Post on 13-Jan-2016
transcript
GSN: Initial Hypotheses and Next Steps
April 18, 2008
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• New information provided by management indicates that the benefits of integrating GSN and FUN accrue to GSN under both the merger and partnership scenarios
• Most merger synergies accrue to FUN technologies and assume significant growth as well as the development of a new business model (Free Games)
• Based on the information provided, SPE should simply retain its interest in GSN rather than investing FUN and pursuing a merger
Information Provided by Management Suggests GSN Will Receive FUN Integration Benefits Even Without Merger
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• Non-Merger will reduce the ability of GSN and FUN executives to seamlessly coordinate (e.g., no co-location, increased difficulty in selling multi-platform buys to advertisers)
• Non-Merger will require duplication of some assets and key personnel thus reducing potential cost synergies
Asset Duplication
Coordination
On a Practical Basis However, GSN Would Require Merger to Maximize Integration Benefits
Potential Lost Value Under Partnership Model
Decision to merge will be informed by quantifying the true cost implications of a partnership and an analysis of FUN EBITDA growth projections
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• Ad Sales – Reduced CPM rates– Reduced multiplatform
sponsorships– Shift ad mix away from direct
response
Asset Duplication
Coordination
Potential Levers
• Marketing Spend Effectiveness– Show specific marketing– Other marketing spend
• Headcount– Increased FTE cost for second
management team
• Facilities– Increased facilities cost driven
by ending co-location of GSN/FUN management
Hypotheses
• Partnership will limit opportunities for multiplatform ad buys which yield higher CPMs
Impact with Strawman Assumptions($MM 2010 EBITDA)
• $1-$3MM (TBD for sponsorship and ad mix)
• Increased marketing cost driven by lost purchasing scale and customer acquisition synergies
• $0.5-$1MM
• Additional management team required once GSN/FUN are de-merged
• $0.5-$1.5MM
• Additional management team required once GSN/FUN are de-merged
• GSN Income from FUN– Licensing revenue– Ad sales rev share
• Licensing and ad sales relationships structured at arms length and unlikely to change under partnership
• $0MM
Initial Hypotheses Regarding Lost GSN Value Under a Partnership Model
Total Likely Impact on 2010 EBITDA • $2.1-5.7MM +TBD
• $0.1-$0.2M
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$37.9
$47.2
$60.3
$34.4
$41.2
$51.1
$20.0
$25.0
$30.0
$35.0
$40.0
$45.0
$50.0
$55.0
$60.0
$65.0
2008 2009 2010
EB
ITD
A $
MM
GSN Case SPT Case
Preliminary Analysis of the Partnership Model With Strawman Assumptions Suggests Lost Value to SPE Share of GSN Would Be Less Than $50MM
• CPM Growth: Reduce all CPM growth rates by 50%
• Marketing Spend: Increase by 5% (excluding re-brand)
• Management Headcount: Hire second management team (8 FTE)
• Facilities Cost: Increased office space and related expenses for second management team at $120K per year
Assumptions Impact
• Lost Value to GSN Under Partnership
• GSN Case Valuation: $486.8 M
• SPT Case Valuation: $415.2 M
$35.8 M• All other drivers constant
• Total Lost Value: $71.6 M
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However There Are Additional Levers Which May Impact GSN Value Under a Partnership
- Drivers Flexed in Strawman AnalysisPotential Levers
ADVERTISING SALES AFFILIATE SALES
Applicable to Daytime / Fringe / Prime / Subcriber RateLatenight / Weekend Categories Licensing Fees
Upfront / ScatterNielsen SubsHH Ratings PROGRAM DEVELOPMENT VPVH AND AMORTIZATIONCPM Rate
Programs - AcquisitionsPrograms - Original Development
Direct Response / Infomercials Roll-out RateCPM Rate Pilot Success Rate
Spot Mix% of Upfront OPERATING EXPENSES% of Scatter% of Direct Response Marketing% of Infomercials Show Specific Marketing
Brand Image (Marketing Rebrand)Creative/Affiliate/Ad Sales/Other
GeneralSponsorships G&AAdvertising Minutes per Hour (# of Spots) Headcount / Additional Management Team
Infrastructure / Facilities
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More Work is Required to Validate Model Assumptions
• How will CPM rates be affected by loss of multiplatform offering?Ad Sales
Key Questions Proposed Approach Timing
Affiliate Sales
Program Development and Amort.
