Confidential Draft Embassy Row: Deal Structure November 2007 DRAFT AS OF: 11.27.07.

Confidential Draft

Embassy Row: Deal Structure

November 2007

DRAFT AS OF: 11.27.07

2

Executive Summary

• We have analyzed alternative deal structures to meet the following goals

– Smooth EBIT impact of earn-outs

– Tie Michael Davies’ incentives to profitability

– Retain Michael Davies as long as possible

– Cap total earn-out exposure

– Avoid paying Davies on EBITDA if we would be EBIT negative after amortization and earn-out expense

• Two primary structures were analyzed

– Up-front payment plus defined earn-outs tied to EBITDA ranges

– Acquire 80% of the company; structure put/call on 20%

• We believe an up-front payment with defined earn-outs is the more attractive structure and recommend submitting an LOI on this basis

3

Structuring Considerations

Earn-outs Tied to EBITDA Ranges Acquire 80%; Put/Call on 20%

Accounting Considerations

Structure• $20.0MM up-front payment

• Up to $14.5MM in earn-outs tied to EBITDA on ER shows (Power of 10 and new shows)

• 100% of earn-out paid if EBITDA target is met

• 0% of earn-out paid if EBITDA is below a floor

• Pro-rated if EBITDA is between floor and target

• 5 year contract and an additional 2 year non-compete

• $16.0MM up-front payment for 80% of ER

• 20% minority interest in ER’s normal share of earnings (EP Fees, modified profit participation)

– Annual cash payments capped at $X MM

• Put/call on remaining 20% in year 5– Based on 7x 20% of ER’s normal share of

earnings– Capped at $XMM – Subject to Davies remaining with SPE until

that time

• 5 year contract and an additional 2 year non-compete

• Initial consideration largely attributed to buy-out of Power of 10 Participation, future shows, and contract/non-compete; amortized over 5 years

• Earn-outs expensed

• Initial consideration largely attributed to buy-out of Power of 10 Participation, future shows, and contract/non-compete; amortized over 5 years

• When the additional 20% is purchased, this results in a new amortizable asset that could create up to $5MM of amortization in years 6 and beyond

• Minority interest is before EBIT for ASPIRE calculations

FY09 FY10 FY11 FY12 FY13

Earn-out $0.0 $2.5 $3.0 $4.0 $5.0

Target $10.0 $12.0 $15.0 $20.0

Floor $7.5 $9.0 $11.3 $15.0

4

Structuring Considerations

Earn-outs Tied to EBITDA Ranges Acquire 80%; Put/Call on 20%

Pros • Simpler to account for, administer, and negotiate

• Provides consistent incentives for Davies beginning in early years of deal life

• Decreases initial consideration

• Minimizes near-term EBIT impact

Cons • Greater initial consideration

• Although profitable, EBIT would be lower in early years than under the “80/20” deal structure

• Only economically attractive under a limited set of parameters that may not be feasible to negotiate

– Requires put/call to be tied to a subset of ER-related profits

– Preferable for Davies’ 20% retained interest to be tied to a subset of earnings

• More complex to account for, negotiate, and administer

• Will result in amortization in later years (year 6 and beyond)

• Provides limited incentive in early years of deal

5

Date Target Acquiror

Transaction Value (m)

(100%)

