Embassy Row Acquisition Update
July 2008
Confidential Draft
Executive Summary
• Reality remains a critical growth area for SPE and requires further investment
– Sector offers attractive program economics and continues to grow
– Through 2waytraffic, SPE has secured strong international distribution
– Additional U.S. product is needed to fill 2way’s distribution capacity
– U.S. formats of 2way’s product will also create new value
• Michael Davies will serve as a cornerstone of our domestic strategy
– Davies has a strong track record, is credible internationally, and works well with 2way
– ER earnings are expected to be below CY08 budget. We continue to believe in Davies’
potential and do not anticipate a significant negative impact on overall economics
– Substantive terms have been agreed (in-line with previous discussions: $25MM at close,
up to an additional $50MM of earn-outs)
• We recommend formalizing the term sheet to acquire Embassy Row
– Sign term sheet
– Finalize long-form and complete confirmatory diligence
– Target closing early October
1
Strategic Rationale
Track Record
• History of success with shows like “Who Wants to be a Millionaire?” and
“Wife Swap”
• Now focusing on reinvigorating Sony brands (e.g., “Million Dollar
Pyramid” and “Newlywed Game”) and launching new shows with global
potential (e.g., “Take the Money and Run”)
International
Credibility
• Well regarded both domestically and internationally
• Strong relationships with networks in multiple territories
• Creates new formats that leverages 2way's distribution capacity
Fit with 2waytraffic
• Valuable sales asset for selling new ER formats, SPT library formats, and
2way formats in the U.S.
– Driving force behind 2waytraffic’s format “All-Star Mr. and Mrs.” being
developed for the U.S. (likely with CBS)
Market Factors /
Timing
• Reality producers / production companies are quickly being locked-up
(Lisa Levenson, Tom Forman, Ryan Seacrest)
• Davies has one of the best track records amongst reality producers; may
be acquired by another studio if not by SPT
2
Financial Performance
CY 07
CY 08
• Operating income was in-line with previous projections
– $3.3MM actual vs. $3.4MM budget
• YTD is below budget, full year is expected to be below budget
– Earnings through May are ($378K) vs. prior year through May of
$892K
– Full year profits estimated to be roughly $1MM vs. budget of
$3.5MM
• FY09 EBIT impact on SPE will be better than SPE budget, due largely to timing
FY 09
– $118K including P10, ($1.0M) before P10 vs. budget of ($3MM)
– Later close of acquisition results in less deal amortization during the fiscal
year
– Earlier quarters (pre-acquisition) included losses; December and March
quarters expected to be more profitable
– Decreased estimates for incremental investment
Deal NPV
• We believe Davies will still generate successful new shows and that the
deal will remain NPV positive under the current structure
3
Deal Structure
• $25MM cash at close
• Up to $50MM of additional earn-outs
–Value of earn-outs would be calculated in Year 6 as: 7x (Average of Years 56 EBITDA) minus $25MM advance
• Earn-out payments would be made between Year 6 and Year 10
–10% of earn-out paid to employees in Year 6
–10% of earn-out paid to employees in Year 7
–80% of earn-out paid to Davies over Years 6-10 if Davies meets minimum
EBITDA targets
–Earn-out payments can be accelerated if Davies exceeds EBITDA goals
Max Total Consideration: $75MM
