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WorldLink Acquisition Opportunity February 2009

WorldLink Acquisition Opportunity February 2009. Executive Summary. SPE must continue to pursue complimentary businesses that diversify our revenue streams and offer higher operating margins 3 rd party rep business continues to be core to SPT Ad Sales’ overall growth strategy

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WorldLink Acquisition Opportunity February 2009

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  1. WorldLink Acquisition Opportunity February 2009

  2. Executive Summary • SPE must continue to pursue complimentary businesses that diversify our revenue streams and offer higher operating margins • 3rd party rep business continues to be core to SPT Ad Sales’ overall growth strategy • Seeking to compliment current growth strategy through acquisitions • An acquisition of WorldLink would bring us a high-margin asset, diversify our revenue streams, and be a strong strategic fit • Consistently generates 30% EBITDA margins on approximately $9-10MM in revenue • Expands SPTAS into the direct-response business, focusing on the highest ROI segment of advertisers • Creates entry point for broader network relationships and better positions us for incremental 3rd party business • We are seeking approval to submit a non-binding LOI to acquire WorldLink for $14MM plus an earn-out of up to $4MM • Propose price and structure to WorldLink founder • Secure senior management approval to issue non-binding LOI • Issue and negotiate LOI • Move to detailed diligence and long-form

  3. WorldLink Is A Leading Independent Direct Response Market Rep Firm • Overview/Business Model • Founded in 1997 by Toni Knight • Provides direct representation services to a cross-platform network of media outlets • DR represents ~97% of WorldLink revenues • Operates across 8 media outlets including regional sports networks, national cable, national broadcast, national syndication, and U.S. Spanish language • Average commission of 6.6% on gross receipts • Offers fulfillment services to D.R. vendors and accounting services to network clients via a proprietary platform • Media outlets serviced include regional sports networks, broadcast, local, espanol, national, syndication, and international • WorldLink % of Gross Receipts by Media Outlet • WorldLink % Gross Receipts by Inventory Type

  4. Direct Response is Potential Growth Category even as Overall Advertising Declines • Direct Response is a meaningful and growing segment of TV advertising • As of 2007, direct response TV was a $3.8BN industry (~6% of total TV advertising) • As a category, direct response represents 15-26% of inventory exposure for top-tier cable channels, including Discovery, Viacom, and Time Warner networks • Direct response ad spend increased 4% on national TV networks and 15% on Spot TV over the 1st nine months of 2008 • Direct response provides advertisers with a high ROI, which is increasingly attractive during an economic downturn “[Agencies] are really firing up the R in ROI, but making sure you’re spending what you have to spend to reach the audience” – Lynn Fantom, CEO Interpublic Group ID Media • Decreased spending by traditional TV advertisers is presenting an opportunity for direct response • Direct response TV advertising seeing increase in primetime cable and broadcast programming • Cash4Gold launched first-ever direct response Super Bowl ad in 2009 • As a category, direct response (TV, mail, other) expected to increase 3.5% in 2009 Sources: eMarketer, 2008; NY Times, 2009; Direct Marketing Association, 2008; Merrill Lynch, 2008; Morgan Stanley 2008

  5. WorldLink is Economically Attractive and a Strong Strategic Fit Stand-Alone Value • Base case suggests WorldLink is worth approximately $20MM on a stand-alone basis • From 2004 to 2008, revenues grew 5% annually with EBITDA margins in the 30% range • Expands current customer base • 110 active clients including cable networks, MSOs, and content owners • Average customer life of 5-6 years • Diversifies ad inventory to hedge against ad market fluctuations Benefits to SPTAS 3rd Party Rep Business • Representing third party networks (e.g., the Golf Channel) is one of the best ways to leverage the investment made in our ad sales organization • However, securing 3rd party business with our focus on general rate advertising is challenging • Smaller networks seek our services but represent a small return on investment • Once networks reach scale they bring their general rate ad sales in-house • By contrast, both large and small networks typically outsource Direct Response advertising • WorldLink would provide additional resources (people, infrastructure) and relationships to help grow our 3rd party rep business • At a minimum WorldLink will generate $250K in EBIT from SPT 3rd party business that would otherwise be lost Upside Opportunity • Potential for SEL to use DR as a cost-effective medium to expand brand message • WorldLink represents inventory on emerging platforms like online networks and Hispanic networks that could provide opportunities for future growth • Potential for WorldLink to represent 2waytraffic’s domestic DR inventory

  6. WorldLink is a Relatively Stable, High Margin Business • WorldLink Historical Financials • From 2004 through 2007, WorldLink revenues grew 4-5% annually • 2008 decline in revenues due in part to taking one network off-line in Q3 for performance problems at the network level; Q4 revenue rebounded slightly from Q3 but were off budget by ~$200K • Significant reductions in SG&A in Q4 2008 helped bring EBITDA to near the low end of budget ($2.8MM) but still down relative to 2007 • EBITDA margins have been consistently in the 30% range • (1) EBITDA and EBIT figures do not include owner’s compensations

