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You must buy on the way down.

There is far more volume on the

way down than on the way back up, and far less competition among
buyers. It is always better to be too early than too late, but you must
be prepared for price markdowns on what you buy.
Seth Klarman, The Baupost Group

January 29, 2016

Volume XLII, Issue I S E A R C H I N G F O R V A L U E S I N C E 1 9 7 5

Page 1 NEW: Colfax Corporation (CFX) ($22.14)

Colfax Corporation (CFX or the Company) is an industrial conglomerate with a truly global presence. The Company generates over
$4 billion in annual sales, with roughly even contributions from its Gas and Fluid Handling and Fabrication Technology segments. 78% of
total sales are derived from markets outside of the United States, and nearly half of total Company sales are derived from emerging
markets. Key end markets include Power Generation, Oil & Gas, and General Industrial. Colfax was founded by Steven and Mitchell
Rales in 1997. The Rales brothers are well known for founding Danaher Corporation during the 1980s, one of the best performing
companies in recent history as measured by stock performance. Not surprisingly, the strategic approach at Colfax incorporates much of
the same principles used at Danaher, embodied within the Colfax Business System. Despite CFXs sound strategy and performance-
oriented culture, recent financial results have been under pressure due to weakening fundamentals for its end markets. Additionally,
CFXs significant exposure to overseas markets has created an additional drag on results via negative currency translation. CFX shares
have declined by more than 50% over the past year, and shares have declined by roughly 70% from 2014 highs. We concur with
managements view that the current downturn is cyclical in nature, and does not represent a permanent impairment in the firms growth or
profitability. Looking at CFX from a 2-3 year perspective, we believe sales and EBITDA of $4.5 billion and $600 million could be
attainable. Our estimate of intrinsic value for CFX of $36 per share is based on a 2-3 year time frame, and this assumes only a partial
recovery in its end markets. This estimate implies an EV/EBITDA multiple of 10.0x, and potential upside of more than 60%. Overall we
view CFXs current valuation as an attractive entry point for patient, long-term investors.
Page 13 NEW: Lions Gate Entertainment Corp. (LGF) ($26.15)
Lions Gate Entertainment is a global entertainment Company with a significant presence in the motion picture and television industries.
Shares of Lionsgate have declined by ~36% over the past two months compared with a 6% decline in the S&P 500. In our view, the
share price weakness represents an opportunity for investors to own a first rate content Company with multiple future growth avenues.
While studio businesses have historically generated uneven levels of profitability, their business model has become stronger in recent
years reflecting an increased demand for content from distributors and consumers insatiable appetite for video programming. We believe
the improved fortunes of the studio business were a factor that caught the attention of media mogul Dr. John Malone and prompted him
to take a 3.4% stake in Lionsgate via a recent stock swap transaction with his personal Starz stake (March 2015). The Success of The
Hunger Games has been a large driver of LGFs revenue growth and profitability in recent years and replacing the contribution from the
series will be a tall order, but LGF has a number of current films that are on their way to becoming strong multi-picture franchises as well
as a solid pipeline of films that could be future franchises. Meanwhile, LGFs Television Production segment has gained momentum in
recent years with strong revenue (+17% CAGR over the past six years) and profitability growth. We see further growth in TV segment
profitability as a number of LGFs key TV series will be entering the very profitable syndication cycle in the next few years. Our estimate
of LGFs intrinsic value is $34 a share representing 30% upside from current levels. We believe there are number factors that could drive
shares higher including opportunistic M&A with Malone-controlled companies, a combination with a studio peer (meaningful revenue and
cost synergies), and greater than anticipated share buybacks.
Page 35 UPDATE: Time Warner Inc. (TWX) ($70.44)
TWX shares have declined over 20% since mid-2015 reflecting renewed investor concern that the traditional pay TV business is being
disrupted by the Internet. However, we believe TWX is particularly well positioned to manage this technological transition, and at just
9.6x 2015E EV/EBITDA, shares reflect excessive pessimism. As the leading producer of television programming, TWXs Warner Bros.
studio is actually a beneficiary of the growing demand for high quality original programming. Its film slate also looks promising over the
next 5 years as Warner leverages its leading DC Comics IP and other promising franchises. At Turner Networks, management forecasts
double-digit growth in affiliate fees in the coming years. Turner has locked up premium sports rights well into the next decade, and we
believe its networks focus on live sports, news, and childrens content position it well to navigate the OTT transition. At HBO, must-have
wholly owned content, an existing a la carte premium pricing structure, and under-penetration (both domestically and globally) position
the business to benefit from the adoption of an Internet-delivered platform. We estimate HBO could increase operating income by >50%
over time by capturing more of the differential between its retail and wholesale pricing, aided by the roll-out of the HBO NOW standalone
Internet product. In estimating TWXs intrinsic value, we conservatively project growth below TWXs forecasts across all segments and
apply market-level multiples to Turner (9.5x EBITDA) and Warner (10x EBITDA) despite their unique advantages. Valuing HBO at a
premium 13.5x EBITDA multiple (though a large discount to Netflix), we derive a 2018E intrinsic value of $116/share. Growing investor
unrest could lead TWX to re-evaluate a sale spin-off of HBO. Absent a break-up, we would not dismiss renewed interest in TWX from Fox
or others if TWX shares continue to flounder. Despite the surge in January, TWX shares still trade nearly 20% below Foxs ~$85/share
bid for TWX in mid-2014.

Published by: BOYAR'S INTRINSIC VALUE RESEARCH LLC 6 East 32nd St. 7th Floor New York, NY 10016 Tel: 212-995-8300 Fax: 212-995-5636
Asset Analysis Focus is not an investment advisory bulletin, recommending the purchase or sale of any security. Rather it should be used as a
guide in aiding the investment community to better understand the intrinsic worth of a corporation. The service is not intended to replace
fundamental research, but should be used in conjunction with it. Additional information is available on request.
The statistical and other information contained in this document has been obtained from official reports, current manuals and other sources which
we believe reliable. While we cannot guarantee its entire accuracy or completeness, we believe it may be accepted as substantially correct.
Boyar's Intrinsic Value Research LLC its officers, directors and employees may at times have a position in any security mentioned herein.
Boyar's Intrinsic Value Research LLC Copyright 2016.
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January 29, 2016
Volume XLII, Issue I

Colfax Corporation
Dow Jones Indus: 16,466.30
S&P 500: 1,940.24
Russell 2000: 1,035.38 Trigger: No
Index Component: Russell 2000 Type of Situation: Business Value

