c
Q. So then is it true that your projection was based on the assumption that that was never there?

A. Yeah.

so
Q. And it did not reduce the cash flow?

ck
A. It didn't.

lJa
Q. Mention was made of the Shot Tower report in 2016.

A. Yes.
ae
Q. Are you aware of the purpose of that report?
ich

A. I'm .... I am. My understanding in it was, as part of the buy/sell provisions, Shot Tower
prepared a report on behalf of the estate. And I think Allen & Co. prepared a report on behalf of
mM

Sony as a means of trying to negotiate the value and the price for the buy/sell arrangement.

Q. Would you interpret those two reports as negotiating tools?

A. I would indeed.
a
Te

Q. All right. Going through the buy/sell process, let's assume that we have a hypothetical buyer
who desires to purchase the estate at one-half interest in Sony/ATV. What steps would that
hypothetical buyer have to take if you were to exercise the buy/sell rights?
w.

A. Unless they were prepared to be a buyer, they would have to get rid of the Sony guarantee
and the $300 million of debt first. So on the .... and I understand it was very difficult to get any
ww
 om
finance without that .... or any finance without that Sony guarantee in place. So it would be very
difficult to buy that 50 percent with that debt in place.

n.c
Q. So in your opinion, would it be necessary to pay off the whole $300 million dollars before
they could even start the process?

so
A. Yes.

ck
Q. Then what would happen as a result of the process? How would that work?

A. The result of the process, well, then once you have got rid of that before, then you can put in

lJa
to either buy or sell and go through it. And if neither side want to buy, you send it to auction, or
one side will buy the other 50 percent out.
ae
Q. If the hypothetical buyer of the estate's half interest were to win the bidding process, would
they have to pay off the Sony amounts?
ich
A. Can you repeat that? Sorry, I misheard. Sorry. Can you repeat that?

Q. Yes. If the hypothetical buyer who purchased a half interest in Sony/ATV initiated the
mM

bidding process and then proceeded to be the buyer of Sony's interest, would it have to pay off
the Sony amounts?

A. Yes.
a

Q. And how much were those in 2009?

Te

A. Six-hundred and .... over $600 million.

w.

Q. So that they would have to pay the estate something to buy the half interest, at least $300
million?
ww
 om
Mr. Camp: Objection. Leading.

n.c
Judge Holmes: Sustained.

Mr. Salkin:

so
Q. In total, what would they have to pay ....

A. They would have to buy the ....

ck
Q. .... in order to purchase ....

lJa
A. They have to repay the $300 million, plus the Sony debt, and anything else would be for the
equity. ae
Q. And would .... they would also have .... would they have to also pay Sony whatever the
amount necessary to complete the bid?
ich

A. You mean for Sony's half share of the interest?

mM

Q. Yes.

A. Yes.
a

Q. And they could be either a buyer or seller. Is that right?

Te

A. Yes.
w.

Q. In analyzing Sony/ATV, are you aware of the financing costs that Sony charged the
company?
ww
 om
A. Yes.

n.c
Q. How would that compare with the market?

A. It would be in line with the market.

so
Q. Pardon? I didn't hear that.

ck
A. Sorry. I ....

lJa
Q. Yes. How does the interest that Sony charged compare with market interest rates, if you have
knowledge of that?

A. I believe it was in ....

ae
Q. One way or the other.
ich

A. I believe it was in line market rates.

mM

Q. Excuse me. You .... I'm not able to hear. My hearing isn't ....

A. Sorry.
a

Q. .... that good. I'm sorry. The question is are you aware of whether or not the interest that
Sony charged to Sony/ATV was consistent with the marketplace for interest rates?
Te

A. I was .... I mean, I was looking at it before interest. So I didn't actually focus on the actual
interest rate because I was taking some of the debt off.
w.

Q. Okay. That's fine. The Beatles were mentioned as a trophy asset. What percent of the
ww

company did the Beatles represent?

 om
A. The Lennon-McCartney catalog. The .... it was less than 10 percent.

n.c
Q. Did you take that .... the quality of the Beatles' catalog into effect in your valuation?

so
A. Yes.