PV(1) of Max Total Consideration: $41MM(1) - $45MM(2)
Note: (1) PV of up-front payment and maximum earn-outs fully vested in Years 6-10 at 16.5% discount rate
(2) PV of up-front payment and maximum earn-outs fully vested in Year 6 at 16.5% discount rate
4
Financial Impact – Base Case
Base Case (Prior)
Base Case (New)
FY13
P&L
$15.5
$21.6
EBITDA
($4.4)
($4.4)
($4.4)
($0.1)
$5.2
$11.1
$17.3
$1.4
$1.4
$3.7
$5.8
$6.7
Amortization
($4.4)
($4.4)
($4.4)
($4.4)
($4.4)
Incremental EBIT
($3.0)
($3.0)
($0.7)
$1.5
$2.4
P&L
EBITDA
Amortization
EBIT
Incremental EBITDA
FY09
FY10
FY11
$1.9
$4.3
$9.6
($4.4)
($4.4)
($2.5)
FY12
FY09
FY10
FY11
$2.1
$3.2
$4.5
$5.4
$5.8
($2.0)
($4.4)
($4.4)
($4.4)
($3.2)
EBIT (1)
$0.1
($1.2)
$0.1
$1.0
$2.6
Incremental EBITDA
$1.0
$1.7
$3.8
$4.9
$5.4
Amortization
($2.0)
($4.4)
($4.4)
($4.4)
($3.2)
Incremental EBIT
($1.0)
($2.7)
($0.6)
$0.6
$2.2
Amortization
FY12
FY13
NPV (10-year)
Nominal (10-Year)
NPV (10-year)
Nominal (10-Year)
Incremental EBITDA: $21.0
Incremental EBITDA: $52.8
Incremental EBITDA: $17.8
Incremental EBITDA: $43.8
Terminal Value: $74.2
Value of Exit (2): $12.9
Terminal Value: $59.4
Total Consideration: ($25.0)
Total Consideration: ($25.0)
Total Consideration: ($25.0)
Total Consideration: ($25.0)
Net Present Value (3): $12.2
Consideration / EBITDA: 47%
Net Present Value (3): $5.7
Consideration / EBITDA: 57%
Value of Exit
(2):
$16.1
Notes: Difference between total EBITDA and Incremental EBITDA is the portion of shows we own under Davies’ current deal
Old Cases assume ER is owned for all of FY09 while New Cases assume ER is owned as of October 1, 2008
Assumes a risk adjusted discount rate of 16.5% for all NPV calculations
(1) If ER secures 5% chargebacks, EBIT in FY10 - FY13 would be ($0.1), $1.9, $3.6 and $6.1, NPV would be $18.1MM
(2) Includes exit at 11x multiple
(3) Includes $25MM up-front, incremental EBITDA less earn-outs, plus exit at 11x
5
Cumulative Incremental EBITDA and NPV: New and Prior Base Case
• Value associated with properties currently on-air has decreased
– Largely offset by decrease in required investment in overhead and development as a
result of the ability to leverage 2waytraffic and ER’s currently increased staff
• Value of properties in development is largely unchanged
• Values of new properties could be higher if ER network contracts include chargebacks
Base Case (Prior)
NPV
Estimates for Properties
On-air
Power of 10 (2)
Other TV
Interactive
Sub-Total
Estimates for Properties InDevelopment
TV
Interactive
Sub-Total
Expenses
ER Overhead
Incremental Investment
Sub-Total
Deal Consideration
Total Acquired EBITDA
(1)
Base Case (New)
NPV
10-yr EBITDA
Impact
$36.5
$13.0
$13.9
$63.4
Cash Flow
$15.0
$9.1
$6.4
$30.5
Terminal
$10.4
$0.0
$3.5
$13.9
Total
$25.4
$9.1
$9.9
$44.4
10-yr EBITDA
Impact
$4.1
$0.0
$12.9
$17.0
Cash Flow
$2.1
$0.0
$5.8
$7.9
Terminal
$0.8
$0.0
$3.3
$4.1
Total
$2.9
$0.0
$9.1
$12.0
$81.4
$3.5
$84.9
$31.6
$1.6
$33.2
$26.2
$0.9
$27.1
$57.8
$2.5
$60.3
$79.8
$7.9
$87.7
$33.7
$3.7
$37.5
$22.4
$1.9
$24.3
$56.1
$5.7
$61.8
($40.8)
($54.7)
($95.5)
($18.4)
($24.2)
($42.6)
($10.5)
($14.4)
($24.9)
($28.9)
($38.6)
($67.5)
($40.6)
($20.2)
($60.9)
($18.5)
($9.1)
($27.6)
($10.3)
($5.2)
($15.5)
($28.7)
($14.3)
($43.1)
N/A
($25.0)
N/A
($25.0)
N/A
($25.0)
N/A
($25.0)
$52.8
($4.0)
$16.1
$12.2
$43.8
($7.2)
$12.9
$5.7
Note: (1) If ER secures chargebacks of 5% of budget on new shows, NPV is $18.1M, if Davies hits his forecast his NPV would be $44.4M.