Price: $ 22.14
Shares Outstanding (MM): 124.4
Fully Diluted (MM) (% Increase): 125.0 (1%)
Average Daily Volume (MM): 1.6
Market Cap (MM): $ 2,750
Enterprise Value (MM): $ 4,078
Percentage Closely Held: Insiders~20%

52-Week High/Low: $ 53.59/18.22

5-Year High/Low: $ 74.82/18.22

Trailing Twelve Months

Price/Earnings: 13.6x
Price/Stated Book Value: 0.9x
Colfax Corporation (CFX or the Company) is
Net Debt (MM): $ 1,328 an industrial conglomerate with a truly global presence.
Upside to Estimate of The Company generates over $4 billion in annual sales,
Intrinsic Value: 61% with roughly even contributions derived from its two
Dividend: NA segments: Gas and Fluid Handling and Fabrication
Yield: NA Technology. Its portfolio of brands includes Howden,
Colfax Fluid Handling, and ESAB. As of the most recent
Net Revenue Per Share: fiscal year 78% of total sales were derived from markets
2014: $ 37.69 outside of the United States, and nearly half of total
2013: $ 41.90 Company sales were derived from emerging markets.
2012: $ 43.01 Key end markets include Power Generation, Oil & Gas,
2011: $ 15.64 and General Industrial.

Earnings Per Share: Colfax was founded by Steven and Mitchell

2014: $ 3.02 Rales in 1997. Prior to starting Colfax, the Rales
2013: $ 1.56 brothers were well known for founding Danaher
2012: $ (0.92) Corporation (ticker: DHR) during the 1980s, one of the
2011: $ 0.10 best performing companies during its history as a public
firm as measured by stock appreciation. In part, the
Fiscal Year Ends: December 31 founding of Colfax represented an attempt by the Rales
Company Address: 420 National Business brothers to replicate the success of Danaher through a
Parkway, 5 Floor new venture. The Rales brothers continue to hold a
Annapolis Junction, MD 20701 19% stake in CFX. Not surprisingly, the strategic
Telephone: 301-323-9090 approach at Colfax incorporates much of the same
CEO: Matthew Trerotola principles used at Danaher, embodied within the Colfax
Business System (also known as CBS). Additionally,
Clients of Boyar Asset Management, Inc. do not own shares of Colfax Colfax has been assembled in a similar fashion, aided
Corporation common stock.
by significant M&A activity.
Analysts employed by Boyars Intrinsic Value Research LLC do not
own shares of Colfax Corporation common stock.

Colfax Corporation

Given the profile and sales mix at Colfax, it should come as no surprise that recent financial results have
been under pressure. The firm has been facing multiple market-related headwinds, reflecting the cyclicality and
economic sensitivity of its businesses and end markets. To make matter worse, CFXs significant exposure to
overseas markets have caused an additional drag on results via negative currency translation. Through the first
9 months of 2015, CFXs sales and operating profit have declined 15% and 27% respectively.
As suggested by the firms recent results and guidance, near-term growth comparisons (2016) for CFX
are likely to remain relatively weak. This outlook reflects the challenging conditions within several of CFXs end
markets. However, we concur with managements view that the current downturn is cyclical in nature, and does
not represent a permanent impairment in the firms growth or profitability. Looking at CFX from a 2-3 year
perspective (roughly 2018), we believe sales and EBITDA of $4.5 billion and $600 million could be attainable.
This assumes some recovery in end market fundamentals, and incorporates the benefits of the firms ongoing
efficiency and cost reduction initiatives. Earnings power beyond 2018 could be significantly higher in our view,
and this is likely being overlooked by investors in this environment.
CFX shares have clearly been out of favor with investors over the past 1-2 years. The stock has
declined by more than 50% over the past year, and shares have declined by roughly 70% from 2014 highs. Our
estimate of intrinsic value for CFX of $36 per share is based on a 2-3 year time frame, and assumes only a
partial recovery in its end markets (and utilizes an operating margin of 10%, still below the mid-teens objective
and below levels achieved in recent years). This estimate implies an EV/EBITDA multiple of 10.0x, and potential
upside of more than 60% over the next 2-3 years. Looking beyond 2018, intrinsic value could reach $45 per
share (over 100% upside) if CFX can approach its more normalized level of growth and profits.

History & Business Overview

Colfax was founded by Steven and Mitchell Rales in 1997. Their goal upon founding the Company was
described as: building a world-class global industrial enterprise focused on delighting its customers and
dedicated to continuous improvement. Prior to starting Colfax, the Rales brothers were well known for founding
Danaher Corporation (ticker: DHR) during the 1980s, one of the best performing companies in recent history as
measured by stock performance. Over the course of 35 years, Danaher shares achieved an estimated 35%
CAGR in share price. Danahers market capitalization is now approaching $60 billion, and annual revenue now
exceeds $20 billion (both Rales brothers remain on DHRs board of directors). The strategy and values of Colfax
are designed to reflect the same founding principles of Danaher. Danaher was built over the decades into a top
performing conglomerate via a series of acquisitions across multiple industries. Danaher eventually evolved
from a portfolio of fragmented businesses into a structure of business platforms focused on building strong
competitive positions within multi-billion dollar global markets. A key driver of Danahers successful track record
relates to its implementation of kaizen, a Japanese business concept that stresses continuous company
improvement. Danahers adoption of kaizen was embodied in its creation of the Danaher Business System (or
DBS) during the mid 1980s. DBS is a business approach founded on lean manufacturing concepts that is a
central aspect of the companys strategy and culture. The Danaher Business Systems areas of focus include
growth, leadership, and efficiency. DBS is designed to produce a culture that Danaher describes as values-
based, customer-centric, process-oriented, and results-driven. Ultimately, DBS seeks to create shareholder
value via a combination of growth and margin expansion over the long term. Given the stellar track record of
Danaher, it is safe to conclude that DBS has been a key differentiator and driver of success.

