Game Show/Reality Format Business
November 2007
Confidential Draft
Executive Summary
• The game / reality format business represents a critical growth area for SPE
– Reality shows represent nearly half of the top 20 shows in the demo
– The overall demand for reality formats grow
– Game / reality shows lend themselves to international formatting, creating a highly
profitable business
• Michael Davies will be the anchor of our format business
– Davies has a proven track record in the space
– Davies current deal expires in early 2009
– We need to extend the relationship to provide continuity and a platform for growth
• An acquisition of Davies’ company, Embassy Row, is the best method for expanding
our format business
– Evaluated both deal extension and acquisition
– Acquisition provides a better long-term platform for growth and can be extended through
complementary acquisitions in international territories
1
Reality Business Continues to Grow
• The total number of reality shows on air continues to grow
– During 2006-07 season 51 reality shows aired in network primetime a 31%
increase over the 39 reality shows aired five years ago
• Reality shows are also growing as a percentage of network primetime
– Reality now represents 27% of the primetime schedule, having grown from
8% of network programming 5 years ago
– Reality represents over 40% of summer programming
• Reality show success is driven by their ability to generate high ratings
– During 2006-07 season, almost half (45%) of the top 20-rated programs
among A18-49 were reality programs
2
Alternatives for SPT to Expand on the Davies Relationship
2 Year Extension
Structure
• Increase overhead to $2.5MM
per year
• SPE owns all copyrights
• Davies retains online and mobile
rights
• Other economics in-line with
current deal
Pros
• Less expensive; lower risk than
outright acquisition
Acquisition
• Up-front consideration of $25MM
• $30MM of earn-outs tied to EBIT
targets ($10MM / yr for 3 yrs)
• 3 year contract with Davies
• Format business run as a
separate P&L within SPT
• Higher appeal to Davies, greater
likelihood of closing
• Longer relationship; easier to
build with complementary
acquisitions
• Acquire all rights, including new
media
Cons
• Shorter relationship limits ability
to add complementary
acquisitions
• More expensive, riskier
• Less appealing to Davies; lower
likelihood of closing
• Does not acquire all rights
3
Incremental Value of Acquisition vs. Deal Extension
2 Year Extension
Acquisition
• Lifetime value of shows created during a 2
year deal extension
• PV of cash flows (and eventual sale) less
purchase price
• Inclusive of recoupment of EP fees
• Excludes value of current Davies deal
• Net of OH expenses
• Ranges vary for number of shows and
percentage of EP/chargeback fees
$35
$35
$30.0
$30.0
$30
$30
$25
$25
$20.0
$20.0
$20
$20
$15
$15
$10.0
$10.0
$10
$10
$5
$5
$0
$0
Low Case
Mid Case
High Case
Low Case
Mid Case
High Case
4
Key Assumptions
Base Case
Mid Case
High Case
Model Assumptions
Model Assumptions
Model Assumptions
• EP Fee: 10%
• Chargeback: 0%
Deal Assumptions
• $25MM cash at close
• Earn-outs not achieved
• $2MM of amort per year
• EP Fee: 10%
• Chargeback: 5%
Deal Assumptions
• $25MM cash at close
• $XMM of earn-outs achieved
• $2MM of amort per year
• EP Fee: 10%
• Chargeback: 10%
Deal Assumptions
• $25MM cash at close
• $XMM of earn-outs achieved
• $2MM of amort per year
Profit from Format Business
(includes current shows / P10)
[EBITDA; Amort;
EBIT, Consideration;
Cash Flow]
Incremental Value: Acquisition
Value of Acquisition(1):
PV of Purchase Price:
Incremental value:
Incremental Value: Extension
