Post on 31-Dec-2015
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• 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 games shows to drive growth
– 2waytraffic provides strong international distribution but needs additional U.S. product fill distribution capacity
• Through the acquisition of his production company (Embassy Row / “ER”), Michael Davies will serve as a cornerstone of our domestic 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 pipeline is strong, with orders for several new shows (Newlywed Game, Make My Day, Empire, PopTub) and key properties in development (American Bandstand, Dating Game)
• We are seeking approval to close the Embassy Row acquisition
– Long-form negotiated in-line terms previously discussed ($25MM at close, up to an additional $50MM of earn-outs)
– RAD to be signed by [date]; deal to be closed by [date]
Executive Summary
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• Creates new formats that leverages 2way's distribution capacity
• 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)
Strategic Benefits
International Credibility• Well regarded both domestically and internationally
• Strong relationships with networks in multiple territories
Fit with 2waytraffic
Fit with GSN
• Successful, original programming is key to GSN’s growth strategy
• Embassy Row is now a key source of GSN originals, including:
– Commited / Likely Series Orders: X, Y, Z
– Shows in development: X, Y, Z
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., “Dating Game” and “Newlywed Game”) and launching new shows with global potential (e.g., “The
Comedy Exchange”)
4
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 5-6 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
5
• FY09 EBIT impact on SPE will be better than budget, roughly in-line Q2 forecast
– Budget for FY09 EBIT was ($3MM); assuming an earlier deal close and higher amortization
– Q2 forecast for FY09 EBIT was $1.7MM due to later deal close and lower amortization
– Current forecast for FY09 EBIT is $1.6MM, offsetting near-term earnings miss with decreased incremental investment in overhead
Financial Performance
Through3/31/08
• YTD is below budget, full year is expected to be below budget
– 15 month forecast was revised downward in October from $1MM to $0.9MM
– November through March Forecast (period owned by Sony) was revised down from $1MM to ($0.1MM)
FY 09
FY10 Forward
CY 07• Operating income was in-line with previous projections
– $3.3MM actual vs. $3.4MM budget
• We believe Davies will continue to generate successful new shows and the deal will generate a positive NPV of $8MM
– Although value of on-air shows (including Power of 10) has decreased, this is 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
– Model assumes that ER create 2 format success in the next 3 year
6
Pipeline Remains StrongPilot & Series Orders Shows in Development
Show Network Show Network
Newlywed
Make My Day
Empire
The Comedy Exchange
BBC America / UKTV
National Bible
Grand Masters ff Pop Culture Vh1
Pop Tub
America's Strongest
Hold on to Your Seat GSN
Hogs
It’s A Knockout: U.S. vs. France GSN / TBD
Honey Please GSN / TBD
Game Show Talk Show GSN
Please format / check / clean-up
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Financial Impact – Base Case
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
Base Case (New)Base Case (Prior)
NPV (10-year)
Incremental EBITDA: $21.0
Value of Exit (2): $16.1
Total Consideration: ($25.0)
Net Present Value (3): $12.2
Nominal (10-Year)
Incremental EBITDA: $52.8
Terminal Value: $74.2
Total Consideration: ($25.0)
Consideration / EBITDA: 47%
NPV (10-year)
Incremental EBITDA: $17.8
Value of Exit (2): $12.9
Total Consideration: ($25.0)
Net Present Value (3): $5.7
Nominal (10-Year)
Incremental EBITDA: $43.8
Terminal Value: $59.4
Total Consideration: ($25.0)
Consideration / EBITDA: 57%
P&L FY09 FY10 FY11 FY12 FY13
EBITDA $1.9 $4.3 $9.6 $15.5 $21.6
Amortization ($4.4) ($4.4) ($4.4) ($4.4) ($4.4)
EBIT ($2.5) ($0.1) $5.2 $11.1 $17.3
Incremental EBITDA $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 FY09 FY10 FY11 FY12 FY13
EBITDA $2.1 $3.2 $4.5 $5.4 $5.8
Amortization ($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
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Cumulative Incremental EBITDA/NPV: MRP/Current Case and 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)
Note: (1) Includes chargebacks of 5% of budget on new shows.
(2) Includes only portion of P10 acquired from Davies.