Q. How did you treat that?

ck
A. I looked at the valuation primarily on the .... an income approach, and I also used the market

lJa
multiple views in EBITDA, but based on transactions and comparable (inaudible) companies.
And I came with a range of values between 800 and 1.05 billion for the enterprise. And with a
sort of a .... my range was sort of coming out around 900, 950 million for the enterprise. But I
recognize that even though it was a relatively small part of the catalog and also there are
ae
certain .... the rights in America would revert to support McCartney over the next few years, I
recognized that that would create a premium for a buyer. And so I went to the very top of my
range at 1.1 billion.
ich

Mr. Salkin: Let me approach the Clerk, please.

mM

Judge Holmes: Sure.

Mr. Salkin: Can you please mark this as the next exhibit in order?

Court Clerk: Exhibit 647-P is marked for identification.

a
Te

Mr. Salkin:

Q. Mr. Wallis, have I given you the chart that has the three lines on it? I'm not sure if I did or
w.

not.

A. No. It's coming.

ww
 om
Q. Okay.

n.c
Mr. Camp: What was the exhibit number?

so
Court Clerk: 647-P.

Mr. Camp: Okay.

ck
Mr. Salkin: Could you explain what .... this is number what? I'm sorry.

lJa
Court Clerk: 647-P.

Mr. Salkin:
ae
Q. Could you explain what Exhibit 647-P is?
ich

A. Yeah, certainly. It is looking at the company growth, the return based on the value of
Sony/ATV .... the enterprise value of Sony/ATV in June 2009, Mr. Jackson's death and then the
value in September '16 or completion of the sale of the fifth .... of Michael Jackson's interest to
mM

Sony/ATV.

Q. And on this numbers, are these ....

Mr. Camp: Your Honor, I would like to object until we know who prepared this document.
a
Te

Judge Holmes: Can you elucidate that, Mr. Salkin?

Mr. Salkin: Yes.

w.

Mr. Salkin: Q. Do you know who prepared this document?

ww
 om
A. I do.

n.c
Q. Who prepared it?

so
A. Me.

Q. On the numbers here, you have, for example, 1,100. What number would that denote? In

ck
millions or billions? What?

lJa
A. 1.1 billion. That's the enterprise value of .... based on my assessment of the value of
Sony/ATV at the date of death.

Q. All right. And in the column that's headed September '16 ....
ae
A. Yeah.
ich

Q. .... in the second line you have EV without option price 1797.4.
mM

A. Yeah.

Q. Can you explain what that is?

a

A. Yeah. That's effectively .... if you took the purchase price of the 750 and just assumed that
there was no cap on 20 .... on half of the estate's interest, that would be the enterprise value of the
Te

business at the date of sale.

Q. Could you go through the arithmetic on how you go from 750 million to 1.797 billion?
w.

A. Yeah. Its 750 million. Without an option price cap would mean that you would double the
value and then add on the debt.
ww
 om
Q. All right. And the next number, which is the third line in the September '16, says 2.157
billion. Is that correct?

n.c
A. Yes.

so
Q. And what does that denote?

ck
A. That recognizes the .... in the 750 million paid, there was a cap on half of that 750 million.
So therefore, it was assumed if there .... if that cap applied, that would have reduced the value.
And therefore, by ignoring that, you would have gotten a higher value of the equity. Then plus

lJa
the debt, you would get a figure of 2.157 billion.

Q. Did that represent the value of the company without the debt taken into effect?
ae
A. Pre-debt.
ich

Q. And then you have a third column on the right, CAGR. What does that stand for?

A. Compound annual growth rate.

mM

Q. All right. And the first line is S&P 500 Index, and that says 12.5 percent. How did you
calculate that?
a

A. That was based on I think .... if you look, we have got between June 2009 and September
'16, it's six .... seven and a quarter years. So it was actually looking at that .... the compound
Te

annual growth rate on the movement between 2.1 .... 2.68 and 920. On an annual growth rate, it
grew 12.5 percent per annum.
w.

