confidential draft embassy row acquisition overview april 2008

Confidential Draft

Embassy Row Acquisition Overview

April 2008

2

Deal RationaleCurrent SPE RelationshipHistory of Success

Embassy Row Overview

• Recent shows:– Who Wants to be a Millionaire*– Wife Swap*– The Power of 10 on CBS– The 9, online with Yahoo!– Buzz Session with Yahoo!– World Series of Pop Culture on

VH1– Grand Slam on GSN– Chain Reaction on GSN– Boy Meets Grill on

Food Network

• Projects in development:– The Newlywed Game– The Dating Game– Pyramid– Make My Day– The Empire– Red Versus Blue– What Would Martha Do?– Couples Dating Couples– National Bible Championships

• SPE’s existing deal with Davies runs through Jan. 2, 2009

• During this term SPE:–Funds $1.2MM of Embassy

Row overhead–Recoups up to $600K in

Executive Producer (EP) Fees–Receives all copyright to

shows created by ER–Derives profits from its share of

format profits

• ER derives its profits from –EP fees–Mark-up on overhead charged

to shows–Ongoing profit participation

• Embassy Row becomes the cornerstone of a domestic light entertainment business

• Creates Enterprise Value for SPE

• Expands the pipeline of formats for 2WayTraffic to distribute

• Acquisition creates a deeper relationship than the current term deal

–Extends the relationship beyond the current term

–Acquires ER’s existing profit streams

–Aligns Davies’ incentives with our own

SPE plans to submit an LOI to acquire ER for up to $75MM in total consideration ($25MM cash up-front + $50MM in earn-outs)

Note: * Not included in current deal

3

• $25MM cash at close

• Up to $50MM of additional earn-outs

–Value of earn-outs would be calculated in Year 5 as: 7x (Average of Last 3 Years EBITDA) minus ($25MM)

• Earn-out payments would be made between Year 5 and Year 10

–10% of the earn-out paid to employees end of Year 5

–10% of earn-out paid to employees in Year 6

–80% of earn-out paid to Davies over Years 6-10 if a) he remains employed by SPT and b) ER meets minimum EBITDA targets

–Earn-out payments can be accelerated if Davies exceeds EBITDA goals

Current Deal Structure

Max Total Consideration: $75MM

PV(1) of Max Total Consideration: $41MM(1) - $48MM(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 5 at 16.5% discount rate

4

• The portion of the “Earn-out Value” not paid to employees will be paid as follows:

• “Year 5 Acceleration”

– If the Earn-out Value is $50MM;

• All or a portion of the earn-out will be eligible for payment in year 5

• For every $1 by which cumulative Year 1-5 EBITDA exceeds $40MM; $0.40 of the earn-out will be paid in year 5

• “Vesting Payments”

–Any portion of the earn-out not paid in year 5 or set aside for the employee pool, will be payable 20% per year over the next 5 years (years 6, 7, 8, 9, 10) if:

• ER EBITDA in any given year meets or exceeds a threshold

Threshold EBITDA will equal the lesser of 80% of the year 3-5 average or $10.7MM

Earnings are “crossed” for purposes of vesting (i.e., earnings shortfall in early years can be made-up in future years)

• And Davies remains employed by SPT in that year

• “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 ER EBITDA exceeds 125% of the Year 3-5 average; Davies will accelerate $0.40 of the total vesting payments

–Any acceleration will decrease future year payments ratably

The “Earn-out Value”

5

EBIT Impact*

($10.0)

($5.0)

$0.0

$5.0

$10.0

$15.0

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5

Do

llars

in M

M

Davies Case Low Case Base Case High Case

High Case ($3.0) $3.7 $7.9 $11.3 $13.4

Davies Case ($1.0) ($1.6) $2.5 $4.8 $7.0

Base Case ($3.0) ($3.0) ($0.7) $1.5 $2.4

Low Case ($3.6) ($4.7) ($5.6) ($3.6) ($2.8)

Note: * Excludes profits in Power of 10 already owned by SPT as a result of our existing term deal

6

$9.4

$52.8

$139.2

$200.0

$0

$50

$100

$150

$200

$250

Low Base Davies High

($ in MM)

Cumulative 10 Yr. EBITDA Cumulative 10 Yr. EBIT* NPV

($12.5)

$30.9

$75.1

$134.4

($20)

$0

$20

$40

$60

$80

$100

$120

$140

$160


($ in MM)

($18.1)

$12.2

$57.2

$98.1

($40)

($20)

$0

$20

$40

$60

$80

$100

$120


($ in MM)

Economic Impact

Notes: In all cases, assumes EBITDA is flat in years 6-10 for purposes of calculating any earn-out acceleration. * EBIT after Earn-out

