REPORT

To: The Board of VYP

From : The Management Accountant
Date : 1st September 2010

REVIEW OF ISUES FACING V AND Y

PRODUCTIONS (VYP)
Content
1 Introduction...............................................................................................................4
Terms of reference.......................................................................................................5
Prioritization of issues..................................................................................................6
Discussion of issues.....................................................................................................7
5. Ethical issues and recommendation on ethics........................................................10
The Ethical issues have been analysed using the CCAB guidelines.........................10
5.1 Charity work........................................................................................................10
Why this is an ethical issue?......................................................................................10
6. Recommendations..................................................................................................11
Conclusion.................................................................................................................14

Appendix 1 -Summery of the Acquisition of X Productions

Appendix 2 - SWOT Analysis
Appendix 3 -Forecast Income Statement
Apendix 4- Acquisition of X
Appendix 5 - Shares to be offered
1 Introduction

VYP producers Documentaries, Drama Series, Scripted comedies and general

Entertainment Programmes, Where it’s strength lies in it’s reputation for Documentaries.

VYP operates in an environment where broadcasters are reducing their budgets. The TV
production companies are overcoming this issue by continuously trying to increase
efficiencies and exports.
Terms of reference

I am the management accountant appointed by the VYP board to write a report on the
issues currently faced by the company. Further I have been requested to present 2
slides summarizing the recommendations relating to the acquisition of X Productions.
Prioritization of issues

The issues have been evaluated according to it’s impact and urgency on VYP.
A full SWOT Analysis is presented in Appendix 2

3.1 TOP Priority – Acquisition of X Productions

This would enable VYP to grow by inorganic growth. And this issue is ranked
as the top priority due to it’s impact on VYP’s value and the value to the
shareholders. Further this would be an opportunity to grow VYP’s sales and
profits in an economic environment where TV production companies’
revenues are continuously declining

3.2 Second Priority – Private Equity financing

This would be a good financing option for VYP, where it currently operates
with a loan covenant and VYP’s financing are restricted due to it being an
unlisted company. This issue is given second priority due to it’s impact on
VYP, where the compay may have to be listed when IPE will go for a listing
as an exit route.

3.3 Third Priority – Performance bonuses

This issue is given third priority because the company’s employees are
demotivated and being an intellectual capital business it is essential to keep
it’s employees motivated. Where the producers are considered to be key
players as per Mendalow’s matrix due to their contribution to VYP’s
operations

3.4 Fourth Priority – Computer graphics package

This issue is given

Discussion of issues

4.1 TOP Priority – Acquisition of X Productions

This proposal can be analysed using Johnson and Scholes’ Suitability,

Feasibility and Acceptability framework.

Suitability

Steven Ray of X productions have offered to sell his 51% stake to VYP for a
price of £ 5.5 million. This would enable VYP to have control over X
productions. X production is famous for producing drama series and this
would be a market penetration strategy for VYP where broadcasting
companies are reducing commissioning revenue. And would enable VYP to
grow it’s business, where VYP is still a small player in the TV production
industry.

Shine had increased it’s profitability by acquiring othr TV production

compnies. Last year it’s operating profits increased vastly due to it’s
acquisition of Reveille the US company.

Similarly this would be a good opportunity for VYP to icrease it’s revenues.
By approximately 6.35 million (12.5*.51)

Fesibility

However VYP would only obtain a value of £3.9 million for a cost of £ 5.5
million. Where VYP would end up making a loss of £1.5 milion. (Appendix
4) There is also a possibility of future cash outflow of £250,000 which would
reduce VYP’s liquidity. Further finacing the acquisition would be difficult due
to the loan covenant, where VYP’s gearing has already reached 22% If VYP
decides to go for private equity financing then the 5.5 m financing could be
obtained. This is further discussed in section 4.2

Acceptability

This would generate a loss of 1.5 m for VYP and the value of the comapy
would decrease. The shareholders will not accept this proposal. Further there
would be cultural differences and difficulties of integration
4.2 Second Priority – Private Equity financing

This would be a good financing option for VYP, where it currently operates
with a loan covenant and VYP’s financing are restricted due to it being an
unlisted company. Further this would provide a 5 million financing for the
acquisition of X Productions. This would be a good opportunity to raise
finance for VYP’s growth opportunities.

However this would result in VYP having to give IPE a 34% shareholding
(Appendix 5) where IPE would have the highest stake in VYP. This would
also dilute the shareholding of the other shareholders; where Steve Voddill
and John Young’s shareholding would decline to 19%. (Appendix 5) This
would enable IPE to be the single highest shareholder of VYP.