In part, the founding of Colfax represented an attempt by the Rales brothers to replicate the success of
Danaher through a new venture. Not surprisingly, the strategic approach at Colfax incorporates much of the
same principles used at Danaher, embodied within the Colfax Business System (also known as CBS). Colfax
has been assembled in a similar fashion as well, aided by significant M&A activity. Although Colfax is less than
20 years old, it warrants mention that several of its businesses have histories that span over a century. Initial
acquisitions focused on businesses such as fluid handling and power transmission. CFXs most significant
acquisition to date has been its 2012 acquisition of Charter International PLC (deal valued at over $2 billion in
cash and stock). Charter was a U.K. based industrial firm with a specialization in welding and cutting systems as
well as industrial gases. In order to facilitate the transaction, CFX raised new capital via debt and equity,
including preferred stock. The preferred shares were issued to BDT Capital Partners, a Chicago-based
merchant banking firm founded by Byron Trott. Prior to founding BDT, Trott was vice chairman at Goldman
Sachs investment banking division and had been a long time advisor to Warren Buffett (Trott is often described
as Buffetts Banker). BDT has since converted its shares into common stock, and is CFXs largest outside

Colfax Corporation

shareholder (9% stake). In many ways, Charter was a transformative deal for CFX which significantly expanded
the size of the Company. At the time of the deal, Charters annual revenue ($2.7 billion) was more than five
times the revenue base of CFX. The transaction was viewed as complementary by CFX management,
expanding its presence outside of pumps and valves and creating a more diversified engineering services
concern with greater exposure to emerging markets.

Today, CFX is a well established, global player in several industrial and engineering businesses. The
Company generates over $4 billion in annual sales, with roughly even contributions derived from its 2 segments:
Gas and Fluid Handling and Fabrication Technology. Its portfolio of brands includes Howden, Colfax Fluid
Handling, and ESAB. Product distribution is via both direct sales and third party channels. As the following
graphs illustrate, the firm has a relatively diversified sales mix in terms of end markets, and in terms of
foremarket compared to aftermarket purchases. From a margin perspective, CFX typically earns higher margins
on aftermarket purchases. CFXs sales mix is also international by nature. As of the most recent fiscal year 78%
of total sales were derived from markets outside of the United States, and nearly half of total Company sales
were derived from emerging markets. CFXs manufacturing facilities possess a similarly global profile with 75%
of property, plant, and equipment located outside of the United States. Additionally, the majority of CFXs
domestic and foreign manufacturing facilities are owned. Given the firms global profile, CFXs overall financial
results can be highly sensitive to foreign currency translation. Colfaxs businesses also have some seasonality,
reflecting heightened demand in the fourth quarter as client capital spending tends to ramp up at year-end.
Colfax employs approximately 15,000 employees around the world, and 19% of CFX employees are
represented by a union or work council.

Sales by End Market Foremarket vs. Aftermarket

(first 9 months 2015) (first 9 months 2015)

Marine 5%
11% Power
Generation Aftermarket
35% 35%

Industrial &
Oil, Gas &

Fabrication Technology (52% of sales): Colfaxs Fabrication Technology division is a provider of

products and equipment used in the cutting and joining of steel, aluminum, and other metals (welding
and related activities). The Company utilizes several well known brands within the welding industry
including ESAB and Victor. The acquisition of Victor was completed in 2014 for $949 million (CFXs
largest deal since Charter). A significant portion (35%) of Fabrication Technology sales is derived from
consumable products for welding (electrodes, wire, fluxes, etc.). Equipment provided to clients includes
everything from portable welding machines to large welding systems. Products from the Fabrication
Technology segment serve end markets such as oil and gas production, power generation, shipbuilding,
pipelines and mining. The global market for Fabrication and Technology is approximately $22 billion and
has a long-term growth rate of approximately 3%-4%. The industry landscape is relatively fragmented
with a majority of market share held by smaller players who possess modest scale. Importantly, Colfaxs
ESAB brand is a leader in industry market share (#1 in Europe, #1 in South America, #1 in India, #3 in
North America), and its largest scale competitors include Lincoln Electric and Illinois Tool Works. Close
to half of this segments revenue is derived from emerging markets.
Colfax Corporation

Gas and Fluid Handling (48% of sales): The Companys Gas and Fluid Handling segment supplies a
wide range of products on a global basis. Its product line includes industrial fans, compressors, rotary
heat exchangers, and various types of pumps and valves (and related services). Products on the gas
handling side are typically marketed under the Howden brand, while fluid handling is primarily marketed
under the Colfax Fluid Handling brand. Large scale competitors for the Gas and Fluid Handling segment
include Siemens, GE, and Netzsch (a German firm). The size of the global gas handling market is
approximately $12 billion and the overall fluids handling industry is approximately $5 billion in size. The
long-term growth rate of the gas and fluid handling industry is roughly 3%-5%. Similar to its position in
the Fabrication Technology business, CFX brands hold leading market share in both the gas and fluid
handling sectors, and both of these sectors are relatively fragmented in nature. CFX has the #1 market
share position in product categories such as heavy fans, rotary heat exchangers, industrial fans, screw
pumps, and lubrication services. About half of CFXs gas handling revenue (Howden) is generated in
emerging markets, serving end markets such as energy and industrial infrastructure. The fluid handling
business is more heavily weighted to developed markets such as the United States and Europe,
supporting customers in the energy, transportation, and industrial infrastructure end markets.

The Colfax Business System: A Culture of Continuous Improvement

A key driver of the successful record for the Rales Brothers first venture (Danaher) was its unique
performance culture and the corresponding benefits to its long-term financial performance (the Danaher
Business System described earlier in this report). A similar approach has been incorporated into Colfaxs culture
and business approach (known as the Colfax Business System or CBS). In our view, this consideration helps to
differentiate CFX from its competitors, and should be a catalyst for the creation of shareholder value during the
coming years, illustrated by organic growth, margin expansion, and efficient integration of M&A. Management
describes CBS in the 2014 10-K in the following way:
It is a repeatable, teachable process that we use to create superior value for our
customers, shareholders, and associates. Rooted in our core values, it is our culture. CBS
provides the tools and techniques to ensure that we are continuously improving our ability to
meet or exceed customer requirements on a consistent basis.

CBS Culture Taking Hold

Source: Company presentation, June 2015

Management summarizes the previously mentioned core value as consisting of 5 parts: 1) Customers
Talk, We Listen, 2) The Best Team Wins, 3) Continuous Improvement (Kaizen) is Our Way of Life, 4)Innovation
Defines Our Future, and 5) We Compete for Shareholders Based on Our Performance. CFX measures the
progress achieved by CBS from several perspectives. CBS-related metrics include on time delivery, sales
conversion, inventory levels, factory capacity and lead time, and reductions in waste and costs. As part of its
continuous improvement efforts, CFX has conducted over 400 Kaizen Events during 2015 alone. These events
are internal meetings designed to evaluate and enhance the Companys operational efficiency. Ultimately,
Colfax Corporation

progress with these metrics should translate to enhanced growth and margins over the long-term (as illustrated
by Danahers success with a similar approach). As part of its cost reduction efforts, CFX has been implementing
restructuring initiatives during recent years that have included facility closures and decreases in headcount.