(2) Includes only portion of P10 acquired from Davies.
6
Key changes in Model: “Base Case”
Current Approach
Slate
• Davies’ “New” slate, but eliminate chargebacks on
new shows
• New shows including 2 modest format successes
in the next 3-5 years
• P10 on GSN, declining format profits, no
syndication and no local language production
Changes from Prior
• Begins w/ Davies’ updated slate
– Smaller shows (WSOPC, Chain Reaction, Grand
Slam) no longer on-air
– New shows added (Newlywed, Pyramid)
– Format profits on new/library shows more modest
compared with format profits on network shows in
prior model
– P10 moved to GSN from CBS, formats/ syndication
fees and local language production reduced
Incremental
Investment
• Reduced to $1.2MM - $2.2MM of investment in
HC and development
• Reduced investment from prior estimate of
$3MM - $6MM due to:
– Ability to leverage 2way for acquisition and
distribution
– Davies now has more HC in place
Interactive
• $1.9MM (CY07 actuals) growing at 5%
• Increased from $1.5MM growing @ 5% based on
actual performance
Ancillary
• Excluded
• No Change
Sports and Film
• Excluded
• No Change
7
Incremental SPT Investment New Case vs. Prior
Incremental Investment (Prior)
Incremental Investment (New)
• Incremental investment was modeled prior to
2waytraffic acquisition
• New incremental investment assumes ability to
leverage 2waytraffic
• $300K-$2.4M of headcount costs
• Current ER and 2way working relationship is
– 2-3 Acquisition headcount
already bearing fruit with the development of
– 1-3 Development headcount
“Celebrity Mr. and Mrs. “
– 1-3 Administration headcount
• Reduced headcount costs to $700K-$1.7M
– An additional 5 Embassy Row headcount
–2 Acquisition headcount
–1 Development headcount
converted to full-time employees
• $2.0-$2.5M of self-funded pilot costs
–1-2 Administration headcount
• $0.0-$2.0M for development and acquisitions
–1 Finance headcount
–2 additional Embassy Row headcount
converted to a full-time employees
• $0 in self-funded pilot costs
• $500K for development and acquisitions
Incremental Investment (New)
Incremental Investment (Old)
FY09
FY10
FY11
FY12
FY13
FY09
FY10
FY11
FY12
FY13
($2.8)
($4.7)
($5.2)
($5.9)
($6.0)
($1.2)
($1.9)
($2.0)
($2.1)
($2.2)
8
Timing and Next Steps
July 2008
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Late July
• Lynton / Hendler review
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August 2008
Early August
• Formalize / sign term sheet
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September 2008
End Sept
• Finalize long-form confirmatory diligence (legal, tax,
financial)
• Final approval from SCA
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Early Oct
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9
APPENDIX
10
Comparable Transaction Analysis
Date
Target
European Deals
07-Dec 12 Yard Productions
Acquiror
ITV
07-Sep Metronome Film & Television
Schibsted
07-Sep Twenty Twenty Productions
Shed Media
07-Aug Sparrowhawk Media
NBC Universal
07-Aug Objective Productions
All3Media
Transaction Value