  7. WorldLink has Grown Consistently Over its History

  8. World Link Deal Structure Considerations • Up to $18MM total consideration • $14MM cash at close for 100% of the Company • $2MM of earn-outs tied to performance of her “core business” • $2MM of earn-outs tied to growing revenue with clients we give her to manage (e.g., Tennis Channel) • Headline Structure • Founder would be subject to a 3 year employment agreement • Use employment agreement as opportunity for knowledge transferand reduce operational risk 3 Year EBITDA Impact 3 Year EBIT Impact NPV NOTE: Excludes synergies

  9. World Link Deal Structure Considerations (continued) • Sony is willing to pay up to $18MM for her company • We will pay $14MM at close and bear all the risk if her business declines due to market forces • The next $2MM should be easily attainable and entirely in her control, she just needs to hit forecasts • The final $2MM is in our joint control. But if she demonstrates capacity to grow, it’s almost a windfall to her (we’re handing her live clients to manage) • The “Pitch” to Toni • $14MM is a reasonable price in this market • Base case DCF supports a value of $20MM • Downside DCF supports $14MM even with business declining 3-5% each year • At 5x trailing EBITDA, we’re in-line with public ad agency comps (excluding any control premium) • $16MM if she hits forecast is also a good price for us • DCF of her forecast values the company at $28MM • $2MM potential earn-out on 3rd party business we ask her to manage requires her to drive significant growth to fully earn-out • To fully earn, she needs to drive roughly $7MM of revenue growth each year ($7MM growth x 10% = $700K earn-out per year X 3 years = $2MM) • The Implications for Sony

  10. World Link Earn-out Structure (in addition to $14MM cash at close) • Up to $2MM structured as 50% of each dollar above 2008 EBITDA of $2.8MM up to a cap • If WorldLink hits it’s forecast, the earn-out is almost fully paid • $500K potential in 2009 (50% of each dollar b/t $2.8MM and $3.8MM) (forecast: $3.7) • $500K potential in 2010 (50% of each dollar b/t $2.8MM and $3.8MM) (forecast: $4.1) • $1MM potential in 2011 (50% of each dollar b/t $2.8MM and $4.8MM) (forecast: $4.7) • Earn-out on Core Business • If we choose to have World Link manage a portion of our 3rd party business (e.g., Tennis Channel) she receives 10% of growth in revenues over 2008 levels • Assuming a 30% margin; 10% of revenues is effectively a 33% profit share (on growth only) • Giving clients to Toni to manage is entirely in Sony’s discretion • Earn-out on SPT 3rd Party Business • Revenues from our existing 3rd party business would be excluded from the “core business” EBITDA calculation • If Toni is forced to hire new resources to service our existing 3rd party business, she will want them excluded from her “core business” calculation. This will be difficult unless staff is directly tied to specific accounts • Other • Items • to Note • Cash at Close

  11. Next Steps • Update Toni on our thinking and confirm feasibility • Inform her of our intent to acquire 100% of the business (eliminates conflicts inherent in only owning 51%) • Discus our interest in transferring a portion of our 3rd party business under DR. Confirm she is interested in managing this business and has the needed resources • Update deal structure based on latest thinking regarding what subset of our 3rd party business Toni can support • Make revised proposal to Toni – discuss process for previewing with SPE management

  12. Appendix

  13. 2008 Quarterly P&L (1) Represents Y/Y growth for FY totals (2) EBITDA and EBIT do not include owner’s compensation

  14. WorldLink Comparable Company Analysis – 2008 Trailing (1) As of market close January 29, 2009

  15. Rationale for Trailing and Exit Multiple • There are no true publicly-traded comps for WorldLink • Available comps are diversified advertising agencies that may/may not include a DR business • We believe a comparable trailing multiple for WorldLink would be slightly less than the global average of 5.6x • Only two domestic comps with one significantly underperforming • A premium of up to 30% for control would apply; however, this premium would be partially offset by a discount for lack of scale and illiquidity • An additional adjustment to account for WorldLink’s focus on DR may be appropriate; however, the degree and magnitude of the adjustment is uncertain • Based on the above, a multiple in the range of 5-7x and a trailing EBITDA of $2.8MM yields a fair value of between $14 and $19MM • A terminal multiple of 6x was applied to DCF analysis

  16. Deal Economics by Case – Before Synergies

  17. Deal Economics by Case – After Synergies

  18. Summary of Customer Contracts by Market • Avg. Client Retention to Date (years) • Avg. Remaining Contract Term (months) • Renewal Clauses • # of Active Clients1 16 4.6 14 • Most contracts subject to 1 – 2 year evergreen renewals • National 13 5.1 20 • Renewal provisions N/A; 10 additional clients currently in the renewal process • Local • Regional 38 6.8 12 • Most contracts 1 year or less; significant number of opt out provisions 10 3.8 10 • Most contracts subject to 1 – 2 year evergreen renewals • Syndication 14 3.8 14 • Most contracts subject to 1 – 3 year evergreen renewals • U.S. Spanish Language • International 13 5.5 10 • Most contracts subject to 1 – 3 year evergreen renewals • 1) # of active clients represents contracts not in the process of renewal; including potential renewals, active client totals are National (18), Local (23), Regional (39), Syndication (14), U.S. Spanish Language (16), and International (15). Total active clients excluding renewals is 104 and including potential renewals is 125.

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