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Summary of Simon Cowell Partnership Opportunities
May 2009
2CONFIDENTIAL
NOTES FOR SPT INTERNAL DISCUSSION ONLY
• Fall 2007 – Sony BMG began negotiations to form a JV with Simon Cowell, buying into his revenues streams
(appearance fees and artist revenues) associated with American Idol, X-Factor, and other shows– At the time, SPE provided a high-level overview of opportunities to partner with Simon that could
complement (but not drive) the Sony BMG deal, including: (1) TV Production, (2) Film Production, (3) Crackle, (4) GSN
• Winter 2008– We were asked to quantify the value of the TV/Crackle/GSN opportunities and estimated their value at
$70-$100MM (see appendix A)– At this point, the TV production portion of the deal evolved from a small (e.g., $1.5MM overall deal) to a
full blown JV with funding for several pilots per year
• June 2008– R. Wiesenthal updated us in detail on a Sony BMG proposal that was being made to Simon without SPE
(see appendix B)
• Today– We have been asked to update our list of partnership opportunities with Simon– The next 4 pages outline these opportunities and have been modified from the Fall 2007 version:
Eliminated the opportunity to receive equity in GSN (given 65% Liberty ownership) Excluding quantification of opportunities until negotiations are further fleshed out (in prior iterations
we were concerned about being asked to over-commit here)
3CONFIDENTIAL
SPT is the top independent studio for network and cable television• Creator and distributor of top comedies, dramas, and game shows:
– #1 comedy of all-time (Seinfeld)– #1 primetime comedy last season (Rules of Engagement)– #1 daytime drama (Young and the Restless)– #1 and #2 game shows of all time (Wheel of Fortune and Jeopardy!)– #1 producer of TV movies, won 3 Emmys for Broken Trail this year
• Broad range of on-air shows, including 10 network shows, 8 cable shows, 5 syndicated shows, and 6 made-for-TV movies
• Industry leader in television distribution with records for shows like Seinfeld and King of Queens• Large ad sales organization with over $200MM in annual revenues
• Establish a JV with Simon and Sony Pictures Television
• Provide Simon access to SPT’s drama and comedy writers as well as our creative executives
• Cover multiple genres as well as scripted and non-scripted formats
• Provide Simon screen credits including Executive Producer, Logo Credit, and paid ads
Preliminary Proposal for an Overall Television Deal
Sony Pictures Television Business Overview
Deal Overview
Simon will tap into Sony Picture Television’s resources, industry leadership, and expertise to expand the range of his television offerings
Need to update these stats
4CONFIDENTIAL
Preliminary Proposal for an Overall Feature Film Deal
Sony Pictures Overview
Sony Pictures is Hollywood’s leading studio
• #1 in openings (2006 & 2007)
• #1 in market share (2006 & 2007)
• #1 in opening day receipts / weekend receipts (Spider-Man 3)
• 12 Best Picture Oscars
Deal Overview
• A multi-year first look deal with Columbia Pictures for all theatrical projects• Deal would cover Simon’s overhead and fringe• Deal would be non-exclusive for Simon with regards to production services / producer
commitments• Pay-or-play for fixed compensation would be based on SPE’s election to proceed to production• Contingent consideration would be the same as existing deal at Columbia (“William Davies /
Untitled Simon Cowell Project”)
Simon will leverage Sony Pictures’ resources and feature film production expertise, providing Simon a vehicle to bring his theatrical projects to the screen
Need to update these stats
5CONFIDENTIAL
• Sony would grant equity in Crackle as part of the venture
[Note: We should discuss. This was previously based on the assumption of Sony BMG funding a portion of EBIT losses]