Mr. Camp: Your Honor, I object to this last question and answer because it's beyond the scope
of my cross-examination.
ww
 om
Judge Holmes: Overruled.

n.c
Mr. Salkin:
Q. Could we go to the second line that has a 7 percent CAGR? That's compound annual growth
rate.

so
A. Yeah.

ck
Q. How did you compute that?

lJa
A. On the same basis as we .... an identical basis the way we calculated the S&P 500
movement. So it was taking the value of 1.797 billion and looking at the growth on an annual
growth rate from the 1.1 - - from the base of 1.1 over 7.2 years. So that's 7 percent.
ae
Q. Did you compound annually to arrive at that number?
ich
A. We did.

Q. All right. And how about the third line where it's 9.7 percent?
mM

A. Exactly the same basis.

Q. Can you compare the market conditions in 2009 with the market conditions in 2016?
a

A. Market condition generally or for the music business?

Te

Q. For the music business.

w.

A. For the .... I mean, the two are inter- related. But the .... certainly, as I said earlier in my
testimony, the .... we were in the midst of the financial crisis, and the music industry across the
piece was suffering from the effect of digitalization, and the introduction of iTunes and the ....
ww
 om
and mechanical income falling quite significantly. It had less of an impact on music publishing,
but it was certainly a factor. The CD sales were falling very quickly, although music publishing
was able to compensate for that through other sources of income. But the recording music

n.c
industry suffered greatly. But it .... so it wasn't growing. And it was in the context of general
financial conditions that were still very difficult.

so
Q. Were you familiar with the changes in Sony/ATV as a company between 2009 and 2016?

A. Yes.

ck
Q. What were those changes?

lJa
A. I mean, the biggest change would have been the acquisition buyer consortium led by Sony
Corp. to acquire EMI music publishing in November 2011, which meant .... where effectively the
staff of EMI and the back office and the creative staff were transferred across into Sony/ATV
ae
who administered the catalog on behalf of the consulting for a fee.
ich
Q. In your opinion, were these differences very material between the two dates?

A. Well, so at that point in time, Sony/ATV went from being the fourth of the majors to being
number one with control over .... I think it's between 3 million and 4 million songs, where before
mM

they had 750,000 songs.

Q. In your opinion, would these changes have a material impact on the value of the company?
a

A. Yes.
Te

Q. And with what kind of impact would that be?

w.

A. Well, I think it would be a positive impact.

ww
 om
Q. And just briefly, expenses were mentioned. Was there a reason for the expenses .... operating
expenses being higher for Sony/ATV as a percentage of their NPS, or as a percentage of revenue
as compared with other companies in the business?

n.c
A. On the basis that it was looking to grow the business, as I said, you would expect them to
have slightly higher staff numbers to meet the growth that you were growing the platform. So the

so
platform, to me, are higher amount of copyrights that you could put through that platform, so you
would expect.

ck
Q. In your opinion, was that program successful when you look at 2016 compared to 2009?

A. On the basis they have gone from number four to number one, yes.

lJa
Q. Okay. I have no more questions. ae
Judge Holmes: Okay. I have just a few, Mr. Wallis.
ich
A. Certainly.
CROSS-EXAMINATION
mM

Judge Holmes:
Q. I'll just be going through your reports. Take the big report, 643-P, and tell me when you have
it. Okay. Turn to Page 10 and tell me when you're there.

A. Yes.
a
Te

Judge Holmes:
Under assumption 3.7D, you say that taxes are payable on the basis that the acquirer will be
required to pay federal and state taxes at the New York rates, but by making an election to treat
w.

the transaction as an asset sale, receive a tax benefit by advertising the value of the useful life
thereof. Did you take into consideration the tax- effecting report of Ms. Fannon on both weighted
average cost of capital and on the proper calculation of a discount factor?
ww
 om
A. Not explicitly, no.

n.c
Judge Holmes:
Did you do it implicitly?

so
A. I was aware of it, but I was making my own judgment on this tax rate ......

ck
Judge Holmes:
Inasmuch as Sony/ATV was a New Hampshire trust, why did you choose the New York tax

lJa
rates?

A. I just saw it as a New York business. ae

Judge Holmes:
In the back .... sort of the background section of your report, you included a summary of the
ich
incredible changes that were going on in the music industry in terms of royalties between album
sales and the digitalization. Can you describe that a bit for me ....
mM

A. Yeah. Can you ....

Judge Holmes:
.... as of '09?
a

A. Sure. Can you ....

Te

Judge Holmes:
This is about Page 17 or so ....
w.