7

Preliminary Deal Timing

April 9• Resolve final, high-level deal points with Davies & his

advisors

April 11 • Brief NY (and potentially Tokyo), prior to LOI distribution

April 14 • Send LOI

April 18• Complete LOI negotiations, execute; 3 month exclusivity

commences

Mid June• Substantive diligence complete; contract near-completion;

GEC approval

End June • Close

July 18 • Exclusivity ends

M T W T F S S

1 2 3 4 5 6

7 8 9 10 11 12 13

14 15 16 17 18 19 20

21 22 23 24 25 26 27

28 29 30

M T W T F S S

1 2 3 4

5 6 7 8 9 10 11

12 13 14 15 16 17 18

19 20 21 22 23 24 25

26 27 28 29 30 31

M T W T F S S

1

2 3 4 5 6 7 8

9 10 11 12 13 14 15

16 17 18 19 20 21 22

23 24 25 26 27 28 29

30

M T W T F S S

1 2 3 4 5 6

7 8 9 10 11 12 13

14 15 16 17 18 19 20

21 22 23 24 25 26 27

28 29 30 31

May 2008

April 2008

June 2008

July 2008

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– Appendix –

9

Key Assumptions

Low Case Base Case High Case

Model Adjustments

• Slate: Slate remains unchanged

• Power of 10: Excludes profits from

Power of 10 (format/syndication)

• Format Profits: Format profits are at

slightly below the industry average

($3.0M)

• Local Production: No local production

• Interactive Profit Growth Rate:

Unchanged at 0%

• Factual Profits from ER: Does not

include the profits from the Factual

portion of Embassy Row’s business

• Slate: Slate remains unchanged

• Power of 10: Includes profits from Power

of 10 (format/syndication)

• Format Profits: Format profits are at

slightly below the industry average

($3.0M)

• Local Production: Local production in

the UK +$3M (for Power of 10)


Increased to 5%

• Factual Profits from ER: Includes the

profits from the Factual portion of

Embassy Row’s business

– Factual Profit Growth Rate at 5% for

2011/2012

– Add +2 HC to manage production

• Slate: Slate includes a home run

network show that starts it run in FY09

• Power of 10: Includes profits from

Power of 10 (format/syndication)

• Format Profits: Above industry

average ($6.5M) for home run show,

but remains at $3.0M for others

• Local Production: Local production in

the UK +$3M for Pof10; UK + 3

additional territories at +$1M per for

“Home Run”


Increased to 10%

• Factual Profits from ER: Includes the

profits from the Factual portion of

Embassy Row’s business

– Factual Profit Growth Rate at 5%

for 2011/2012

– Add +2 HC to manage production

Model Adjustments Model Adjustments

10

Low Case – Economic Impact

NPV

Incremental EBITDA: $3.2

EBIT: ($11.0)

Terminal Value (1): $3.7

Total Consideration: ($25.0)

Net Present Value (2): ($18.1)

Nominal

EBITDA: $9.4

EBIT: ($12.5)

Terminal Value: $17.2


Consideration / EBITDA: 2.7x

Notes: 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

P&L FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Sum

Incremental EBITDA $0.8 ($0.3) ($1.2) $0.8 $1.6 $1.6 $1.6 $1.6 $1.6 $1.6 $9.4

Amort of Upfront ($4.4) ($4.4) ($4.4) ($4.4) ($4.4) $0.0 $0.0 $0.0 $0.0 $0.0 ($21.9)

Amort of Employee Pool $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Amort of Remainder $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

EBIT ($3.6) ($4.7) ($5.6) ($3.6) ($2.8) $1.6 $1.6 $1.6 $1.6 $1.6 ($12.5)

EBITDA for Earnout Calc $0.4 ($1.5) ($1.7) ($1.5) ($2.6) ($2.6) ($2.6) ($2.6) ($2.6) ($2.6) ($20.0)

NPV

Earn-Out (Cash Payments) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Incremental EBITDA $0.8 ($0.3) ($1.2) $0.8 $1.6 $1.6 $1.6 $1.6 $1.6 $1.6 $9.4

Terminal Value $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $17.2 $17.2

Sum for NPV Calculation $0.8 ($0.3) ($1.2) $0.8 $1.6 $1.6 $1.6 $1.6 $1.6 $18.7 $26.6

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Base Case – Economic Impact

NPV


EBIT: $6.9

Value of Exit (1): $16.1


Net Present Value (2): $12.2

Nominal

EBITDA: $52.8

EBIT: $30.9



Consideration / EBITDA: 47%



Incremental EBITDA $1.4 $1.4 $3.7 $5.8 $6.7 $6.7 $6.7 $6.7 $6.7 $6.7 $52.8

Amort of Upfront ($4.4) ($4.4) ($4.4) ($4.4) ($4.4) $0.0 $0.0 $0.0 $0.0 $0.0 ($21.9)

Amort of Employee Pool $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Amort of Remainder $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