• Crackle would provide technology, infrastructure, and management team
• Partnership would include marketing support and music video distribution
• Simon would receive cash compensation for his services, including contribution of his expertise in developing the Network concept
• Simon would contribute his name and likeness, public relations support, and on-going interaction with audience members [Note: Crackle partnership likely no longer about audience talent; less like Idol]
Crackle is a premier destination for online video, focused on high-quality short-form video
• Crackle is elevating the quality of online video and attracting the best creators of short-form video
• Crackle has attracted a large and loyal audience, making it the ideal destination to extend Simon’s brand online
• Crackle’s model is an ideal fit for identifying talent, with a brand built on offering fame-based incentives to emerging talent
Preliminary Proposal for a Crackle-based Online Partnership
Crackle Overview
Deal Specifics
With no cash investment, Simon would participate in creating the leading online destination for talent and extend his brand to a site that reflects his style of straight talk and celebrity
6CONFIDENTIAL
Collaborate with Simon to build a game-based business around his brand
• With the backing of Sony Pictures, Liberty Media, and new management, GSN is redefining its brand
• GSN is building on its position as a leader in TV game shows (reaching 66MM households) to expand into online and casual games
• GSN’s affiliation with Fun Technologies uniquely positions it to be the leader in games across platforms
Preliminary Proposal for a GSN-based Game Partnership
GSN Overview
Deal Specifics
Leverage GSN and FUN Technologies to extend Simon Cowell’s brand into both television game shows and skill-based casual video games
• GSN would guarantee exclusive carriage for a defined number of Simon’s game shows each year
(number of shows / format would be negotiated)
• Simon would have a dedicated programming block one night per week
• Simon, GSN, and FUN Technologies would collaborate in developing online skill-based games
• Deal would build on Sony’s partnership with IGT and history of introducing the most successful gaming
machines of all time to offer slot machines based on Simon’s game shows
7CONFIDENTIAL
Appendix A – Back-up from Fall 2007 / Winter 2008
8CONFIDENTIAL
Estimated Value Ranges (As of Winter 2008)
Deal ComponentEntity Value
% to Simon / SBMG
Implied Value
Entity Value BasisSimon / SBMG
Equity Basis
Sony Pictures Television JV
$45MM -$100MM
50% $22MM -
$50MM
• 2 successful shows w/ network, sponsors, and syndication
• Funding for pilots required to yield 2 shows
• OH funding
• Based on % of development and OH funding provided
Crackle $62.5MM22.5% -
30% $15MM -
$20MM• Acquisition price
• 5% at close for cash• 15.5% based on EBIT
funding• 7.5% based on financial
milestones
GSN $600MM -
$700MM5%
$30MM -$35MM
• Negotiated value between Sony and Liberty Media
• Warrants• Based on financial
milestones
Partnership opportunities with SPE would provide $70-100MM in equity plus additional income to Simon / Sony BMG
Likely off the table
Need to revisit
Need to revisit
9CONFIDENTIAL
TV Production Company Overview (As of Winter 2008)
• Reality Shows (e.g., America’s Got Talent, Cupid)• Game Shows (e.g., Power of 10)
Organizational Structure
Business Model
Content Focus
• $7 MM annually required for development budget, 6 pilots (50% license fees covered by networks), and overhead in Year 1; growing to $12 MM by Year 5
• Only network shows assumed without need for deficit financing (i.e., no cable shows modeled)• Reality shows assumed to generate incremental revenue from sponsorship and format sales• Game shows assumed to generate incremental revenue from First Run Syndication,
Advertising (syndication barter), and international format sales