Operating Expenses
• Are lucrative sponsorships at risk under a partnership scenario?
• Will management be able to shift the ad mix away from D.R. without FUN?
• Interview SPT ad sales team to gauge likely market response to loss of integration with FUN
• Analyse Q1 ’08 actuals for evidence of sponsorship growth driven by FUN integration
• Review ad mix strategy and implications with GSN management
• Confirm hypothesis of negligible impact on subscriber rates and sub fees
• Confirm and validate the specific marketing synergies that are listed in aggregate in the GSN/FUN management projections
• Finalize incremental headcount required under partnership model
• Identify incremental facilities costs and asset leasing required under partnership
• Request submitted to GSN for detailed backup—awaiting response
• Determine reasonable salaries based on SPE actuals
• Identify actual costs based on GSN current leases and gross-up based on headcount analysis
• Interview affiliate experts (SPT Research, IBB, FEARnet execs)
• Confirm hypothesis of negligible impact on programming economics (e.g. acquisitions, development, pilot pick-ups)
• Interview GSN Development team and/or SPT Production and Programming
• Week of April 21
• Upon receipt of Q1 ’08 actuals from GSN
• Week or April 21
• Upon receipt of data from GSN
• Week of April 14
• Week of April 21
• Week of April 21
• Week of April 21
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$8.1
$6.8
$8.9$9.3
$13.6
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
2002 2003 2004 2005 2006
Rev
enu
e $M
MFor SPE to Lose No More Buying FUN Than It Would Under The Partnership Model, FUN Revenue Must Increase at a CAGR of 8.9% Over The Plan Period
Worldwinner (FUN Games) Historical Revenue
• FUN acquisition valuation:
13.8% • Acquisition cost to SPE:
• FUN DCF Value at 8.9% Revenue CAGR 2008-2010:
$200MM
($100MM)
$128.4MM
• SPE Share of DCF Value
$64.2MM
• Net SPE Investment Loss
($35.8MM)
Note: Due to acquisitions 2007 revenue increased 314% over 2006. 2007 excluded from CAGR calculation as it is not indicative of organic growth in the business
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Given the Estimated Impact of Lost GSN Synergies, FUN Valuation Will Likely Determine Merger Attractiveness
GSN/FUN Valuation Under Multiple Scenarios
• At 8.9% EBITDA growth and a $200MM acquisition valuation, FUN would represent a $36 MM loss to SPE
• $36MM is equal to the expected lost GSN value under a partnership model
*
* SPT Strawman case introduced on pg. 4
• FUN acquisition is accretive for SPE only if revenue CAGR exceeds 8.9% over the plan period**
CY08 CY09 CY10 DCF SPE Share SPE Gain/LossGSN As Provided (Partner or Merger) 37,903 47,191 60,308 Exit Value (10x) 603,083$ $486,863 $243,432 N/A
GSN if Synergies Lost (SPT Case) 34,405 41,190 51,085 Exit Value (10x) 510,850$ $415,274 $207,637 ($35,795)
Fun Grow @ 8.9% CAGR on Revenue 10,859$ 13,400$ 15,699$ Exit Value (10x) 156,991$ $128,411 $64,205 ($35,795)
Fun Grows at Management Proj. 10,859$ 19,734$ 30,046$ (28.8% CAGR on Revenue) 300,460$ $232,888 $116,444 $16,444Exit Value (10x)
Fun Management Proj. + Free Games 13,013$ 26,035$ 39,420$ (28.8% CAGR on FUN Revenue ) 394,200$ $304,593 $152,296 $52,296(90.1% CAGR on Free Games Revenue)Exit Value (10x)
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Next Steps
4/21 4/28 5/5 5/12
Business Diligence
– Develop financial model based on senior management input
– Submit and receive incremental diligence request
Legal Diligence
– Gather priority documentation
– Review priority documentation
– Visit and review Boston data room
– Finalize model assumptions and assess impact
– Finalize legal diligence and develop recommendations
Present findings to Mosko
Present findings to Mosko
If findings suggest merger…
• Prepare legal documentation
• Prepare and submit deal for GEC review
If findings suggest partnership…
• Structure arms length agreements between GSN and FUN
• Develop roadmap for separation of operations (e.g. management team, facilities)
• 3-4 weeks to determine at an SPT level if we want to buy or partner with GSN• 2-3 months to formalize
merger or partnership
Review model with Carey, Shearer and Calkins