The Rales brothers (currently aged in their early-mid 60s) are not involved in management of Colfaxs
daily operations (Mitchell Rales retains the Chairman position). However, the influence of the Rales brothers
and their approach at Danaher can still be seen in the firms distinctive culture and business model. During July
of 2015, CFX announced the hiring of a new CEO to replace the retiring Steve Simms. The new CEO, Matthew
Trerotola (age 48), was most recently an Executive Vice President at DuPont (responsible for overseeing the
Electronics & Communications and Safety & Protection segments). Prior to joining DuPont in 2013 Trerotola had
several managerial roles at Danaher. Not surprisingly, former Danaher employees have a meaningful presence
on CFXs management team and across the organization (CFO Scott Brannan is another former Danaher
employee). After Trerotolas appointment last year, Chairman Mitchell Rales issued the following statement:
He is an extremely talented executive with an ideal combination of strong leadership
skills, a track record of driving organic growth and significant expertise in global manufacturing
and engineering businesses. While at Danaher, where Steve and I got to know Matt well, he
developed a deep understanding and appreciation for the Danaher Business System and the
focus on continuous improvement, which will ensure a smooth transition into his new leadership
role at Colfax.

It is also worth noting that the Company also has CEOs for Colfaxs individual business lines within its 2
segments: Gas & Fluid Handling (Howden and Colfax Fluid Handling) and Fabrication Technology (ESAB). The
CEO for Fabrication Technology (Clay Kiefaber) announced his retirement from CFX last November. CFX CEO
Matthew Trerotola is serving as interim CEO of Fabrication Technology while the Company searches for a
permanent replacement. Given the unique culture at CFX, development and retention of talented managers has
been cited by CFX as a key future priority.

Executive Officers Joined CFX Prior Position/Background

Matthew Trerotola, President & CEO 2015 Former executive at DuPont & Danaher
Scott Brannan, SVP & CFO 2010 Previously at Aronson & Co, Danaher
Ian Brander, CEO: Howden 1983 Numerous operations positions at CFX
Daniel Pryor, EVP: Strategy & Development 2011 Managing Director: The Carlyle Group
Darryl Mayhorn, CEO: Colfax Fluid Handling 2014 President: Rexnord Aerospace Group
Steve Wittig, SVP: Business System & Supply Chain 2011 Operations positions at several firms

Recent Developments
Given the profile and sales mix at Colfax, it should come as no surprise that recent financial results have
been under pressure. The firm has been facing multiple market-related headwinds, reflecting the cyclicality and
economic sensitivity of its businesses and end markets. The deterioration in fundamentals has been particularly
pronounced for CFXs energy related businesses, reflecting the significant impact of lower energy prices on that
industrys capital expenditures. However, it warrants mention that management regards these current
challenges as cyclical in nature, and not representing impairments in the Companys long-term earnings power
(we concur with that assertion). Through the first 9 months of 2015, CFXs sales and operating profit have
declined 15% and 27% respectively. Comparisons have been negative for both of CFXs operating segments
during the same period, with both Gas & Fluids Handling and Fabrication Technology reporting double-digit drop
in revenue through the first 3 quarters of 2015. The Companys operating margin during the most recent quarter
stood at approximately 6%, down from 11% in the year-ago period. Management expects overall results to
remain under pressure during the coming quarters, with organic sales growth not expected to resume until 2017.
To make matter worse, CFXs significant exposure to overseas markets have caused an additional drag on
results via negative currency translation. Through the first 9 months currency translation penalized CFXs sales
by approximately $400 million (total sales for the period were $2.9 billion).

Colfax Corporation

Management has undergone recent changes (new CEO appointed last July), and the firms leadership
has acknowledged that the extent of the declines for CFXs businesses have surpassed their earlier
expectations. Consequently, initial cost reduction efforts designed to mitigate challenging fundamentals may
have been insufficient, and management has begun to express greater urgency over this issue. In conjunction
with its release of 3Q-2015 results, CFX announced an additional $50 million in cost reduction measures
beyond what had been already targeted. In total, $45 million in cost savings are expected to be realized in 2015
and $50 million is projected for 2016 (largely driven by cuts in SG&A). Despite the negative comparisons, CFX
continues to be a profitable firm with significant cash flow. The firm continues to consider potential M&A
opportunities, and announced an authorization by its board for a $100 million share repurchase program. CFXs
guidance for 2015 results includes sales of $3.90-$3.95 billion, operating income of $345-$352 million, and
adjusted EPS of $1.52-$1.56.

Financial Performance
2013 2014 YTD 2015
Sales 7.5% 9.9% -15.0%
Gross Margin 31.0% 32.0% 31.6%
Operating Margin 10.5% 10.1% 8.4%

Strategy & Growth Outlook

CFXs financial results help to demonstrate the challenges that are inherent to cyclical businesses. In
this most recent period, the extent and magnitude of the Companys industry headwinds have exceeded
managements initial expectations, and investors have largely abandoned the stock as near-term fundamentals
offer little in the way of positive changes (stock down over 50% in the past year). In our view, maintaining a
coherent and consistent strategy through all phases of market cycles is a key driver of long-term success. CFX
has maintained this consistent long-term approach, while also acknowledging the need to make adjustments
(cost reduction) to reflect the current environment. Management provided a detailed update of its strategy and
outlook during an investor day in mid-December. A recurring theme throughout the presentation was the view
that current conditions represent a cyclical correction rather than a permanent impairment in CFXs portfolio of
businesses. We concur with this assessment, and would encourage investors to avoid placing undue emphasis
on existing challenges when evaluating CFX shares from a long-term perspective.

Management has summarized its overall Company strategy into 3 corporate priorities. Its first priority is
described as Secure a Strong Foundation. This reiterates the firms commitment to maintaining leading market
share positions in its respective businesses, achieving top tier technological innovation that differentiate its
products and services, and use of CBS to continuously improve Company performance. Its second priority is
described as Improve and Grow Our Business. This priority primarily addresses the role CBS plays in CFXs
financial results, illustrated by metrics such as margin improvement and free cash flow conversion. Moreover,
management is targeting growth rates for its businesses that exceed industry rates. CFXs third priority is to
Innovate and Acquire to Accelerate. This priority relates to the prominent role of M&A as the Company seeks
to build and expand its business platforms and achieve synergies and scale within the highly fragmented
industries in which it operates. Importantly, innovation should also benefit from a steady increase in CFXs
annual R&D expenditures through all market phases. Overall, these priorities are designed to support CFXs 3-5
year financial goals which include annual organic sales growth that exceed global GDP by 1%-2% and overall
operating margins in the mid-teens.