EBIT ($3.0) ($3.0) ($0.7) $1.5 $2.4 $6.7 $6.7 $6.7 $6.7 $6.7 $30.9

EBITDA for Earnout Calc $1.0 $0.3 $3.3 $3.6 $2.5 $2.5 $2.5 $2.5 $2.5 $2.5 $23.4

NPV

Earn-Out (Cash Payments) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0


Terminal Value $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $74.2 $74.2

Sum for NPV Calculation $1.4 $1.4 $3.7 $5.8 $6.7 $6.7 $6.7 $6.7 $6.7 $80.9 $127.0

12

Davies Case – Economic Impact

NPV


EBIT: $24.4




Nominal

EBITDA: $139.2

EBIT: $75.1







Amort of Upfront ($4.4) ($4.4) ($4.4) ($4.4) ($4.4) $0.0 $0.0 $0.0 $0.0 $0.0 ($21.9)

Amort of Employee Pool $0.0 ($1.7) ($1.7) ($1.7) ($1.7) ($1.7) $0.0 $0.0 $0.0 $0.0 ($8.4)

Amort of Remainder $0.0 ($1.5) ($2.8) ($3.6) ($4.3) ($4.3) ($4.3) ($4.3) ($4.3) ($4.3) ($33.8)

EBIT ($1.0) ($1.6) $2.5 $4.8 $7.0 $11.3 $13.0 $13.0 $13.0 $13.0 $75.1


NPV

Earn-Out (Cash Payments) $0.0 $0.0 $0.0 $0.0 ($4.8) ($12.5) ($7.7) ($7.7) ($7.7) ($7.7) ($48.3)


Terminal Value $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $190.6 $190.6


13

High Case – Economic Impact

NPV


EBIT: $47.8




Nominal

EBITDA: $200.0

EBIT: $134.4







Amort of Upfront ($4.4) ($4.4) ($4.4) ($4.4) ($4.4) $0.0 $0.0 $0.0 $0.0 $0.0 ($21.9)


Amort of Remainder $0.0 ($2.5) ($3.5) ($4.4) ($4.9) ($3.9) ($3.9) ($3.9) ($3.9) ($3.9) ($35.0)

EBIT ($3.0) $3.7 $7.9 $11.3 $13.4 $18.8 $20.6 $20.6 $20.6 $20.6 $134.4


NPV



Terminal Value $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $269.6 $269.6


14

NPV


EBIT: $18.9




Nominal

EBITDA: $134.9

EBIT: $69.3





Special Case 1 – “Year 5 Spike”

• Early performance is above vesting threshold and requires SPT to accelerate amortization



Amort of Upfront ($4.4) ($4.4) ($4.4) ($4.4) ($4.4) $0.0 $0.0 $0.0 $0.0 $0.0 ($21.9)


Amort of Remainder $0.0 ($1.7) ($3.2) ($4.0) ($26.1) $0.0 $0.0 $0.0 $0.0 $0.0 ($35.0)

EBIT ($2.4) ($1.8) $1.8 $3.8 ($7.5) $13.7 $15.4 $15.4 $15.4 $15.4 $69.3


NPV



Terminal Value $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $169.7 $169.7


15

NPV


EBIT: $11.6




Nominal

EBITDA: $94.1

EBIT: $32.9





Special Case 2 – “Accelerates Vesting, but Later Generates Losses”

• Cumulative earnings in years 6-10 would not normally entitle vesting, but cross-collateralizing and accelerating allows him to get paid a piece


Incremental EBITDA $2.0 $6.0 $11.1 $13.9 $16.7 $9.7 $24.7 $15.4 ($0.3) ($5.3) $94.1

Amort of Upfront ($4.4) ($4.4) ($4.4) ($4.4) ($4.4) $0.0 $0.0 $0.0 $0.0 $0.0 ($21.9)


Amort of Remainder $0.0 ($1.9) ($3.6) ($4.5) ($5.4) ($3.1) ($8.0) ($5.0) $0.0 $0.0 ($31.5)

EBIT ($2.4) ($1.9) $1.6 $3.5 $5.4 $5.0 $16.7 $10.4 ($0.3) ($5.3) $32.9

EBITDA for Earnout Calc $2.0 $6.0 $8.0 $10.0 $12.0 $5.0 $20.0 $10.7 ($5.0) ($10.0) $58.7

NPV

Earn-Out (Cash Payments) $0.0 $0.0 $0.0 $0.0 ($4.5) ($4.5) ($17.4) ($6.2) $0.0 $0.0 ($32.6)

Incremental EBITDA $2.0 $6.0 $11.1 $13.9 $16.7 $9.7 $24.7 $15.4 ($0.3) ($5.3) $94.1

Terminal Value $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0

Sum for NPV Calculation $2.0 $6.0 $11.1 $13.9 $12.2 $5.2 $7.3 $9.2 ($0.3) ($5.3) $61.5

confidential draft embassy row acquisition overview april 2008

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