Business Combination

6 Months Ended

Jun. 30, 2014

Business Combination

Business Combination

Note 2. Business Combination

On April 1, 2014, we closed on the acquisition of the net assets of the Spanish-language television network business of Media World (the “Cable Networks Acquisition”), which is comprised of Pasiones, Centroamerica TV and TV Dominicana, which we refer to as the Acquired Cable Networks.  The Acquired Cable Networks are highly complementary to our existing television networks, and build on our commitment to provide unique programming focused on the U.S. Hispanic market.  The purchase price for the Cable Networks Acquisition and certain agreements entered into with MediaWorld contemporaneously with the business combination was $101.9 million, and was funded with cash on hand.  The Cable Networks Acquisition was accounted for by applying the acquisition method, which requires the determination of the fair value of the consideration transferred, the fair value of the assets and liabilities of the acquiree, and the measurement of goodwill pursuant to ASC Topic 805-10, “Business Combinations-Overall”.  Costs incurred in connection with the Cable Networks Acquisition are included in other expenses and totaled $1.2 million, of which $0.9 million was recorded in the fourth quarter of 2013, with the balance recorded in 2014.

The following table summarizes the estimated fair values of the assets acquired, liabilities assumed and resulting goodwill in the Cable Networks Acquisition (amounts in thousands):

Other assets	$	177
Intangible asset - affiliate agreements	46,014
Intangible asset - brands	15,986
Intangible asset - advertiser relationships	3,310
Intangible assets - other	648
Other liabilities	(2,124		)
Fair value of identifiable net assets acquired	64,012
Goodwill	34,093
Total	$	98,105

In addition to the above identifiable assets, the estimated fair values of a non-compete agreement entered into with Media World and a consulting agreement with certain Media World executives are $3.3 million and $0.5 million, respectively, which are accounted for separately from the Cable Networks Acquisition.

The estimated fair value of the affiliate agreements of $46.0 million was determined using a discounted cash flow method utilizing an 8.5% discount rate.  This intangible asset will be amortized on a straight-line basis over eight years.  The estimated fair value of the television network brands of $16.0 million was determined using a discounted cash flow based method based on a royalty rate of 5% and utilizing an 8.5% discount rate.  This intangible asset was determined to be indefinite-lived given the strong association of the brand with the content appearing on the networks and their respective target audiences. The estimated fair values of the advertiser relationships and non-compete agreement of $3.3 million each were determined using a discounted cash flow method utilizing an 8.5% discount rate and will be amortized on a straight-line basis over six years.  All other intangibles of $1.1 million will be amortized over a period of one year or less.

Goodwill of $34.1 million is the excess of the net consideration transferred over the fair value of the identifiable net assets acquired, and primarily represents the benefits we expect to realize from the Cable Networks Acquisition and the synergistic opportunities with our existing networks.  The goodwill associated with the transaction is deductible for tax purposes.

In connection with the Cable Networks Acquisition, we determined that it is reasonably certain that its foreign tax credits will be realized and, as a result, reversed the valuation allowance previously recorded of $2.5 million.

Pro Forma Information

The following table sets forth the unaudited pro forma results of operations assuming that the Cable Networks Acquisition occurred on January 1, 2013:

	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Net Revenues	$	29,055	$	28,374	$	55,868	$	47,327
Operating Income	$	6,674	$	3,144	$	11,472	$	3,692

The unaudited pro forma results of operations for all periods set forth above includes the operating results of the Acquired Cable Networks, and amortization of finite-lived intangible assets identified as a result of the Cable Networks Acquisition, and excludes all transaction related fees and expenses, and non-recurring expenses (primarily the $3.8 million charge in the 2013 periods as a result of the termination of an agreement in connection with the April 4, 2013 Transaction). These are the combined historical results of operations of Hemisphere and the Acquired Cable Networks. These unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the Cable Networks Acquisition occurred on January 1, 2013, nor are they intended to represent or be indicative of future results of operations.

Net revenues and operating income of the Acquired Cable Networks included in our actual condensed consolidated statements of operations were $5.8 million and $1.3 million respectively, for both the three and six months ended June 30, 2014.