CFXs 2 segments (Fabrication Technology and Gas and Fluid Handling) each have their own unique
opportunities and challenges that require a customized strategy and business approach. Fabrication Technology
is currently under the interim leadership of CFX CEO Matthew Trerotola, but this has not hindered the firm from
developing and updating its strategy for this business. A combination of end market weakness and unfavorable
foreign exchange translation has placed downward pressure on profits for CFXs welding intensive businesses.
Consequently, initiatives related to productivity and cost reduction have taken on added significance. These
efforts have translated to an 8% reduction in SG&A and a 10% reduction in headcount. The ESAB business has
been undergoing a restructuring to improve performance and adapt to weak market conditions. Service levels to

Colfax Corporation

customers have been a primary focus as ESAB, addressed via simplifying the supply chain. An additional
ongoing challenge has been the integration of the Victor Technologies acquisition (completed in 2014 for
$948 million), a welding provider with a complementary product and geographic profile that boosted CFXs
exposure to higher margin products. Innovation for this business remains a key strategic priority, illustrated by
growing demand for automated and user-friendly welding equipment (a function of the industry shortage of
skilled welders). Similar to the expectations for the overall firm, financial progress is expected to be muted in
2016, but CFX is targeting 2%-4% organic sales CAGR and a mid-teens operating margin for Fabrication
Technology over the next 3-5 years.

The Gas and Fluid Handling business has faced its own share of challenges during recent years,
particularly relating to weakness in the energy industry. Restructuring and cost reduction measures designed to
mitigate industry headwinds have been among the firms top strategic priorities. At Howden (gas handling), a
10% reduction in production capacity paired with a management reorganization are projected to yield $50 million
in cost savings by the end of 2016. At Colfax Fluid Handling (fluid handling) similar restructuring actions have
been implemented, translating to an 8% reduction in SG&A. From a longer-term perspective, the Gas and Fluid
business is focused on enhancing its organic growth prospects by expanding the addressable markets for its
products and capturing a greater portion of clients aftermarket and services business. Moreover, broad market
trends such as energy efficiency investment and emerging market infrastructure needs should be positive
catalysts for long-term demand. Given the highly fragmented nature of the gas and fluid handing industry,
organic growth at CFX will likely continue to be supplemented by M&A activity. In addition, M&A synergies
combined with ongoing benefits from CBS should be meaningful sources of efficiency and margin expansion
during the coming years. From a 3-5 year perspective, CFX is targeting 3%-5% organic sales growth and a mid-
teens operating margin for Gas and Fluid Handling.

Growth Outlook
As suggested by the firms recent commentary and guidance, near-term growth comparisons (2016) for
CFX are likely to remain relatively weak. This outlook reflects the challenging conditions within several of CFXs
end markets such as energy and infrastructure. The Companys high exposure to foreign currency and
emerging market economies are additional challenges that will hinder CFXs financial results during the coming
quarters. As management has indicated, organic growth trends are not expected to regain traction until 2017,
and reaching more normalized levels of sales and profits is likely to be more of a multi-year process. CFX
strategies and objectives are expressed in a 3-5 year context, and the exact timing of realizing these objectives
will be dependent on the pace of recovery within the Companys respective end markets. It warrants mention
that we utilize a normalized approach for evaluating companies with exposure to the oil and gas sector. In our
view, a mid-cycle pricing scenario for oil and gas ($80 oil, $4 natural gas) provides a more relevant view long-
term fundamentals and earnings power for such firms. Attempting to forecast the timing or magnitude of a
commodity price recovery is an inexact science at best. However, even a more modest recovery and
stabilization for commodity prices could provide a meaningful tailwind to CFXs growth comparisons going
forward. In the case of CFX, some normalization of foreign exchange rates back to more typical levels could
also provide a material benefit to financial results (though we regard this as unrelated to the firms underlying
operational performance).

Looking at CFX from a 2-3 year perspective (roughly 2018), we believe sales and EBITDA of $4.5 billion
and $600 million respectively could be attainable (EPS over $2.00). This assumes some recovery in end market
fundamentals, and incorporates the benefits of the firms ongoing efficiency and cost reduction initiatives. This
2018 projection assumes an overall operating margin of 10% for the Company, still below CFXs 3-5 year
objective and below margin levels achieved in recent years. Looking beyond 2018, EBITDA could exceed
$700 million assuming CFXs end markets ultimately achieve a full recovery. This level of EBITDA would
represent an increase of more than 40% relative to 2015 guidance (implies EPS of~$3.00). In our view, CFX has
multiple catalysts for long-term growth that are currently being overlooked by investors. In addition to the
previously discussed expectation for a more normalized pricing market for energy, several other potential drivers
warrant mention. In particular we would highlight CFXs significant exposure to emerging economies (over 40%
of sales). Overall, this exposure to emerging economies should be a positive catalyst for long-term growth,
helping to distinguish CFX from its industry competitors. Near-term growth may be more muted in these
geographies, but overall GDP growth is still expected to approach 5% within the next 2-3 years according to IMF
projections. The urbanization and growth of the middle class in regions such as Asia should drive continued

Colfax Corporation

growth in CFX end markets such as power generation and infrastructure. According to the International Energy
Agency, worldwide demand for electricity is projected to increase by over 60% within the next 20 years (coal-
fired plants in Asia will be a primary source of new supply). In addition, CFXs marine end market (11% of sales)
should be a beneficiary of the continued trend towards global trade (supporting construction and maintenance of
shipping capacity). Based on projections from shipping concern Hapag-Lloyd, long-term growth prospects for
the marine industry continue to be at least 3%-5% per year.