Going for private equity financing would enable VYP having to list the
company in another 5 years as an exit route for IPE and this would create
threat of takeover, where VYP is still a small player in the industry, if VYP’s
growth is slow during the next five years. And VYP’s directors would lose it’s
business.

The current shareholders will not accept this, and Steve Voddil and John
Young will not be willing to lose their high stake in the company.
4.3 Third Priority – Performance bonuses

The company’s employees are demotivated and being an intellectual capital

business it is essential to keep it’s employees motivated. Where the producers
are considered to be some of the key players of the business, and struggle to
achieve cost control measures.

However giving a bonuses of 2% would enable VYPto incur a forecast bonus

cost of £ 0.7 million(3.4*.02) and would reduce operating profits of VYP by
13% (5103-4403)/5103. Further as of recent the programme producers’ have
failed to meet cost targets, due to poor estimates and poor cost controls.
Therefore it is not wise to give them bonuses just because they request it.

The following structure of Appraisal system can be considered in order to give

a fair bonus and not to effect VYP’s profitability adversely and to keep the
producers’ motivated.
5. Ethical issues and recommendation on ethics

The Ethical issues have been analysed using the CCAB guidelines

5.1 Charity work

Why this is an ethical issue?

Providing donations for charity is one of VYP’s CSR policies and reducing the
donation would leave a lot of charities disappointed and in a difficult position in
the FY 10/11 if they are greatly dependent on VYP’s donations. This would also
result VYP breaching the act of professional care and due competence.

Recommendation on ethical issue

The daonations are approximately 128,000 and would only be 3% of profits.

Therefore it is recommended to donate the full amount to the charity as this would
be a huge income from their point of view.

5.2 Outsourcing to a related party.

Why this is an ethical issue?

The outsourcing work has been 450000 and if it was possible to obtain
outsourcing to other outsources for a lesser amount it would be unethical of the
producer to outsource to Keylight. This violates the act of objectivity.

Recommendation on Ethical Issue

It recommended to get quotations from other outsourcing company’s of lighting

equipment and evaluate if outsourcing to Keylight is profitable. Out of the
quotations the less costly outsourcing company with high quality products should
be selected.

In the long run it is recommended to have a supervisor to look into such matters.
6. Recommendations

6.1 TOP Priority – Acquisition of X Productions

It is recommended not to go for the acquisition of X Productions

Justification for the recommendation

VYP would only obtain a value of £3.9 million for a cost of £ 5.5 million.
Where VYP would end up making a loss of £1.5 milion. (Appendix 4) There
is also a possibility of future cash outflow of £250,000 which would reduce
VYP’s liquidity. This would reduce the value of VYP.

However VYP should look for other acquisition opportunities, where it would
be a faster way to grow and a penetration strategy.
4.2 Second Priority – Private Equity financing

It is recommended not to go for private equity financing from IPE.

Justification for the recommendation

This would result in VYP having to give IPE a 34% shareholding (Appendix
5) where IPE would have the highest stake in VYP. This would also dilute the
shareholding of the other shareholders; where Steve Voddill and John
Young’s shareholding would decline to 19%. (Appendix 5) This would enable
IPE to be the single highest shareholder of VYP.

Further going for private equity financing would enable VYP having to list the
company in another 5 years as an exit route for IPE and this would create
threat of takeover. Also there is no greater need for a 5 million cash if VYP is
not going for the acquisition of X Productions.

However if VYP decides to acquire X Production s it is recommended to look

for other equity financing since finacing from IPE would dilute VYP’s cureent
shareholding and would enable IPE to become the highet single shareholder.
6.3 Third Priority – Performance bonuses

The following performance appraisal systems can be considered.

If the commissioned programme win awards,

If the commissioned programme win awards this would enhance VYP’s

reputation and would enduce them to obtain future programmes. Therefore the
relevant producers regarding the respective programme should be given a
bonus of 3% of the respective revenue from the award winning programme.
This would keep the producers motivated to perform better and will not effect
VYP’s profitability too adversely.

For re-commissioned programmes

For re-commisioned programmes it is advised to give a bonus of 1% of the

respective re-commissioning revenue. This would be fair since re-
commissioned revenues per hour is expected to be 15% less than new
programmes.

For International sales

For International sales a commission of 5% of the respective programmes is

recommended because this would motivate the producers to produce to the
international market and where the local broadcasting companies are reducing
revenues and VYP should target the international market.
Conclusion