A. Sure.
ww
 om
Judge Holmes:

n.c
.... a little bit of to-ing and fro-ing. Was the composition of revenues changing ....

A. Yes.

so
Judge Holmes:
.... first of all?

ck
A. I mean, the .... yeah. There was .... I mean, with the music publishing business, you have got

lJa
to be careful and distinguish between a recording music business and music publishing business
actually get its income from a wider range of sources. So there are four main sources of income.
There are .... there is mechanicals, which is sales of CDs, increasingly downloads. There's
performance income from being played on the radio. There are .... and then there is
ae
synchronization, which is actually the way you have direct licenses between you and whoever
wants to use the song in a conjunction with a moving image. So you have got four sources of
income. And what has happened for a number of years prior to that is the performance income,
because there was more radio stations, more places, was growing quite nicely. Mechanical
ich
income was falling as CD .... CD sales had peeked in the 1990s. And then by the time
everyone .... piracy became a problem with people .... with digitalization. And then also .... then
Apple came along with that .... with iTunes, which meant you didn't need to go out and pay $15
for an album anymore. If there's two tracks you liked, you could get it for $0.79 each. So that
mM

distance of mediation of the album was a major factor on the mechanical income stream. So I
have quoted statistics where you were seeing the falling in mechanical sales. But with the music
publishers, the other income was making some of that .... that fall-off was making up for that. It
was compensating for it.
a

Judge Holmes:
Te

Okay. How are you able to predict synched income, which seems very discontinuous from year
to year?
w.

A. When I first started doing valuations, synch income was regarded very much as lumpy and
one off in nature, and therefore, quite risky particularly for small catalogues. But with everything
that was going on in the industry, it was becoming a far more important part of how you continue
to grow the business, so there was more effort and more tension paid to generating that income.
ww
 om
And it's not necessary .... and I think .... the pair we talk about, it wasn't necessarily huge
amounts of money, that million dollar synch, so it would be small amounts, but doing lots of
deals. And I think when you're doing lots of deals and you've got a reputation for generating

n.c
synch income, then there's no reason to think it's suddenly going to stop.

Judge Holmes:

so
So it becomes more ....

A. It's really based on the history .... sorry.

ck
Judge Holmes:

lJa
Okay. But it becomes sort of more predictable the more songs you have the rights to. Is that the
gist of it?
ae
A. Not necessarily because some songs aren't necessarily .... lend themselves to
synchronization. It does depend on the nature of the catalogue. I think you can tell the
relationships you've got with music supervisors, advertising agencies, and film industry to get ....
ich
for them to use your songs.

Judge Holmes:
mM

On Page 20 of your primary report at 643-3, you rely heavily, it seems, on these Enders
predictions of what's going on in the industry. What are the Enders predictions?

A. Claire Enders is a former analyst who worked for EMI. And a few years before her valuation
date, she set up a research firm but spent a lot of time .... why .... I think she started with music
really. I mean, she's been far more into other media assets. But in my experience, and whenever
a

I've done any work in this sector, people refer to Enders as an informed source and an industry
Te

source on growth forecast for the industry.

Judge Holmes:
w.

One peculiarity that you highlighted in 4.60 on Page 20 of your report, was the expiration of
the .... the foreseeable expiration at the end of 2009 of the ....
ww
 om
A. Yeah.

n.c
Judge Holmes:
.... overall industry licensing agreements. What effect did that have in the middle of 2009? Were
there widely held expectations as to what would be happening in the renewal negotiations?

so
A. I think it was a risk that no one was sure what was going to happen, so ....

ck
Judge Holmes:
How long are those industry licensing agreements for?

lJa
A. Off the top of my head, I can't recall. It's been awhile ago.

Judge Holmes:
ae
Down on 4.65 under Outlook, using the Enders forecast, you said that recorded music revenue
was estimated to fall by 18.7 percent between '08 and 2013 and with music publishing's forecast
ich
to increase in that over for the same period. Are these dateline ..... streams of revenues reflected
in there somewhere?

A. Not at that point in time. Spotify only saw a (inaudible) impact in 2009. It wasn't in
mM

America, at that point.