• JV headed by Simon Cowell with 10 professionals in the first year growing to 20 professionals by Year 5
• Wholly owned by SCA and SyCo (50/50 JV)
Key Success Factors
• Pilot pickup rate throughout the plan period in line with industry averages (33%)• Successful first run syndication of best game shows (e.g., Who Wants to be a Millionaire)• Reality formats attract significant sponsorship ($20 MM/Year by Year 3)• NewCo earns all EP fees at 10% of production budget (60-85% of PV)
PV of production company cash flows ranges from $45 MM to $100 MM driven by Simon’s ability to continue to create exciting television content
10
Slate Assumptions (As of Winter 2008)
• 6 pilots per year with a 33% pick-up rate for both reality and game shows
General Assumptions
• Mix of successful (3+ seasons, syndication and format sales) and under performing (average 1-2 seasons, limited sponsorship, no syndication) game show and reality programming
• Successful shows reach steady state economics in Year 3
• 100% network shows with license fees equal to production budgets
Case Specific Assumptions
Aggressive Case
Industry Average
Year 1 to 2 60% 27%30%
Year 2 to 3 50% 61%67%
Year 3 to 4 67% 67%50%
Base Case
Aggressive Case
Reality Success 22
Reality Underperform 23
Game Show Success 32
Base Case
Success Rates Overall Programming Mix*
Game Show Underperform 3 3
Show Type
*Numbers represent picked-up shows
11CONFIDENTIAL
Appendix B – Last Sony BMG Proposal to Simon Cowell(June 2008)
Simon Cowell / SONY BMG
London Meeting
June 3, 2008
13
13
Syco 3.0Unique Advantages of Partnership With SONY BMG
U.S. Switzerland Poland Taiwan MexicoCanada Sweden Hungary Korea Central AmericaUK/Ireland Austria Turkey Hong Kong U.S. LatinFrance Denmark Russia Indonesia BrazilGermany Norway South Africa India ArgentinaBelgium Finland Australia Singapore ChileNetherlands Greece New Zealand Thailand ColombiaItaly Portugal Japan Malaysia EcuadorSpain Czech Republic China Philippines Venezuela
U.S. Switzerland Poland Taiwan MexicoCanada Sweden Hungary Korea Central AmericaUK/Ireland Austria Turkey Hong Kong U.S. LatinFrance Denmark Russia Indonesia BrazilGermany Norway South Africa India ArgentinaBelgium Finland Australia Singapore ChileNetherlands Greece New Zealand Thailand ColombiaItaly Portugal Japan Malaysia EcuadorSpain Czech Republic China Philippines Venezuela
Continuity of Established SONY BMG Relationships
Around the World
Continuity of Established SONY BMG Relationships
Around the World
Exchange Opportunities With All U.S. Labels
and Key Territories
Exchange Opportunities With All U.S. Labels
and Key Territories
Important Relationships With SONY BMG Parent
Companies
Important Relationships With SONY BMG Parent
Companies
Begins Now! …Not In 2011Immediate Profit Share In Syco and Ronagold Assets
SONY BMG Committed to Invest Required Funds to Achieve JV Goals
Begins Now! …Not In 2011Immediate Profit Share In Syco and Ronagold Assets
SONY BMG Committed to Invest Required Funds to Achieve JV Goals
14
14
JV Beginning Now! …Not In 2011
Effective January 1, 2008, SONY BMG contributes ~$200M of Syco and Ronagold assets and Pop Idol override
50% of asset value given to SC, now and ongoing
SONY BMG makes $200M flat payment to SC
$100M on signing
$34M in 2010
$66M in 2015 (or earlier if thresholds are met)
50% share of JV profits from January 1, 2008 thru 2015, worth est’d $296M
Additionally, SONY BMG to fund all JV productions and investments
JV Beginning Now! …Not In 2011
Effective January 1, 2008, SONY BMG contributes ~$200M of Syco and Ronagold assets and Pop Idol override
50% of asset value given to SC, now and ongoing
SONY BMG makes $200M flat payment to SC
$100M on signing
$34M in 2010
$66M in 2015 (or earlier if thresholds are met)
50% share of JV profits from January 1, 2008 thru 2015, worth est’d $296M
Additionally, SONY BMG to fund all JV productions and investments