Prior Base Case (SCA Preview 04/08) MRP/Current CaseNPV NPV Base Case (Prior)
Estimates for Properties On-air
10-yr EBITDA Impact Cash Flow Terminal Total
10-yr EBITDA Impact Cash Flow Terminal Total
Power of 10 (2) $36.5 $15.0 $10.4 $25.4 $0.3 $0.3 $0.0 $0.3Other TV $13.0 $9.1 $0.0 $9.1 $0.0 $0.0 $0.0 $0.0Interactive $13.9 $6.4 $3.5 $9.9 $12.9 $5.8 $3.3 $9.1
Sub-Total $63.4 $30.5 $13.9 $44.4 $13.2 $6.1 $3.3 $9.4
Estimates for Properties In-DevelopmentTV $81.4 $31.6 $26.2 $57.8 $98.3 $40.6 $28.4 $69.0Interactive $3.5 $1.6 $0.9 $2.5 $7.9 $3.7 $1.9 $5.7
Sub-Total $84.9 $33.2 $27.1 $60.3 $106.2 $44.3 $30.3 $74.6
ExpensesER Overhead ($40.8) ($18.4) ($10.5) ($28.9) ($53.7) ($23.4) ($14.3) ($37.6)Incremental Investment ($54.7) ($24.2) ($14.4) ($38.6) ($18.6) ($8.6) ($4.6) ($13.2)
Sub-Total ($95.5) ($42.6) ($24.9) ($67.5) ($72.2) ($32.0) ($18.9) ($50.9)
Deal Consideration N/A ($25.0) N/A ($25.0) N/A ($25.0) N/A ($25.0)
Total Acquired EBITDA $52.8 ($4.0) $16.1 $12.2 $47.2 ($6.6) $14.7 $8.2
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Key changes in Model: “Base Case”
Changes from PriorCurrent Approach
• 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
• 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
Slate
• 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
Incremental
Investment
• $1.9MM (CY07 actuals) growing at 5% • Increased from $1.5MM growing @ 5% based on
actual performanceInteractive
• Excluded • No ChangeAncillary
• Excluded • No ChangeSports and Film
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Economic Impact of Acquiring Embassy Row
$47.0 $47.2
$52.8
$0
$10
$20
$30
$40
$50
$60
Base Case
($ in MM)
Today MRP Prior
Cumulative 10 Yr. EBITDA (1) Cumulative 10 Yr. EBIT(2) NPV
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.(2) EBIT after Earn-out.
$34.5 $34.7
$30.9
$0
$10
$20
$30
$40
Base Case
($ in MM)
Today MRP Prior
$8.0$8.2
$12.2
$0
$2
$4
$6
$8
$10
$12
$14
Base Case
($ in MM)
Today MRP Prior
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Date
Late July • Lynton / Hendler review
Early August • Formalize / sign term sheet
End Sept
• Finalize long-form confirmatory diligence (legal, tax, financial)
• Final approval from SCA
Early Oct • Close
Timing and Next Steps
S M T W T F 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
S M T W T F 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
S M T W T F 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
S M T W T F 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
August 2008
September 2008
October 2008
July 2008
Update. Use the concepts in your latest time line (e.g.,
docs in “lawyer’s escrow” etc.) to figure out when the soonest we can close is. Assume major contract issues or agreed this
week. Docs are finished end of next week. We start
circulating RAD for signatures next Tues or Wed.
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Current Year Update
Embassy Row Standalone EBITDA Forecast SPE EBITDA Forecasts
($ in 000)
Embassy Row CY08 (15 mos.)
Nov 08 – Mar 09 (5 mos.)
SPE EBITDA FY09 Impact Notes
As of 4/08 Briefing
$3,500 N/A $1,900 (1)
• SPE EBITDA is a base case which assumed some ER shows missed as well as additional SPT revenue and expenses
As of MRP $1,092 $2,051 $1,750 (2)
• Includes incremental investment and headcount re-adjustments and revised Power of 10 profits
Today ($163) (3) $891 $1,561 (4)
• 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.
• 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
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Managing Current Year Earnings
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.).
Current As of MRP VarianceSPT FY09 Budget SPT FY09 Budget SPT FY09 BudgetNov 08 - Mar 09 Nov 08 - Mar 09 Nov 08 - Mar 09
Net Revenue $2,665,947 $3,740,091 ($1,074,144)
Cost of Goods Sold ($24,000) ($24,000) $0
Gross Profit $2,641,947 $3,716,091 ($1,074,144)
Expenses - Embassy Row (1) ($1,751,403) ($1,665,403) ($86,000)
Operating Income as Provided by ER $890,544 $2,050,688 ($1,160,144)
Expenses - SPT Headcount Re-adjust (2) ($530,494) ($188,275) ($342,219)
Expenses - SPT Investment $0 ($963,094) $963,094
Savings for Not Owning in November $350,000 N/A $350,000
EBITDA b/f Power of 10 $710,050 $899,319 ($189,269)
Power of 10 Profits 850,621 850,621 $0
EBITDA w/ Power of 10 $1,560,671 $1,749,940 ($189,269)
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Incremental SPT Investment New Case vs. Prior
Incremental Investment (New)Incremental Investment (Prior)
• New incremental investment assumes ability to
leverage 2waytraffic
• Current ER and 2way working relationship is
already bearing fruit with the development of
“Celebrity Mr. and Mrs. “
• Reduced headcount costs to $700K-$1.7M
–2 Acquisition headcount
–1 Development headcount
–1-2 Administration headcount
–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 was modeled prior to
2waytraffic acquisition
• $300K-$2.4M of headcount costs
–2-3 Acquisition headcount
–1-3 Development headcount
–1-3 Administration headcount
–An additional 5 Embassy Row headcount
converted to full-time employees
• $2.0-$2.5M of self-funded pilot costs
• $0.0-$2.0M for development and acquisitions
Incremental Investment (Old)
FY09 FY10 FY11 FY12 FY13
($2.8) ($4.7) ($5.2) ($5.9) ($6.0)
Incremental Investment (New)
FY09 FY10 FY11 FY12 FY13
($1.2) ($1.9) ($2.0) ($2.1) ($2.2)