Judge Holmes:
Were there industry expectations in the middle of 2009 as to the income that was to be expected
from Spotify?
a
Te

A. At that time, everyone was hoping that maybe streaming would, but no. It was very difficult
at that stage to see whether we had .... whether you had a viable streaming platform that was
going to work.
w.

Judge Holmes: Was the possibility of a streaming platform being taken into consideration in
transactions in 2009?
ww
 om
A. No.

n.c
Judge Holmes:
On Page 23 in 4.78, you say any of the majors, referring to major music publishing companies,
would have had great difficulty bidding for Sony/ATV and antitrust firms. What's your basis for

so
saying that?

ck
A. Experience of when BMG was sold to Universal Music in 2006, as part of that process,
BMG had .... Universal .... I beg your pardon .... had to agree to dispose of part of the catalogue.

lJa
Judge Holmes:
What part? Do you know?
ae
A. Yeah. It wasn't .... it was certainly not the good felt ..... part. In overall terms, I think it came
out to .... in value terms, if I can think of it that way, sort of around 130,000 in the context of the
2 billion transactions.
ich

Judge Holmes:
Does your modeling of the future revenue flow for Sony/ATV include the expiration of the .... or
mM

I guess, the reversion of the rights to Paul McCartney of the value of those Beatles songs?

A. No. I didn't explicitly take into account for cash flows. I considered whether we would do
that, but I decided in the overall scheme of things that it would have been difficult to get the
information for it to be on the shelf ......
a
Te

Judge Holmes:
Would the midrange plan that Sony/ATV had be .... have been available to a hypothetical buyer
back in 2009?
w.

A. Yes.
ww
 om
Judge Holmes:
Why do you say that?

n.c
A. In my experience of doing valuations of assets such as this, I think it would be anyone
acquiring a 50 percent stake in the business would have asked to see management's forecast.

so
Judge Holmes:
In calculating your forecast multiples, you used Warner Music Group, didn't you?

ck
A. I used the trend on the basis of it was a listed company at that point in time, so I took ....
yeah.

lJa
Judge Holmes:
Did you consider using any other companies?
ae
A. Well, the only .... that was the only project for .... on the basis of looking at comparable listed
ich
companies, it was the only comparable listed company out there. Can I just add to it? On the ....

Judge Holmes:
mM

Sure.

A. I mean, Universal is owned by Vivendi, which is a listed company, and Sony/ATV is owned
by Sony Corp, but they've got such .... you know, such a wide diverse nature of other
transactions. Their shared prices are impacted by other things, so they're not pure play music
companies.
a
Te

Judge Holmes:
And you adjusted for the minimal $11 million payment to Mr. Jackson, right?
w.

A. Yeah.
ww
 om
Judge Holmes:
Why did you assume a dividend rate of zero?

n.c
A. In what context?

so
Judge Holmes:
This is in terms of your calculation of a discount for lack of marketability, on Page 52.

ck
A. Oh, in terms of using the optional analysis, that would be normal practice just to assume no
dividend.

lJa
Judge Holmes:
I just .... I'm not aware of that. Why is that normal practice?
ae
A. I think it's just to put it on a level- playing field.
ich

Judge Holmes:
Tell me a little bit about why an operating agreement that featured provisions for a forced sale,
you've had a discount for lack of marketability at all.
mM

A. Well, I .... the view .... I mean, let's go back to the .... I was valuing .... my starting point was
the value of 100 percent, but recognizing what the asset that I was required to express an opinion
or value on was the membership interest owned by Mr. Jackson. So .... which was a non-
controlling interest. And in the context of a transaction between a willing buyer and a willing
seller of that interest, I took the view that anyone buying that interest would then be bound by the
a

buy-sell provisions. But that would be once they were a registered shareholder.
Te

Judge Holmes:
Yeah. You would, in essence, have had to spend $300 million, give or take, as an option.
w.

A. Yes.
ww
 om
Judge Holmes:

n.c
Well, yeah ....

A. I mean, yeah.

so
Judge Holmes:
.... it would be an option to ....

ck
A. Yeah.

lJa
Judge Holmes:
.... force the buy-sell provision. Given the value of the company, wouldn't a rational hypothetical
buyer have been willing to pay that?
ae
A. I think .... it's a valuation question because the risk of this one is the .... there was not much
ich
headroom. The values of .... the collateral wasn't sufficiently large enough for anyone to take that
risk, I don't think.
mM

Judge Holmes:
By which you mean that the value of Michael Jackson's share would not have been sufficiently
above $300 million ....