Balance Sheet and Financial Position

CFX has a strong balance sheet and ample cash flow. In our view, this is particularly crucial given the
current industry headwinds, and the Companys use of M&A as part of its business model. As of the most recent
quarter, CFX has net debt of approximately $1.3 billion, a relatively modest degree of financial leverage given
the firms level of profitability (EBITDA on a TTM basis stands at over $500 million). CFX has investment grade
credit ratings and its debt bears interest rates in the low single-digits (variable rates subject to changes in
LIBOR). Given the possibility of distressed assets becoming available for its respective businesses, this financial
strength could take on added significance during the coming years. The firm also has pension obligations that
were underfunded by approximately $296 million as of the most recent fiscal year (a majority of the obligations
are in overseas markets). It warrants mention that CFX has been contributing Company shares to the plan on a
regular basis.

CFX does not pay a dividend, and typically focuses its capital allocation on M&A activity. However,
given the firms increasingly depressed stock price, CFXs board recently authorized a $100 million share
repurchase program (no guidance provided on time frame for potential repurchases). CFXs overall capital
allocation approach is focused on achieving attractive returns that maximize shareholder value over the long
term. Historically, M&A has been focused on bolt-on deals that expand or complement existing businesses (the
transformative acquisition of Charter 2012 is the main exception). Since the Charter acquisition, 14 more
modestly sized acquisitions have been completed. Importantly, management cites price discipline as a key
aspect of its M&A approach, and targets a return on capital of at least 10% within 3 years of deal completion.
Consistent with the CBS approach, integration and synergies for transactions are closely monitored and
regularly reviewed. Innovation for the purposes of efficiency and organic growth is another focus of CFXs
capital allocation, and capital expenditures ($81 million last year) has remained steady though all phases of the
economic cycle. In our view, the track record of capital allocation, M&A, and value creation at Danaher should
provide added confidence for investors when evaluating the outlook for Colfaxs capital allocation.

Revenues Added Through Acquisition

(Year Prior to Acquisition; Cumulative $ Million)



Revenue $MM




2012 2013 2014 2015

Note: Revenues added from deals closed after Charter. Not constant currency.
Source: Company presentation, December 2015. Internal company reporting
and company filings.

Colfax Corporation

Clearly, CFXs most recent financial results are not representative of the firms capacity for profits and
cash flow given the cyclical downturn many of its businesses are experiencing. Prior to 2015, annual free cash
flow was approximately $300 million (implying a free cash flow yield of 11%). Annual capital expenditures have
been in the $70-80 million range during recent years, and annual R&D expense has been in the $20-$40 million
range. CFXs high exposure to overseas markets makes the Companys results sensitive to foreign exchange
rates, and adds to the volatility of near-term results. Just through the first 9 months of 2015, negative effects
from foreign currency translation have reduced sales by about $400 million on a year over year basis.
Conversely, the strong U.S. dollar may prove to be an asset in CFXs future M&A activities, making foreign
assets more affordable for a U.S. based buyer.

Corporate Governance
Insider ownership at Colfax stands at approximately 20%, largely a function of the 19% stake retained
by founders Mitchell and Steven Rales. Also worth noting, board member Patrick Allender purchased an
additional 10,000 shares of CFX in December at a price of $22.13 (doubling his stake). Importantly, there are
not multiple classes of CFX shares, ensuring full alignment of interests between investors and insiders. This
consideration, paired with the founders substantial stakes, help to illustrate a strong shareholder orientation at
Colfax. Moreover, compensation for senior executives have a significant variable component (cash and equity)
benchmarked to financial metrics such as sales, operating profit, EPS and return on capital. CFX does utilize
stock options as part of its compensation system, and annual stock-based compensation has averaged about
$13 million over the past 3 years. Unrecognized compensation related to stock options stands at approximately
$35 million. Under CFXs corporate governance guidelines, it is required that a majority of its Board qualify as
independent according to NYSE standards. However, the board of directors has several members with
experience at both Colfax and Danaher. BDTs previously discussed ownership stake allows that firm to have a
seat on the Colfax board. Board members are subject to annual elections.

Board of Directors
Board Member Independent Background
Mitchell Rales Chairman of CFX, Cofounder of Colfax and Danaher
Matthew Trerotola President & CEO of Colfax
Steven Simms Former President & CEO of Colfax (retired in 2015)
Patrick Allender Former CFO of Danaher
Thomas Gayner Chief Investment Officer at Markel Corporation
Rhonda Jordan Former Executive at Kraft Foods
San Orr III Partner & COO at BDT Capital Partners
Clayton Perfall Former CEO of Archway Marketing Services
Rajiv Vinnakota President of SEED Foundation (education non-profit)

Valuation & Conclusion

CFX shares have clearly been out of favor with investors over the past 1-2 years. The stock has
declined by more than 50% over the past year, and shares have declined by roughly 70% from 2014 highs. In
our view, this poor performance largely relates to the challenges associated with CFXs end markets (such as
energy) and exposure to emerging market economies. The current industry environment continues to be
challenging, and financial results during the coming quarters will likely be far from stellar. However, CFXs
strong financial position should allow it to weather the difficult operating environment, and potentially acquire
attractively priced assets that bolster or complement its existing portfolio of businesses. Longer-term, we believe
the firms fundamental outlook, competitive position, and profit potential have not been impaired by the recent
headwinds. As discussed earlier in this report, the firm still possesses an attractive long-term growth profile that
investors are largely choosing to ignore. Moreover, its unique performance oriented culture (stemming from the
founders past history at Danaher) and commitment to shareholder-oriented capital allocation provide additional
catalysts for growth and margin expansion during the coming years. Given the firms culture, heritage, and high
degree of insider ownership, a strong shareholder orientation should remain a key driver of CFX long-term
business approach.

Colfax Corporation

Peer Comparison Table

Company Ticker TTM EV/EBITDA TTM Operating Margin TTM ROE
Danaher DHR 15.8x 16.9% 11.0%
Dover DOV 9.2x 13.2% 16.2%
Flowserve FLS 7.9x 14.9% 8.7%
Illinois Tool Works ITW 11.1x 21.1% 29.6%
Lincoln Electric LECO 7.9x 16.0% 12.9%
Peer Average 10.4x 16.4% 15.7%
Colfax CFX 7.7x 9.7% 6.6%

As the above table depicts, CFXs level of profitability trails its peers on a TTM basis. CFXs high
exposure to energy and emerging markets has likely hindered its relative operational performance. As
fundamentals in these areas eventually recover, and CFX executes on its growth and margin objectives, we
would expect this differential to gradually narrow over time. It also warrants mention that recent stock
performance for CFXs peer group has also been weak, as the 5 firms listed above have declined an average of
18% over the past 12 months. Looking at the current valuation based on our projections for 2018, CFX shares
are trading at an EV/EBITDA multiple of approximately 7.25x, and a P/E multiple of 12.0x. Since CFXs
transformative acquisition of Charter International in 2012, CFX have generally traded at a multiple in the
8.0x-14.0x range from an EV/EBITDA perspective, and its long-term average multiple since becoming a publicly
traded firm has approximated 11.0x. As CFXs long-term earnings power becomes more apparent, multiple
expansion to more typical historical levels should become attainable. Colfaxs already depressed valuation, and
its level of free cash flow generation (11% free cash flow yield) help to demonstrate the increasingly attractive
long-term risk/reward proposition the stock is offering investors.