Syco 3.0 – New Improved Proposal
Forecast SC income:Flat payments $200M+ Est’d profit $296M
Total $496M
Note: all other terms as before
15
15
New Improved Proposal Vs. Prior Offer
Additional $66M On Signing Was $34M, now $100M Interest benefit to SC est’d at $10M
Additional $18M Profit Share 50% Profit Share In 2008 & 2009 (Was 25%)
Additional $28M in post-tax profits to SC
Accelerate Final Flat Payment and Profit Share When Threshold Achieved Vs. All In 2015
Additional $66M On Signing Was $34M, now $100M Interest benefit to SC est’d at $10M
Additional $18M Profit Share 50% Profit Share In 2008 & 2009 (Was 25%)
Additional $28M in post-tax profits to SC
Accelerate Final Flat Payment and Profit Share When Threshold Achieved Vs. All In 2015
ImprovementsImprovements
16
16
Pre TaxIncome
($ In Millions)
Pre TaxIncome
($ In Millions)
Post TaxIncome
($ In Millions)
Post TaxIncome
($ In Millions)
SC* SONY BMG Worldwide Income
Income Projections: New Improved Proposal
Includes $200M Flat Payment*
17
17
Understanding of Competitive
Offer
Understanding of Competitive
Offer
SONY BMGOpportunities Are
Far Greater Than AnyCompetitive Offer
SONY BMGOpportunities Are
Far Greater Than AnyCompetitive Offer
SC Pre Tax Income Projections ($ In Millions)
Our Unprecedented Success to Date Is theFoundation to Build A $1 Billion Media Empire
Our Unprecedented Success to Date Is theFoundation to Build A $1 Billion Media Empire
$496M
$557M
$619M
Forecasted Income: % of Base Case100% 125% 150%
$400M $400M $400MSC
Pre
Ta
x In
com
e
$500
$600
$400
50% Participation In Valuable Asset
Portfolio
50% Participation In Valuable Asset
Portfolio
with
18
18
Shared Ambition to Build A $1Billion Media Company
Add Resources to Coordinate Global TV Activities
Appoint Dedicated SBMG Global Brand Executive Focused On Syco Business
– Responsibilities Include Endorsements, Branding, Sponsorship, Online, Games, Film, Music Publishing, Etc
Create International Structure to Focus On Local Territory Syco Exploitation
Assemble Biannual Meeting of Key Global SBMG/Syco Executives to Brainstorm Opportunities, Develop Plans for Execution
Add Resources to Coordinate Global TV Activities
Appoint Dedicated SBMG Global Brand Executive Focused On Syco Business
– Responsibilities Include Endorsements, Branding, Sponsorship, Online, Games, Film, Music Publishing, Etc
Create International Structure to Focus On Local Territory Syco Exploitation
Assemble Biannual Meeting of Key Global SBMG/Syco Executives to Brainstorm Opportunities, Develop Plans for Execution
RefocusSONY BMG
Organization to Maximize
Exploitation of Syco Assets
RefocusSONY BMG
Organization to Maximize
Exploitation of Syco Assets
Establish LA Presence With Necessary Resources In TV and A&R
Expand In-House TV Producer Team to Deploy On Key Productions
Increase Global Marketing and A&R Resources Accordingly
Establish LA Presence With Necessary Resources In TV and A&R
Expand In-House TV Producer Team to Deploy On Key Productions
Increase Global Marketing and A&R Resources Accordingly
Grow Current TV and Recorded
Music Business
Grow Current TV and Recorded
Music Business
Aggressively Pursue New Business Opportunities
Commit to Provide Funding for Diversification Into New Media Sectors
Aggressively Pursue New Business Opportunities
Commit to Provide Funding for Diversification Into New Media Sectors
Expand Into New Business Areas
Expand Into New Business Areas
Simon Cowell / SONY BMG
London Meeting
June 3, 2008
20
20
SONY BMG Assets Created Together
Il Divo
CarrieUnderwood
Six
AmelBent
The XFactor
GarethGates
ClayAiken
KelliePickler
ChristopheWillem
PaulPotts
ShayneWard
KellyClarkson
DamienLeith
MichelleMcManus
JordinSparks
GotTalent
ShannonNoll
WillYoung
AnthonyCallea
Robson &Jerome
FantasiaBarrino
Daughtry
TaylorHicks
GuySebastian
Westlife
DavidCook
ElliotYamin
RubenStuddard
LeonaLewis
FiveMark
Medlock
American Inventor
21
