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Time Warner
Research Notes

Time Warner Thesis Update

Date: Sept. 21, 2015
Source: Broyhill Asset Management

After discussing Time Warner at length, we reached the following conclusions which ultimately
supported our initial estimates of downside risk around $65 - $70 per share. Commentary below is largely
focused on the Turner division given growing concerns around cord-cutting. Bottom line: despite the
implied multiple compression at Turner, we remain confident the remaining segments are growing in
value and provide a comfortable margin of safety.

It is unlikely that Turners value declines significantly in the next few years given visibility into affiliate fee
increases. At the companys October 2014 Analyst Day, management guided to low double-digit annual
growth in affiliate fees from 2013-2018. Assuming they are in the right ballpark (a reasonable assumption
in the near-term given the contracted nature of affiliate fees), affiliate revenue should grow high singledigits annually through 2018 even assuming modest subscriber losses. Mid-single digit expense
growth would translate into low-double digit operating income growth at Turner through 2018.

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Subscriber Losses
We believe 1% annual declines in subscribers is a fair base case for TWX. This would be consistent with
commentary from multiple sources as well as recent trends.
If we assume subscriber losses accelerate to say 2.5% annually not a given although the market appears
to be pricing it as such Turner revenue growth might decline to a low or mid-single digit rate. At 8x $5B
in EBITDA (far short of managements $6B goal illustrated below) - roughly in line with other businesses
facing secular headwinds1 - Turner would be valued at $40B.

Warner Brothers
Warner Brothers owns a collection of some of the most valuable branded content in the world including
DC Comics, Looney Tunes, Lego, and Harry Potter. Its film and television libraries are incredibly valuable.
These assets are not being appropriately valued inside of TWX today. 2 Valuing WB at 10x EBITDA
(arguably over conservative given the premium it would warrant in a strategic transaction) and assuming
$2B in EBITDA (management is guiding for $2B in FY18 Operating Income) would put WB at $20B.

The implied value of the HBO stub under this scenario would be worth $20B or about 10x EBITDA. For
perspective, NFLX is currently valued closer to 100x last years EBITDA. As its only pure comp, HBO
appears grossly undervalued inside of TWX. It is unlikely that HBO would trade below 15x EBITDA as a
standalone entity. Some might argue 20x is more appropriate. If we assume HBO generates $2.5B in
EBITDA it would trade for $40B to $50B or more than half of TWX EV today.

Viacom, arguably the worst positioned cable network, has traded at roughly 9x EBITDA over the last decade. The
recent sell off in the media sector has left the stock trading at 7.5x EBITDA today.

Lions Gate currently trades at nearly 18x FY16 EBITDA. MGM changes hands at 12x today.

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Bottom Line
Putting it all together, we see $40B of value at Turner even assuming that accelerating subscriber losses
result in significant earnings shortfalls and continued multiple compression. We see $20B of value at WB
backed by attractive intellectual property and broader distribution driving pricing for content. At almost
any reasonable multiple for HBO, we have a very difficult time justifying todays $80B enterprise value of
Time Warner even under very challenging assumptions.

The long term risk to our investment in TWX is an acceleration in subscriber losses which would force cable
companies to squeeze channels from the bundle and eventually squeeze affiliate fees. This combination of
falling subscriber counts, lower affiliate fee growth and fewer advertising dollars would be a challenging
backdrop for the industry and would likely result in a far less attractive growth profile looking forward from
FY18, at which point, the industry might see greater multiple compression.
Successful investing requires that we consider all possibilities. It requires an objective assessment of risk as
well as a determination of what one should be compensated for assuming those risks. The draconian
scenario outlined above represents one potential outcome. It would seem as though markets are taking this
as a given today given the current values on offer in the media sector. Therein lies the opportunity.
While some companies in the space may in fact deserve this treatment, we think TWX is being painted with
a bad brush. Turner Sports, DC Comics and Looney Toons, for example, would offer a tremendous value
proposition to a number of potential suitors (i.e. Disney, Universal). CNN is arguably the most widely
watched news network around the globe. During the companys negotiations with Fox, the network was
valued as high as $8B3.
The bundle coming apart isnt a given. It will probably happen over time, but that is just one possibility, and
one that folks have been talking about for a very, very long time. Still, it remains intact today. And even
assuming it does unravel, the speed at which this occurs is also uncertain as is its impact on the media sector.
The economics of the industry may shift but they are unlikely to vanish. Well positioned companies, like Time
Warner, with premium content that can be viewed on digital and mobile platforms by a growing pool of
global viewers will still be able to monetize these assets across new distribution platforms.
For the moment, this uncertainty has put pressure on valuations in the sector and as a result, the Turner
segment of Time Warner is masking the companys most valuable assets. We are continually assessing risks
to our thesis, but remain confident that we are being adequately compensated for those risks today.
We continue to believe that Time Warner is very well positioned in this environment with multiple levers to
pull to create its own catalysts. In the interim, suffice it say that downside risk at Turner is somewhat hedged
by the option value at HBO in that an acceleration in cord cutting would also accelerate value creation at
HBO Now.

CNN Said Valued at Up to $8 Billion by Fox in Time Warner Deal

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The analyses and conclusions of Broyhill Asset Management (Broyhill) contained in this presentation
are based on publicly available information including SEC filings and numerous other public sources that
we believe to be reliable. We recognize that there may be confidential information in the possession of
the companies discussed in this presentation that could lead these companies to disagree with our
conclusions. If we have made any errors or if any readers have additional facts or corrections, we welcome
hearing from you. This presentation and the information contained herein is not a recommendation or
solicitation to buy or sell any securities.
This document contains general information that is not suitable for everyone. The information contained
herein should not be construed as personalized investment advice. The views expressed here are the
current opinions of the author and not necessarily those of Broyhill. The authors opinions are subject to
change without notice. There is no guarantee that the views and opinions expressed in this document
will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all
investors. Information presented herein is subject to change without notice and should not be considered
as a solicitation to buy or sell any security.
Our purpose is to disseminate publicly available information that we believe has not been made readily
available to the investing public but is critical to an evaluation of the company. The analyses provided
may include certain statements, estimates, and projections prepared with respect to the historical and
anticipated operating performance of the company. Such statements, estimates, and projections reflect
various assumptions by Broyhill concerning anticipated results that are inherently subject to significant
economic, competitive, and other uncertainties and contingencies and have been included solely for
illustrative purposes. No representations, expressed or implied, are made as to the accuracy or
completeness of such statements, estimates or projections, or with respect to any other materials herein.
Assets managed by Broyhill and its affiliates own shares of Time Warner Inc. (TWX). Broyhill manages
accounts that are in the business of trading buying and selling securities and financial instruments. It
is possible that there will be developments in the future that cause Broyhill to change its position
regarding TWX. Broyhill may buy, sell, or otherwise change the form of its investment in TWX for any
reason. Broyhill hereby disclaims any duty to provide any updates or changes to the analyses contained
here including, without limitation, the manner or type of Broyhill investment.

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