Transaction Value /

Last FY Sales

Last FY

EBITDALast FY

EBIT

Sep-07 Metronome Film & Television Schibsted ASA £31.4 0.4x na 18.8x

Sep-07 Twenty Twenty Productions Shed Media £18.0 1.9x 8.6x na

Aug-07 Sparrowhawk Media NBC Universal £175.0 1.8x na na

Aug-07 Objective Productions All3Media £50.01 2.2x na na

Jul-07 Marathon Group De Agostini €250.0 3.6x na na

Jul-07 Prospect Pictures DCD Media £7.1 0.9x na 3.9x

Jul-07 September Holdings DCD Media £9.1 1.2x na 12.9x

Jul-07 West Park Pictures DCD Media £3.0 2.7x na nm

May-07 Endemol Investor group incl. John de Mol €3,396.8 3.0x 19.2x 21.2x

Jan-07 Princess Productions Shine £20.0 na 8.5x 8.6x

Jan-07 Endemol France Endemol NV €450.0 2.6x na na

Dec-06 WWTBAM & Cellador 2waytraffic £111.52 3.8x 7.3x na

Dec-06 Kudos Shine £35.0 na 11.0x 11.3x

Aug-06 All3Media Secondary buy-out (Permira) £320.0 1.4x 11.5x 12.3x

May-06 Tiger Aspect Holdings IMG Media £27.02 0.4x 12.1x 15.1x

Apr-06 Darlow Smithson Productions IMG Media £20.02 1.0x na na

Apr-06 Odeon Film GFP Vermögensverwaltungs £15.63 0.4x 4.3x 4.5x

Mar-06 Hurricane Spütz na na na na

Dec-05 IWC RDF £14.02 0.8x 17.5x 19.5x

Nov-05 Ricochet Shed £30.02 2.0x na 14.1x

Oct-05 TV Corp Tinopolis £27.7 0.6x 21.2x na

Aug-05 Touchpaper Television RDF £4.2 0.9x 11.9x na

Median 1.4x 11.5x 12.9x

Average 1.7x 12.1x 12.9x

(1) Estimated consideration(2) Median of upfront and earn-out inclusive multiple(3) Includes maximum earn-out(4) Source: Offer Memorandum, LTM multiples to June 2007, Forecasts from ING research, 3 August 2007

Comparable M&A Multiples: TV Production

Median Multiple

ER Figures

(MM)

Implied Value (MM)

Sales 1.4x $28.6 $40.0

EBITDA 11.5x $3.4 $39.1

EBIT 12.9x $3.4 $43.9

Average Implied Value (MM)

$41.0

PV of Cash Paid to Daveis

(assuming high-case payout) (MM)

Earn-outs:$X

80/20: $X

6

Impact of Earn-outs Tied to EBITDA Ranges

P & L Cash Flow / Valuation

Mid Case

Low Case

High Case

Fiscal Year($ in MM) 09 10 11 12 13 DCFInitial Consideration ($20.0) $0.0 $0.0 $0.0 $0.0 ($20.0)All Other EBITDA 3.4 3.8 2.7 3.0 3.1 10.5Earn Out 0.0 0.0 0.0 0.0 0.0 0.0Terminal Value 0.0 0.0 0.0 0.0 21.8 10.2FCF + Terminal ($16.6) $3.8 $2.7 $3.0 $25.0 $0.7

Fiscal Year($ in MM) 09 10 11 12 13 DCFInitial Consideration ($20.0) $0.0 $0.0 $0.0 $0.0 ($20.0)All Other EBITDA 3.5 4.0 3.0 4.3 6.3 13.1Earn Out 0.0 0.0 0.0 (0.5) (2.2) (1.3)Terminal Value 0.0 0.0 0.0 0.0 44.4 20.7FCF + Terminal ($16.5) $4.0 $3.0 $3.8 $48.5 $12.5

Fiscal Year($ in MM) 09 10 11 12 13 DCFInitial Consideration ($20.0) $0.0 $0.0 $0.0 $0.0 ($20.0)All Other EBITDA 3.8 5.5 5.9 10.2 11.5 21.9Earn Out 0.0 (0.5) (1.1) (4.0) (5.0) (5.6)Terminal Value 0.0 0.0 0.0 0.0 80.8 37.7FCF + Terminal ($16.2) $5.0 $4.8 $6.2 $87.4 $34.0

Fiscal Year($ in MM) 09 10 11 12 13Pof10 (Format/1st Run) EBITDA $0.1 $2.5 $4.2 $7.4 $10.9All Other EBITDA 3.4 3.8 2.7 3.0 3.1Total EBITDA 3.6 6.3 6.9 10.4 14.0Amort (3.5) (3.5) (3.5) (3.5) (3.5)Earn-out 0.0 0.0 0.0 0.0 0.0EBIT $0.1 $2.8 $3.4 $6.9 $10.5

Fiscal Year($ in MM) 09 10 11 12 13Pof10 (Format/1st Run) EBITDA $0.1 $2.5 $4.2 $7.4 $10.9All Other EBITDA 3.5 4.0 3.0 4.3 6.3Total EBITDA 3.6 6.5 7.3 11.7 17.2Amort (3.5) (3.5) (3.5) (3.5) (3.5)Earn-out 0.0 0.0 0.0 (0.5) (2.2)EBIT $0.1 $3.0 $3.8 $7.7 $11.5