A. Yeah.
a
Te

Judge Holmes:
.... to admittedly an ignorant buyer ....
w.

A. Exactly.
ww

Judge Holmes:
 om
.... in the sense of what is the context. I think that's what you're saying. Next up, 644-P. That is
your rebuttal report.

n.c
A. Yep.

Judge Holmes:

so
What have I got there? Remind me again of whether it was you or Mr. Anson who thought that
the sale of BMI was a distressed sale?

ck
A. Mr. Anson thought it was a distressed sale.

lJa
Judge Holmes:
Okay. I have questions on that for him though. Never mind for you, though. We talked about the
tax affecting, so. Oh, on Page 4, you criticize Mr. Anson for not taking into account the
ae
percentage of Sony/ATV's sales that were part of the front list, which we learned last week is
kind of like the book publishing industry.
ich
A. Yeah.

Judge Holmes:
mM

You have ....

A. Exactly.
a

Judge Holmes:
Te

.... best sellers and the back list.

A. Yeah.
w.

Judge Holmes:
ww
 om
Tell me what a normal percent .... is there a normal percentage in this industry for that split
between front list and back list?

n.c
A. I think Sony's would have been toward .... for small companies, they may not have much
front list at all. They might be largely catalogue. But for the music business, and it's actually one
of the majors, my understanding is that Sony's may have had a slightly larger front list because

so
they were trying to grow the catalogue.

Judge Holmes:

ck
Now, you also guessed it for the A&R cost, or whatever it's calling .... 50 million versus 25
million.

lJa
A. That was the .... no, the 50 million was the .... for buying catalogues.

Judge Holmes:
ae
Oh, okay.
ich
A. Okay?

Judge Holmes:
mM

That was growing the catalogue side of the business.

A. Yeah. So there's also another line, Your Honor, in the valuation, which was for paying
advances to sign new writers.
a

Judge Holmes:
Te

Okay. What did you .... what assumptions did you make on the signing new writers part of that?
w.

A. I used .... I looked at and reviewed management's assumptions in the docufiles ......

Judge Holmes:
ww
 om
Okay. On Page 17 of Exhibit 644-P, go to 4.4. Tell me when you're there.

n.c
A. I'm there.

Judge Holmes:

so
When you say, "There are relatively few transactions overall, so I would not characterize the
M&A market as especially active around the valuation date" .... when you say around the
valuation date, what time frame were you looking at?

ck
A. I'm .... I looked at that year, 2009.

lJa
Judge Holmes:
And what were the number of transactions in that year compared to '08?
ae
A. I think there were very few.
ich
Judge Holmes:
Okay. And you contribute that to the recession that they had.
mM

A. Yeah. Your Honor, if it helps, if you go to appendix .... just on that last question, if you go to
Appendix D of ....

Judge Holmes:
Of the big report?
a
Te

A. Yeah. No, no, on the rebuttal report.

Judge Holmes:
w.

Okay.
ww
 om
A. Page 47. I've listed ....

n.c
Judge Holmes:
Appendix E?

so
A. D .... D for Donald.

Judge Holmes:

ck
Oh, D. D as in David.

lJa
A. D for Donald. D for Donald, so to speak. So there were a couple of small transactions .... or
was .... there was one small transaction on Richard Marx, and then there was the Rogers and
Hammerstein acquisition. But that .... but you can see the .... very few transactions .... more
transactions in the following year.
ae
Judge Holmes:
ich
Is there a rule of thumb in the industry, or some other way to predict how much overhead costs
increase through acquisitions? You know, if you buy 100,000 bonds, you're looking at X in terms
of increased overhead?
mM

A. I mean, it could be, if you require a 100,000 songs. There's very little additional overhead.

Judge Holmes:
Oh.
a
Te

A. It depends on the .... the back office and the platform that you've already got, which is why
some of the majors do put .... make use of taking on admin contracts. Even though, you know,
they may not be the most profitable, it generates cash flow. It's like a law firm that, you know,
got three people and are not very busy. They may take some work at a lower cost just to .... to
w.

keep them busy.