Transaction Value /
Last FY Sales Last FY EBITDA
Last FY EBIT
£35
3.0x
14.8x
na
£31.4
0.4x
na
18.8x
£18.0
1.9x
8.6x
na
£175.0
1.8x
na
na
£50.0
2.2x
na
na
07-Jul Marathon Group
De Agostini
250
3.6x
na
na
07-Jul Prospect Pictures
DCD Media
£7.1
0.9x
na
3.9x
07-Jul September Holdings
DCD Media
£9.1
1.2x
na
12.9x
07-Jul West Park Pictures
DCD Media
£3.0
2.7x
na
nm
3396.8
3.0x
19.2x
21.2x
£20.0
na
8.5x
8.6x
450
2.6x
na
na
£111.5
3.8x
7.3x
na
£35.0
na
11.0x
11.3x
07-May Endemol
Investor group incl. John de Mol
07-Jan Princess Productions
Shine
07-Jan Endemol France
Endemol NV
06-Dec WWTBAM & Cellador
2waytraffic
06-Dec Kudos
Shine
06-Aug All3Media
Secondary buy-out (Permira)
£320.0
1.4x
11.5x
12.3x
06-May Tiger Aspect Holdings
IMG Media
£27.0
0.4x
12.1x
15.1x
06-Apr Darlow Smithson Productions
IMG Media
£20.0
1.0x
na
na
06-Apr Odeon Film
GFP Vermögensverwaltungs
£15.6
0.4x
4.3x
4.5x
06-Mar Hurricane
Spütz
Na
na
na
na
05-Dec IWC
RDF
£14.0
0.8x
17.5x
19.5x
05-Nov Ricochet
Shed
£30.0
2.0x
na
14.1x
05-Oct TV Corp
Tinopolis
£27.7
0.6x
21.2x
na
05-Aug Touchpaper Television
RDF
£4.2
0.9x
11.9x
na
Median
1.6x
11.7x
12.9x
Average
1.7x
12.3x
12.9x
2waytraffic Deal
TBD
2waytraffic (1)
Sony Pictures Entertainment
$353.0
3.4x
11.4x
nm
Recent US Deals
7-Dec Reveille
Shine
$155.0
2.0x
12.0x
12.0x
Davies CY07 EBITDA: $3.3M
Implied Market Value at 11-12x: $36M - $40M
Total Initial Consideration: $25M
Note: (1) Based on expected Sony Base Case consideration of $353 and CY07E projections.
11
Financial Impact – Davies Case
Davies Case (Old)
P&L
Davies Case (New)
P&L
$32.2
EBITDA
FY10
FY11
$3.9
$8.9
$17.3
$24.1
($4.4)
($7.6)
($8.9)
($9.7) ($10.4)
($0.5)
$1.3
$8.4
$14.4
$21.9
$3.4
$6.0
$11.4
$14.4
$17.3
Amortization
($4.4)
($7.6)
($8.9)
($9.7) ($10.4)
Incremental EBIT
($1.0)
($1.6)
$2.5
EBITDA
Amortization
EBIT
Incremental EBITDA
FY12
FY13
FY09
$4.8
$7.0
FY09
FY10
FY11
$5.3
$7.1
$10.2
$12.4
$15.3
($2.0)
($4.4)
($4.4)
($4.4)
($3.2)
EBIT
$3.3
$2.7
$5.8
$8.1
$12.1
Incremental EBITDA
$4.2
$5.6
$9.5
$12.0
$14.9
Amortization
($2.0)
($4.4)
($4.4)
($4.4)
($3.2)
Incremental EBIT
$2.2
$1.3
$5.1
$7.6
$11.7
Amortization
FY12
FY13
NPV (10-year)
Nominal (10-Year)
NPV (10-year)
Nominal (10-Year)
Incremental EBITDA: $56.6
Incremental EBITDA: $139.2
Incremental EBITDA: $49.6
Incremental EBITDA: $120.6
Terminal Value: $190.6
Value of Exit (1): $35.6
Terminal Value: $163.8
Total Consideration: ($40.8)
Total Consideration: ($73.3)
Total Consideration: ($40.8)
Total Consideration: ($75.0)
Net Present Value (2): $57.2
Consideration / EBITDA: 53%
Net Present Value (2): $44.4
Consideration / EBITDA: 62%
Value of Exit
(1):
$41.4
Notes: Difference between total EBITDA and Incremental EBITDA is the portion of shows we own under Davies’ current deal
Old Cases assume ER is owned for all of FY09 while New Cases assume ER is owned as of October 1, 2008
Assumes a risk adjusted discount rate of 16.5% for all NPV calculations
(1) Includes exit at 11x multiple
(2) Includes $25MM up-front, incremental EBITDA less earn-outs, plus exit at 11x incremental EBITDA in FY18
12