Although CFX largely focuses its cash flow on internal investments and M&A and it typically does not
return capital to shareholders, the boards recent $100 million share repurchase authorization further illustrates
the historically attractive valuation of the stock. However, since the firm has provided no guidance on share
repurchase activity, our estimate of intrinsic value assumes no change in share count going forward. Moreover,
no growth or margin benefits from future M&A activity have been incorporated into our future projections.
Consistent with managements outlook, our projections assume no organic sales growth until 2017 (we project
mid single-digit revenue growth for the 2017- 2018 period). These assumptions may prove to be conservative
from a long-term perspective, especially if one assumes a full recovery in CFXs end markets is eventually

CFX Estimate of Intrinsic Value

2018 Value ($MM)
EV/EBITDA 10.0x 6,065
Net Debt (1,328)
Underfunded Pension (296)
Equity 4,441

Shares Outstanding 125.0

Intrinsic Value Per Share $35.53

Implied Total Return Potential 61%

Our estimate of intrinsic value for CFX of $36 per share is based on a 2-3 year time frame, and
assumes only a partial recovery in its end markets (and utilizes an operating margin of 10%, still below the firms
mid-teens objective). This estimate implies an EV/EBITDA multiple of 10.0x, and potential upside of more than
60% over the next 2-3 years. By 2018 EPS of over $2.00 should also be achievable, implying a P/E of about

- 10 -
Colfax Corporation

17.0x based on our estimate of intrinsic value. Evaluating the stock from a longer term perspective, this estimate
of intrinsic may prove to be low. Looking beyond 2018, EBITDA could eventually exceed $700 million assuming
CFXs end markets ultimately achieve a full recovery (and a mid-teens operating margin would likely become
attainable). Assuming this higher level of EBITDA and incorporating that into our valuation projection for CFX
(10.0 EV/EBITDA) would suggest an intrinsic value of approximately $45 (over 100% upside) from a normalized,
long-term perspective. It warrants highlighting that CFX shares were trading above $70 per share as recently as
mid-2014. Overall we view CFXs current valuation as an attractive entry point for patient, long-term investors.

The Companys primary risks include:
Many of Colfaxs businesses are sensitive to economic conditions, and profits could decline in the
event of economic weakness.
Continued energy price weakness and the corresponding declines in capital expenditures could
translate to additional headwinds for several of Colfaxs businesses.
The majority of Company sales are derived from overseas markets, causing firm results to have
significant sensitivity to foreign currency translation and other global trade issues.
Colfax places a strong emphasis on M&A as part of its operating strategy, and unattractive
transactions could negatively impact shareholder value.
The Company is involved in several asbestos-related lawsuits that could create financial liabilities in
the future. The firm has insurance coverage to address this issue, but this issue still creates
potential uncertainty.
Some Colfax employees are represented by unions, creating the potential for work disruptions.
The firms expectation for a resumption of organic sales growth may take longer than expected to

Analyst Certification
Asset Analysis Focus certifies that the views expressed in this report accurately reflect the personal
views of our analysts about the subject securities and issuers mentioned. We also certify that no part of our
analysts compensation was, is, or will be, directly or indirectly, related to the specific views expressed in this

- 11 -
Colfax Corporation

(Dollars in thousands)

ASSETS September 25, 2015 December 31, 2014

Current Assets:
Cash and cash equivalents $ 221,247 $ 305,448
Trade receivables, less allowance for doubtful accounts 990,452 1,029,150
Inventories, net 449,891 442,732
Other current assets 337,502 323,148
Total current assets 1,999,092 2,100,478
Property, plant and equipment, net 664,200 727,435
Goodwill 2,876,011 2,873,023
Intangible assets, net 1,004,232 1,043,583
Other assets 496,361 491,842
TOTAL ASSETS $ 7,039,896 $ 7,236,361


Current Liabilities:
Current portion of long-term debt $ 16,517 $ 9,855
Accounts payable 735,310 780,287
Accrued liabilities 453,599 496,207
Total current liabilities 1,205,426 1,286,349
Long-term debt, less current portion 1,532,267 1,526,955
Other liabilities 998,172 1,070,613
TOTAL LIABILITIES 3,735,865 3,883,917
Common stock, $0.001 par value 124 124
Additional paid-in capital 3,219,262 3,200,832
Retained earnings 513,103 389,561
Accumulated other comprehensive loss (629,435) (443,691)
Total Colfax Corporation equity 3,103,054 3,146,826
Noncontrolling interest 200,977 205,618
TOTAL EQUITY 3,304,031 3,352,444
TOTAL LIABILITIES AND EQUITY $ 7,039,896 $ 7,236,361

- 12 -
January 29, 2016
Volume XLII, Issue I

Lions Gate Entertainment Corp.

Dow Jones Indus: 16,466.30
S&P 500: 1,940.24
Russell 2000: 1,035.38 Trigger: No
Index Component: N/A Type of Situation: Business Value

Price: $ 26.15
Shares Outstanding (MM): 148.3
Fully Diluted (MM) (% Increase): 148.3 (0%)
Average Daily Volume (MM): 4.8
Market Cap (MM): $ 3,879
Enterprise Value (MM): $ 5,290
Percentage Closely Held: Mark Rachesky: ~20%

52-Week High/Low: $ 41.07/25.82

5-Year High/Low: $ 41.07/5.76
Trailing Twelve Months Overview
Price/Earnings: 33.5x Lionsgate Entertainment Corp. (Lions Gate,
Price/Stated Book Value: 4.3x Lionsgate, LGF, or the Company) was founded in
1997 by Frank Giustra, a lifelong movie fan, who had
Net Debt (MM): $ 1,410 been working as an investment banker within the
Upside to Estimate of mining industry. Mr. Giustra, who sought a career
Intrinsic Value: 30% transition to the entertainment industry upon turning 40,
Dividend: $ 0.36 began acquiring film businesses in his native Canada
Yield: 1.4% as he set out to assemble an entity to rival major
Hollywood studios. Over the ensuing years, acquisitions
Net Revenue Per Share:
of entertainment businesses were a recurring theme for
TTM: $ 15.39
LGF, helping it to become a meaningful industry player.
FY 2015: $ 16.07
During calendar 2012, Lionsgate generated more than
FY 2014: $ 17.03
$2.5 billion at the box office worldwide ranking among
FY 2013: $ 17.84
the top five studios and helping it boast the distinction
Earnings Per Share: as the first major new Hollywood studio to emerge in
TTM: $ 0.78 more than 50 years. The Companys strong film
FY 2015: $ 1.23 momentum has continued in recent years with LGFs
FY 2014: $ 1.04 Motion Pictures segment generating an average of
FY 2013: $ 1.61 $2.1 billion in revenue over the past 3 years.