Judge Holmes: Marginal pricing.

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 om
A. Yep.

n.c
Judge Holmes:
Thats to teach me that much. All right. We talked about that. All right. That's it for me. Any
follow-up questions, Mr. Salkin?

so
Mr. Salkin: Can he have a break, Judge?

ck
Judge Holmes: Oh, sure. Actually, why don't you both do that and be ready with any follow-up
questions.

lJa
Mr. Salkin: Sure. ae
RECESS..
ich
Judge Holmes: Mr. Salkin, anything?

Mr. Salkin: Yes, please.

mM

Judge Holmes: Go ahead.

REDIRECT EXAMINATION
a

Mr. Salkin:
Te

Q. Did some of the difficulties in going through the buy-sell process impact your opinion on
discounts?
w.

Mr. Camp: Objection, leading.

ww
 om
Judge Holmes: Overruled.

n.c
A. Yes.

Mr. Salkin:

so
Q. Why?

A. Because of his own complex structure, it would take time to go through that process with no

ck
guarantee of success. It's very risky. I think it was risky.

lJa
Q. How long a time span would be involved?

A. Well, I think that it would take .... I was working .... it would take a matter of between six
and nine months.
ae
Q. Besides dealing with Sony and other prospective buyers, are there any other things that
ich
would have to be done to be able to complete the buy- sell process?

A. Other than?
mM

Q. Like regulatory ....

A. Oh.
a

Mr. Camp: Objection, leading.

Te

Judge Holmes: That's leading.

w.

A. Sorry. Sorry.
ww
 om
Judge Holmes: Rephrase.

n.c
Mr. Salkin:
Q. Are there any regulatory approvals that would be necessary in the sale of either an interest in
Sony/ATV or Sony/ATV selling its own business?

so
A. I think in the context of .... if it was in the context of 100 percent, there would .... and you
will find the whole company, yes, there would.

ck
Q. Did you experience or note any in other transactions?

lJa
A. Yes.

Q. What were those?

ae
A. It certainly came up. As I say, I was acting for an inquirer after the BMG .... the Bertelsmann
ich
transaction with Universal. I acted for a potential buyer of the rights that Universal had to sell.
I'm aware of it from the EMI transaction. That was a big concern, those two, the regulatory
requirements and who might be able to bid and what would happen if .... in those circumstances
so that Sony willing to (inaudible) BMI making regulatory risks, which is one of the reasons they
mM

sold it in parts.

Q. What regulatory issues are you talking about?

A. The fact that .... its having market dominance.

a
Te

Q. Would there be foreign, as well as U.S.?

A. It would be .... I mean, certainly US, and Europe is quite a significant risk for .... in my
w.

experience as well.
ww
 om
Q. And in your opinion, would that be .... would be by itself process be sufficient to take away
the discounts?

n.c
A. No.

Q. Could you explain why?

so
A. Well, I think .... for one thing, I'm not valuing it onto the buy-sell provisions. I'm valuing the

ck
50 percent stake between a willing buyer and a willing seller or a Russian investor or acquiring
50 percent, and they're not actually doing it under those provisions. And I just think that there
was a lack of control. Mr. Jackson didn't .... although it was major decisions that he had to go the
Board of Representatives, when you look at them, they didn't really stop Sony managing and

lJa
running the business on a day-to-day basis. And, you know, the actual major decisions that he
could impact, didn't really impact that business on a day-to-day basis. And secondly, I don't think
it was a particularly liquid investment. So therefore, there was a market initial if you couldn't just
sell this the next day.
ae
Q. What right to manage would the purchaser of a one-half interest in Sony/ATV have?
ich

A. On a day-to-day basis, none. You'd have the right to .... I think under the operating
agreement, he would have a right to approve the budget. But my understanding of the way it
worked was if that budget wasn't approved, the previous year's budget just carried on.
mM

Q. And what right would the buyer of the half interest have to inspect records?

A. Limited, to my understanding.
a
Te

Q. Can you elaborate on that, please?

A. I can maybe get financial accounts and they would get an access to the budget, but not much
w.

else.
ww
 om
Q. One of the things mentioned in Mr. Anson's report was the suggestion that it might be a good
idea to sell off the catalogue in pieces to third parties. Did you hear that?

n.c
Mr. Camp: Objection. This is beyond the scope of the questioning, Your Honor.

