Embassy Row Acquisition Update
November 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
– GSN is increasingly dependent on original game shows to drive growth
– 2waytraffic provides strong international distribution but needs additional U.S. product to
fill distribution capacity
• Through the acquisition of his production company (Embassy Row / “ER”),
Michael Davies will serve as a cornerstone of our reality strategy
– Strong track record, credible internationally and works well with 2way and GSN
– ER earnings will be below CY08 budget, but we continue to believe in ER’s potential and
do not anticipate a significant negative impact on overall economics
– ER recently received orders for new shows (Newlywed Game, Make My Day, Empire,
PopTub) and has key properties in development (American Bandstand, Dating Game)
• We are seeking approval to close the Embassy Row acquisition
– Long-form negotiated in-line with terms previously discussed ($25MM at close, up to an
additional $50MM of earn-outs)
– RAD to be signed week after Thanksgiving
– Target closing December 12th
1
Strategic Benefits
Track Record
• Michael Davies has a history of success with shows like “Who Wants to
be a Millionaire?” and “Wife Swap”
• Now focusing on reinvigorating Sony brands (“Dating Game” and
“Newlywed Game”) and launching new shows with global potential (“The
Comedy Exchange”)
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)
• Successful, original programming is key to GSN’s growth strategy
Fit with GSN
• Embassy Row is now a key source of GSN originals, including:
– Shows in production: Newlywed Game
– Shows in development: Hold on to Your Seat, It’s A Knockout: U.S. vs. France,
Honey Please and Game Show Talk Show
2
Key Terms: Deal Consideration
Current Deal Structure
• $25MM cash at close
• Up to $50MM of additional earn-outs tied to “Adjusted Company Profit” (ACP)
–ACP mimics the portion of profits ER would retain under the existing overall deal, tying
earn-outs to profits that are truly incremental to SPE
–Value of earn-outs would be calculated in Year 6 as: 7x (Average of Years 5-6 ACP) minus $25MM
advance
• Earn-out payments would be made between Year 6 and Year 10
–Subject to the creation of an incentive plan to be approved by the SCA Comp Committee, 10% of
earn-out would be paid to employees in Year 6; 10% in Year 7
–80% of earn-out paid to Davies over Years 6-10 if Davies meets minimum Adjusted Company
Profit (ACP) targets
–Earn-out payments can be accelerated if Davies exceeds ACP goals
Changes from April 2008 Deal Update
• No change to overall consideration or mix between cash at close and earn-out
• Changed earn-out measurement period from years 3-5 to years 5-6 to improve tax impact to Davies and
accounting impact to SPE
• Earn-out payments are no longer subject to Davies being employed by SPE
3
Financial Performance
CY07
Through
3/31/09
• Operating income was in-line with previous projections
– $3.3MM actual vs. $3.4MM budget
• 15 months ending March 2009 is expected to be below forecast
– 15 month forecast was revised downward in October from $1.1MM to ($0.1MM)
– November through March Forecast (period owned by Sony) was revised down
from $2.0MM to $0.9MM
• FY09 EBIT impact will be better than budget, roughly in-line with Q2 forecast
FY09
– Q1 forecast for FY09 EBIT was ($3MM) with higher amortization and excluding P10
– Q2 forecast for FY09 EBIT was $0.4MM with lower amortization and including P10
– Current forecast for FY09 EBIT is $0.3MM, offsetting near-term earnings miss with
decreased incremental investment in overhead and development
FY10 Forward
• We believe Michael Davies will continue to generate successful new shows and
the deal will generate a positive NPV of $8.0MM
– Although value of on-air shows (including Power of 10) has decreased, the ability to
leverage 2waytraffic and ER’s currently increased staff has decreased our required
incremental investment
– Model assumes that ER creates 2 format successes in the next 3 years
4
Embassy Row’s Pipeline Remains Strong
Pilot & Series Orders
Show
Newlywed Game
Shows in Development
Network
GSN
Show
The Comedy Exchange
Network
BBC / UKTV
TV Land
Grand Masters of Pop
Culture
Vh1
The Empire
MTV
Hold on to Your Seat
GSN
National Bible
Championships
CMT
It’s A Knockout: U.S. vs.