Value of New Shows
(2):
Notes: (1) Includes value of new shows and divestiture of format business at a 7x multiple in 2013; excludes value of shows created
under current contract (i.e., excludes Power of 10 from incremental value calculation)
(2) Includes value to Sony of shows created in 2009 and 2010
5
Overall Assumptions for Acquisition
•
Embassy Row is a viable acquisition with limited incremental investment
– Develop and launch new series for Network and Cable
– Extend existing slate into syndication
– Hire 9 additional headcount
 3 sales people to sell formats internationally
 3 people to acquire successful international formats for domestic development
 3 people to develop additional show concepts in-house
•
We will also seek complementary acquisitions to grow Embassy Row into a true
international business
– Acquire multiple international production companies to increase local development,
sales, and acquisitions
– High priority countries for acquisitions include UK, Mexico, and Australia
6
Slate Assumptions
General Assumptions
• Begins with Embassy Row Base Slate
• Eliminates short order cable series
• Increases cable pilots for more conservative pilot/pick-up ratio
• Adds one acquired product per year
• Bring one Embassy Row created show into syndication by end of model
Pilot / Pick-up Ratio
Network Pick-ups / Pilots
X/X
X%
Cable Pick-ups / Pilots
X/X
X%
Cancellation Ratios
Model
Industry
Year 1
X/X
X%
Year 1
130/180
73%
Year 2
X/X
X%
Year 2
19/49
39%
Year 3
X/X
X%
Year 3
10/30
33%
7
Number of Shows Included in Slate
2008
2009
2010
2011
2011
2013
Product Pipeline
Cable Pilots
Network Pilots
Acquired
Formats
Shows On Air
Cable
Network
Shows Sold
Int’l Format
Sales
Syndication
8
Next Steps
• Complete high level price discussions with Michael Davies
• Submit / negotiate LOI
• Enter exclusive diligence period
• Close acquisition
• Expand Embassy Row team
• Begin screening complementary acquisition targets
9
Appendix: Detailed Model Assumptions
10
Detailed Slate
Paste Detailed Slate Here
11
SPE Model Assumptions
Source
($ in 000)
Cost per Pilot
Fee per ep, for acquisitions
Episodes
ER
Broadcast
$750
SPE Assumptions
Pof10
ER
First-Run
Cable
$450
$325
SPE
Acquired
26
195
10
$4
40
$722
$760
$800
$840
$882
$65
$75
$95
$130
$145
$244
$257
$270
$284
$298
$244
$257
$270
$284
$298
$0
$0
$0
$0
$0
$65
$65
$65
$65
$65
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
EP and Chargeback Fee / ep Yr 1
EP and Chargeback Fee / ep Yr 2
EP and Chargeback Fee / ep Yr 3
EP and Chargeback Fee / ep Yr 4
EP and Chargeback Fee / ep Yr 5
$144
$152
$160
$168
$176
$25
$26
$28
$29
$30
$49
$51
$54
$57
$60
$49
$51
$54
$57
$60
All Prod Costs / ep Yr 1
All Prod Costs / ep Yr 2
All Prod Costs / ep Yr 3
All Prod Costs / ep Yr 4
All Prod Costs / ep Yr 5
$722
$760
$800
$840
$882
$125
$131
$138
$145
$152
$244
$257
$270
$284
$298
$244
$257
$270
$284
$298
Lic / ep Yr 1
Lic / ep Yr 2
Lic / ep Yr 3
Lic / ep Yr 4
Lic / ep Yr 5
Ads / ep Yr 1
Ads / ep Yr 2
Ads / ep Yr 3
Ads / ep Yr 4
Ads / ep Yr 5
Other
Format Eps
Formats Sold
Fee Per Ep/Territory
G&A Expenses as a % of Headcount
Acquisition Budget
Acquisition Revenue Share
Growth in ER Overhead Expense
EP and Chargeback Fee
40
10
$4
25%
$2,000
40%
5%
20%
12
Base Case P&L
Summary P&L – Full Reality / Game Business
(Revenues, Pdtn Expense, HC Expense,
EBITDA, Deal Amortization, EBIT)
Acquisition Valuation
DCF of Income and Exit (8x)
Less DCF of Current Deal
Extension Valuation
Less DCF of Investment/Earn-out
NPV
13
Mid Case P&L
Paste Detailed P&L Here
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High Case P&L
Paste Detailed P&L Here
15