Judge Holmes: Overruled. Go ahead.

so
Mr. Salkin:

ck
A. Can you ask me again, please?

lJa
Q. Yes. In your opinion, would it be desirable for Sony/ATV to break up its business by selling
the catalogues in pieces? ae
A. I think there are a number of reasons why I don't think that's .... that makes any sense
whatsoever. First off, you've got the .... it's .... the idea would be that you could get a better price
ich
by selling it in parts. And I'm not denying that the .... and I'm not denying that there are certain
parts of the catalogue you may get a premium price for. But then, there's a rump of something in
the catalogue that may be very difficult to sell, and I'm not sure you would get the .... effectively,
the blended multiple by selling it in parts at all. So I think you'd have difficulties. I think there's
also the issue of how many parts are we talking about. You know, just saying we'll sell it in bits.
mM

Well, how many bits are we speaking of, would be a question I'd have. And there certainly would
be a cost associated with doing it. And the more parts that you're selling off, the greater the cost
would be, so .... and the timing issue. Then I come to the question .... they're all my reasons why
I think it doesn't make sense. And then I look around and say has anyone ever done it. And it's
never been done. And the whole rationale of the majors was to acquisitions, not to sell off
catalogues. And then lastly, of course, the purchase .... the acquirer of the 50 percent interest is in
a

the position to do it anyway.

Te

Q. You talked about timing with respect to the buy-sell process. What would happen during this
period of time that the process took place?
w.

A. Well, there'd be .... I think it would be expert reports being done, depending on how many
stages you enter in negotiations between parties.
ww
 om
Q. And each side would .... would each side select their own expert for those expert reports?

n.c
A. I believe so.

so
Mr. Camp: Objection, leading.

Judge Holmes: Sustained.

ck
Mr. Salkin:

lJa
Q. Who .... how would the expert be selected to facilitate the buy-sell process?

A. I'm assuming you would look for people who've got experience of valuing these type of
ae
assets and hire someone with that experience. And each side would have their own value.

Q. During 2009, were you able to identify the likely investors who would be willing to buy a
ich
half interest of Sony/ATV?

A. I do think about the universal potential buyers, yes.

mM

Q. How large is that universe?

A. I think it would be .... if the credit market .... if the credit markets had been open and the
financial markets had been open and sort of leverage was available, I think it might have been
a

bigger, but at that point in time, I thought it as a very small width, you know, possibly two or
Te

three potential acquirers, largely amongst the trade buyers.

Q. You mentioned before that Sony ATV went from number 4 in the industry to number 1 in the
w.

industry between 2009 and 2016. What impact did that have on the value of the company?
ww
 om
A. I think it would have been .... I mean, that was always the objective, I think, to be much
bigger. And I think, you know, you get more power, more leverage with whoever wants to use
your music when you're number one.

n.c
Q. And ....

so
A. So there would be positives, to answer your question.

ck
Q. One last question. Either Sony/ATV .... or Sony, rather or the estate started the buy-sell
process, would there have been any certainty with respect to the outcome?

lJa
A. No.

Q. How would you quantify the level of risk associated with initiating the buy-sell process?
ae
A. I would say a great deal of risk because you're effectively as .... I'm reading Mr. Dunn's
ich
testimony .... you know, you pay to play. I think in those markets, that would have been highly
risky.

Mr. Salkin: I have no more questions.

mM

Judge Holmes: Follow-up questions, Mr. Camp.

Mr. Camp: No further questions, Your Honor.

a
Te

Judge Holmes: Okay. Is he going to be coming back?

Mr. Toscher: Depending if we put on a rebuttal, Your Honor. So ....

w.

Mr. Camp: We may.

ww
 om
Mr. Toscher: .... we'll wait to hear.

n.c
Mr. Camp: Okay.

Mr. Toscher: Yes.

so
Judge Holmes: Well, you're free to step down, Mr. Wallis. Who's next?

ck
Mr. Toscher: Ms. Fannon.

lJa
ae
ich
a mM
Te
w.
ww