France
GSN / TBD
Honey Please
GSN / TBD
Make My Day
Pop Tub
America’s Strongest
American
Hogs & Heifers
YouTube
CBS
Oxygen
Game Show Talk Show
GSN
American Bandstand
TBD
Dating Game
N/A
5
Financial Impact – Base Case
Prior Base Case (4/08)
P&L
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
EBITDA
Amortization
EBIT
Incremental EBITDA
FY09
FY10
FY11
$1.9
$4.3
$9.6
($4.4)
($4.4)
($2.5)
Current Base Case
FY12
FY09
FY10
FY11
$1.6
$0.7
$3.3
$5.5
$6.2
($1.3)
($3.1)
($3.1)
($3.1)
($1.8)
EBIT
$0.3
($2.4)
$0.1
$2.4
$4.3
Incremental EBITDA
$0.9
$0.5
$3.2
$5.4
$6.2
Amortization
($1.3)
($3.1)
($3.1)
($3.1)
($1.8)
Incremental EBIT
($0.4)
($2.6)
$0.1
$2.3
$4.3
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: $18.3
Incremental EBITDA: $47.0
Terminal Value: $74.2
Value of Exit (2): $14.7
Terminal Value: $67.8
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): $8.0
Consideration / EBITDA: 53%
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 December 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
6
Cumulative Incremental EBITDA/NPV: Current Base Case vs. Prior Base Case
• Value associated with properties currently on-air has decreased
– Partially 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 higher because ER network contracts include
chargebacks (1)
Estimates for Properties
On-air
Power of 10 (2)
Other TV
Interactive
Sub-Total
Estimates for Properties
In-Development
TV
Interactive
Sub-Total
Expenses
ER Overhead
Incremental Investment
Sub-Total
Deal Consideration
Total Acquired EBITDA
Prior Base Case (SCA Preview 04/08)
NPV
10-yr EBITDA
Impact
Cash Flow
Terminal
Total
$36.5
$15.0
$10.4
$25.4
$13.0
$9.1
$0.0
$9.1
$13.9
$6.4
$3.5
$9.9
$63.4
$30.5
$13.9
$44.4
Current
NPV
10-yr EBITDA
Impact
$0.3
$0.0
$12.9
$13.2
Cash Flow
$0.3
$0.0
$5.8
$6.1
Terminal
$0.0
$0.0
$3.3
$3.3
Total
$0.3
$0.0
$9.1
$9.4
$81.4
$3.5
$84.9
$31.6
$1.6
$33.2
$26.2
$0.9
$27.1
$57.8
$2.5
$60.3
$97.6
$7.9
$105.5
$40.0
$3.7
$43.7
$28.4
$1.9
$30.3
$68.4
$5.7
$74.0
($40.8)
($54.7)
($95.5)
($18.4)
($24.2)
($42.6)
($10.5)
($14.4)
($24.9)
($28.9)
($38.6)
($67.5)
($53.1)
($18.6)
($71.7)
($22.8)
($8.7)
($31.5)
($14.3)
($4.6)
($18.9)
($37.1)
($13.3)
($50.4)
N/A
($25.0)
N/A
($25.0)
N/A
($25.0)
N/A
($25.0)
$52.8
($4.0)
$16.1
$12.2
$47.0
($6.7)
$14.7
$8.0
Note: (1) Includes chargebacks of 5% of budget on new shows.
(2) Includes only portion of P10 acquired from Davies.
7
Economic Impact of Acquiring Embassy Row
Cumulative 10 Yr. EBITDA (1)
($ in MM)
Cumulative 10 Yr. EBIT(2)
($ in MM)
Current
Current
Prior
$40
$52.8
$50
($ in MM)
Prior
$60
NPV
Current
Prior
$14
$12.2
$34.5
$12
$47.0
$30.9
$30
$10
$40
$8
$30
$8.0
$20
$6
$20
$4
$10
$10
$2
$0
$0
Base Case
$0
Base Case
Base Case
Footnotes:
(1)
Based on incremental EBITDA (e.g., only includes portion of Power of 10 SPE did not already own). In all cases, assumes incremental EBITDA
is flat in years 6-10 for purposes of calculating any earn-out acceleration.
8
(2)
EBIT after Earn-out.
Embassy Row Deal Timing
Day
Item
11/24
• SPT and Embassy Row meeting to close final open
issues in long-form agreement
11/26
• Contract is agreed by both parties but remains
unsigned
12/10
• Sony Approval process complete (RAD signed) –
provides two weeks after Thanksgiving to secure all
signatures
• Purchase Agreement “dated as of the closing date”
signed and put into “lawyer escrow”
12/12
S
M
November
T
W
T
2
9
16
23
30
3
10
17
24
4
11
18
25
6
13
20
27
7
14
21
28
S
1
8
15
22
29
M
1
8
15
22
29
December
T
W
T
2
3
4
9 10 11
16 17 18
23 24 25
30 31
F
5
12
19
26
S
6
13
20
27
S
7
14
21
28
5
12
19
26
F
• Funds wired and deal closes
9
Appendix
10
Current Year Update
• Since we began negotiations, Davies’ forecast for his standalone business has declined
from $3.5MM to breakeven
• $1MM of the decline has occurred since submitting the MRP and would impact SPE’s FY09
dollar-for-dollar unless we further decrease our incremental investment in ER operations
Embassy Row Standalone
EBITDA Forecast
($ in 000)
As of 4/08
Briefing
As of MRP
Today
SPE EBITDA Forecasts
Embassy
Row CY08
(15 mos.)