Fiscal Year($ in MM) 09 10 11 12 13Pof10 (Format/1st Run) EBITDA $0.1 $2.5 $4.2 $7.4 $10.9All Other EBITDA 3.8 5.5 5.9 10.2 11.5Total EBITDA 4.0 8.0 10.1 17.6 22.4Amort (3.5) (3.5) (3.5) (3.5) (3.5)Earn-out 0.0 (0.5) (1.1) (4.0) (5.0)EBIT $0.5 $4.0 $5.5 $10.1 $13.9

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Impact of Acquiring 80% with a Put/Call on 20%

P & L Cash Flow / Valuation

Mid Case

Low Case

High Case

Fiscal Year($ in MM) 09 10 11 12 13Pof10 (Format/1st Run) EBITDA $0.1 $2.5 $4.2 $7.4 $10.9All Other EBITDA 3.4 3.8 2.7 3.0 3.1Total EBITDA 3.6 6.3 6.9 10.4 14.0Amort (2.6) (2.6) (2.6) (2.6) (2.6)Minority Interest (0.1) (0.4) (0.5) (0.9) (1.4)EBIT $0.8 $3.2 $3.8 $6.8 $10.0



FY14 – 18 could include ~$4-5MM of amortization for the buyout of the additional 20%

Fiscal Year($ in MM) 09 10 11 12 13 DCFInitial Consideration (15.0) 0.0 0.0 0.0 0.0 ($15.0)All Other EBITDA 3.4 3.8 2.7 3.0 3.1 $10.5Minority Interest (0.1) (0.4) (0.5) (0.9) (1.4) ($1.9)Buyout of 20% 0.0 0.0 0.0 0.0 (4.4) ($2.0)Terminal Value 0.0 0.0 0.0 0.0 21.8 $10.2FCF + Terminal (11.7) 3.3 2.2 2.1 19.2 $1.8



8

Appendix

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Earn-out Target Estimates

(1) Based on Davies’ CY08-11 estimates with CY12-13 growth at 15%.(2) Based on SPT estimates

FY09 FY10 FY11 FY12 FY13Davies Targets (Fiscalized) (1) $5.5 $6.8 $8.1 $9.2 $10.5Format and 1st Run on Pof10 (2) 0.1 2.5 4.2 7.4 10.9

Total $5.6 $9.4 $12.3 $16.6 $21.4

Earn-out Target N/A $10.0 $12.0 $15.0 $20.0

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ER Calendar Year Projections (Per Michael Davies)

Embassy Row 2007 2008 2009 2010 2011Production RevenueEntertainment $20,756,574 $33,855,940 $39,897,074 $47,841,235 $48,691,161Interactive $2,445,000 $3,697,843 $5,300,157 $6,456,163 $7,536,010Sports $455,858 $3,700,000 $5,860,000 $7,506,400 $11,957,536Factual $4,348,000 $6,870,000 $11,948,000 $12,638,000 $14,748,000Film $600,000 $1,200,000 $1,200,000 $1,200,000 $600,000

Gross Revenue $28,605,432 $49,323,783 $64,205,231 $75,641,798 $83,532,707

Production ExpensesEntertainment $16,670,767 $27,959,861 $33,627,544 $40,532,624 $41,224,931Interactive $953,913 $2,035,649 $3,278,935 $4,412,112 $5,209,777Sports $322,418 $3,190,000 $5,027,800 $6,380,440 $10,163,906Factual $4,348,000 $6,705,000 $11,448,590 $11,715,650 $13,696,650Film $600,000 $1,200,000 $1,200,000 $1,200,000 $600,000

Net Revenue $5,710,334 $8,233,273 $9,622,362 $11,400,972 $12,637,443

Overhead Expenses $2,307,531 $3,030,981 $3,155,137 $3,550,819 $3,798,688

Annual Net Profit $3,402,803 $5,202,292 $6,467,225 $7,850,153 $8,838,756

Confidential Draft Embassy Row: Deal Structure November 2007 DRAFT AS OF: 11.27.07.

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Transcript of Confidential Draft Embassy Row: Deal Structure November 2007 DRAFT AS OF: 11.27.07.