21
Leona Lewis: Most Recent Syco/SONY BMG Global Success
#1 Top Selling Global Album In 2008#1 Top Selling Global Album In 2008
Debut Album AlreadyGold or Platinum in 17Territories; 4M Units
Spirit
•Fastest selling UK debut album ever (375,000 copies in first week)
•Entered US Billboard 200 at #1 - first British solo artist to achieve this with debut release
Bleeding Love
•Best selling UK single of 2007
•First #1 US single by UK female in over 20 years
•Only the second single to ever fall out and return to the number one position on the Hot 100 twice
Debut Album AlreadyGold or Platinum in 17Territories; 4M Units
Spirit
•Fastest selling UK debut album ever (375,000 copies in first week)
•Entered US Billboard 200 at #1 - first British solo artist to achieve this with debut release
Bleeding Love
•Best selling UK single of 2007
•First #1 US single by UK female in over 20 years
•Only the second single to ever fall out and return to the number one position on the Hot 100 twice
22
2222
Tax Appendix
23
23
Major New Tax Development
New Tax Structure
100% Capital Gain Benefit to SC
Partial Tax Benefit to SONY BMG
Create New English Limited Liability Partnership (LLP)
SC Will Be Partner In LLP and Furnish Services As A Partner
$200M Flat Payment – 18% Tax Rate for SC Vs. Significant Risk of 41% Rate In Option 3
SC Profit Share – 40% Personal Tax Rate Vs. 46% Corporate Rate
Lower National Insurance Costs for JV
See Tax Appendix for Further Details
Significantly Less Risk of Tax Audit for SC
24
24
Current Status
SBME - UK
RonagoldSIMCOSimon Current
Employment Contract
Royalty Free
License
Simon Cowell (SC)
Assets Including Intellectual Property
and Goodwill
Royalty Free
License
25
25
Preliminary Step
SBME - UK
RonagoldSIMCOSimon Current
Employment Contract
SC
Assets Including Intellectual Property
and Goodwill
• Ronagold and SIMCO Give Notice to SBME-UK to Terminate Current Royalty-Free License
Adjusted
License
Adjusted
License
26
26
Venture Formation
• SBME-UK and SC Incorporate A 50/50 English Limited Liability Partnership (LLP) and Make Nominal Capital Contributions (£50K)
– Initially LLP Could Be Formed Internally Within SBME-UK
• SBME-UK and LLP Enter Into Secondment Agreement Under Which SBME-UK Employee Seconded to LLP On A Part-Time Basis (Employee Will Report to SBME-UK and SC) and Employee Would Invest Capital In Short-Term Interest Bearing Intra-Group Loans
• SBME-UK, SC and LLP Enter Into Joint Venture Agreement Pursuant to Which:– SBME-UK Contributes Its Shares In Ronagold and SIMCO to the LLP As A Gift
– SBME-UK Contributes to the LLP As A Gift Up to $200 Million In Three Tranches (i.e., $67 Million Day 1, $67 Million 2010 and Up to $66 Million In 2015 If Earn-Out Conditions Are Met)
– SC Sells His Intellectual Property For Up to $200 Million (i.e., $67 Million Payable Day 1, $67 Million 2010, and Up to $66 Million In 2015 If Earn-Out Conditions Are Met)
– SBME-UK and SC Agree to Adapt A New LLP Agreement Containing the Terms On Which the LLP Will Be Managed by SBME-UK and SC and Under Which SC Agrees to Devote Substantially All of His Time to A&R On Behalf of the LLP On An Exclusive Basis Until 2015
– SC and SIMCO Agree to Terminate SC’s Current Employment Contract
27
27
Venture Formation
SBME - UK
SIMCO
Simon Cowell
Ronagold
LLP
50% 50%
IP
100%
$200
Million
$200
Million
28
28
Structure Tax Advantages
• SBME-UK Should Be Directly Entitled to Amortize 50% of the Cost to the LLP of the Intellectual Property and Goodwill Acquired by the LLP From SC
• Simon's Ability to Claim 18% Tax Rate On the Receipt of $137 Million Plus the Net Present Value of $66 Million Substantially Improves As Compared to Simon's Current Maidmetal Proposal
– As A Matter of English Law, SC Should Be Deemed A Partner and Not An Employee
• SBME-UK Saves Stamp Duty Costs ($1 Million) Since It Is Not Required to Acquire SC’s Shares In Maidmetal