Nov 08 – Mar
09 (5 mos.)
SPE EBITDA
FY09 Impact
$3,500
N/A
$1,900 (1)
$1,092
($163) (3)
$2,051
$891
$1,750
(2)
$1,561 (4)
Notes
• SPE EBITDA is a base case which assumed
some ER shows missed as well as additional
SPT revenue and expenses
• Includes incremental investment and
headcount re-adjustments and revised Power
of 10 profits
• Includes a reduction in incremental investment
and headcount re-adjustments
• Includes $350K in expenses saved by not
closing during the month of November
Footnotes:
(1)
12 months ending 3/31/09.
(2)
5 months ending 3/31/09.
(3)
15 month net operating profit from Davies estimated at ($694K). Excludes $530K from Davies salary ($264K) and salary re-adjustment ($266K).
(4)
4 months ending 3/31/09. Assumes zero additional revenue during the month of November.
11
Managing Current Year Earnings
Current
Dec 08 - Mar 09
Net Revenue
Cost of Goods Sold
Gross Profit
Expenses - Embassy Row
Operating Income as Provided by ER
Expenses - SPT Headcount Re-adjust (1)
Expenses - SPT Investment
Savings for Not Owning in November
$2,665,947
($24,000)
As of MRP
Nov 08 - Mar 09
$3,740,091
($24,000)
$2,641,947
$3,716,091
($1,751,403)
($1,665,403)
$890,544
($530,494)
$2,050,688
($1,074,144)
($86,000)
($1,160,144)
$0
($963,094)
$963,094
$350,000
N/A
$350,000
$899,319
Power of 10 Profits
850,621
850,621
$1,560,671
$1,749,940
($1,302,083)
($1,302,083)
EBIT w/ Power of 10
$0
($342,219)
$710,050
Amortization
($1,074,144)
($188,275)
EBITDA b/f Power of 10
EBITDA w/ Power of 10
Variance
$258,588
$447,857
($189,269)
$0
($189,269)
$0
($189,269)
Footnotes:
(1)
Includes $61K in expenses that weren’t accrued and $25K in December bonuses which weren’t accrued.
(2)
Gross up on employee salaries for Nov-Mar 2009. SPT also should have accrued for an additional $342K of expenses ($106K associated
with Davies' salary in Nov and Dec.; $173K of accruals for aspire bonuses; $63K in fringe in Nov. and Dec.).
12
Key Terms: Calculation and Payment of Earn-out
• The portion of the “Earn-out Value” not paid to employees will be paid as follows:
• “Year 6 Acceleration”
– If the Earn-out Value is $50MM;
• All or a portion of the earn-out will be eligible for payment in year 6
• For every $1 by which cumulative Year 1-6 ACP exceeds $56MM; $0.40 of the earn-out will
be paid in year 6
• “Vesting Payments”
– Any portion of the earn-out not paid in year 6 or set aside for the employee pool, will be payable
equally per year in years 6, 7, 8, 9, 10 if:
• ACP in any given year meets or exceeds a threshold
 Threshold ACP will equal the lesser of 80% of the year 5-6 average or $8.6MM
 Earnings are “crossed” for purposes of vesting (i.e., earnings shortfall in early years
can be made-up in future years)
• “Acceleration of Vesting Payments”
– In Years 6-10, any payments normally payable under the Vesting Payments will be subject to
acceleration
• For every $1 a given year’s ACP exceeds 125% of the Year 5-6 average; Davies will
accelerate $0.40 of the total vesting payments
– Any acceleration will decrease future year payments ratably
13
Key Terms: Davies Employment and Non-compete
Current Deal Structure
• Davies will be subject to a 4 year employment agreement
–Exclusive to SPE with the exception of
Executive Producer services on Who Wants to be a Millionaire? and Wife Swap
Journalistic work for ESPN (e.g., Davies’ World Cup Blog)
–Liquidated damages if employment contract is breached
• After a 4 year employment contract:
–If Davies chooses not to stay; he is subject to a 2 year non-compete
–If Davies wants to stay; SPT may retain him for 2 years
–If Davies wants to stay and SPT doesn’t retain him; he is not subject to a 2 year
non-compete
Changes from April 2008 Deal Update
• Previously discussed a 5 year contract
• Shortened to 4 years to address tax and accounting issues
• Introduced liquidated damages into deal to ensure Davies is present long enough to drive value
14
Key changes in Model: “Base Case”
Current Approach
Slate
• Davies’ “New” slate, but with 5% 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 $0.5MM - $1.9MM 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
15
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 $500K-$1.4M
– 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
–1 Director of Digital Development
• $0 in self-funded pilot costs
• $0-$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)
($0.5)
($1.7)
($1.8)
($1.9)
($1.9)
16