Fiscal Year Ends: March 31 LGF reports the results of its operations in two
Company Address: 2700 Colorado Avenue segments including Motion Pictures (76% of FY 2015
Santa Monica, CA 90404 revenues; 90% pre-corporate segment profit) and
Telephone: 310-449-9200 Television production (24%; 10%). Key franchises in the
Chairman: Mark Rachesky Companys film portfolio include Hunger Games,
Twilight and Divergent. Meanwhile, Lionsgates TV
Clients of Boyar Asset Management, Inc. do not own shares of Lions business includes many successful shows including
Gate Entertainment Corp. common stock.
Mad Men, Orange is the New Black, Nashville and
Analysts employed by Boyars Intrinsic Value Research LLC do not
own shares of Lions Gate Entertainment Corp. common stock. Anger Management.

- 13 -
Lions Gate Entertainment Corp.

While studio businesses have historically generated uneven levels of profitability, their business model
has become stronger in recent years as a result of several notable industry developments. These factors include
an increased demand for content as new distribution platforms have emerged, and increased consumption of
content as new platforms have made it easier to find and consume content. In our view, Lionsgate is well
positioned to capitalize on these industry trends as a producer of high quality content. It also warrants mention
that Lionsgate is generally agnostic towards distribution platform so the disruption currently taking place in the
media industry is actually beneficial for the Company.

Lionsgate operates its production business (both film and TV) in a manner that a prudent value investor
can appreciate: by minimizing its downside risk while still being able to participate on the upside. The
Companys film business employs a risk mitigation strategy that emphasizes the negotiation of co-production
agreements, pre-licensing of films in most international markets, structuring agreements with talent that reduces
guaranteed payments, and utilization of available tax incentives and structures. Within the TV production
business LGF utilizes a model that can generate recurring revenue streams from profitable TV series.

In our view, the improved fortunes of the studio business were a factor that caught the attention of
media mogul Dr. John Malone and prompted him to take a 3.4% stake in Lionsgate via a recent stock swap
transaction with his personal Starz stake (March 2015). Subsequent to the transaction, Malone-controlled
Discovery Communications and Liberty Global also each took a 3.4% stake in the Company. We note that
Malone has recently stated that he believes that pay-TV distributors still have an opportunity to create a service
that could rival that of Netflix, and we would not be surprised if his investment in LGF helps further those

Shares of Lionsgate have declined by ~36% over the past two months compared with a 6% decline in
the S&P 500. In our view, the share price weakness represents an opportunity for investors to own a first rate
content Company with multiple future growth avenues. We would note that LGF has investments in various
media companies that are not fully appreciated by investors. The current carrying value of these investments is
$475 million, however we believe their intrinsic value is more than double that amount. The most valuable of
these investments is premium pay-TV provider Epix, which has reported strong profitability growth in recent
years and has a number of potential catalysts on the horizon.

Our estimate of LGFs intrinsic value is $34 a share representing 30% upside from current levels. We
believe there are a number factors that could drive shares higher including opportunistic M&A with Malone-
controlled companies, a combination with a studio peer (meaningful revenue and cost synergies), and greater
than anticipated share buybacks. It should be noted that LGF recently increased its share buyback authorization
and now has $250 million of capacity to take advantage of the recent share price weakness.

Lions Gate Entertainment Corp. was founded in 1997 by Frank Giustra, a lifelong movie fan, who had
been working as an investment banker within the mining industry. Mr. Giustra, who sought a career transition to
the entertainment industry upon turning 40, began acquiring film businesses in his native Canada as he set out
assemble an entity to rival major Hollywood studios. Over the ensuing years, acquisitions of entertainment
businesses were a recurring theme for LGF, helping it to become a meaningful industry player. The following
are a selection of key developments/events in the Companys history:
In January 2000, LGF received $33 million of funding from a group of investors that included
Paul Allen and former Sony Pictures executive Jon Feltheimer, among others. In March 2000,
Mr. Feltheimer would become LGFs CEO, a position that he still holds today. During
Mr. Feltheimers tenure, LGFs market cap has increased from $80 million to $4 billion while
revenues have increased more than 15 times.
Subsequent to Mr. Feltheimers appointment as CEO, a number of acquisitions of entertainment
companies were made to bolster the Companys film library, including Trimark Holdings (June
2000), Artisan Entertainment (December 2003), Modern Entertainment (August 2015), and Redbus
Film Distribution (October 2015), which would become Lionsgate UK.
In 2006 LGF acquired Debmar-Mercury, which is an independent television distributor.

- 14 -
Lions Gate Entertainment Corp.

In 2007, Lionsgate acquired a stake in Roadside Attractions, an independent film and distribution
In 2011, after a multi-year battle to take control of Lionsgate, Carl Icahn reached an agreement to
end his involvement with the Company by selling ~11 million shares back to the Company for $7 a
share and 11 million shares to Mark Rachesky, a former Icahn employee, who acquired his initial
stake (5.9%) in the Company in August 2005. Following the transaction Mr. Rachesky held
~51 million LGF shares representing a 37% stake.
In 2012 LGF acquired Summit Entertainment for $412.5 million in a cash and stock transaction. The
transaction gave Lionsgate access the last Twilight movie and library rights to its first four movies,
among others. Lionsgate had initially tried to acquire Summit in 2009.
Lionsgates home entertainment business finished the 2012 calendar year with a 9.5% market
share, putting it among the top five studios.
In 2014, Lionsgate sold its stake in the Fearnet cable network to Comcast.
In April 2015, March Rachesky sold 10 million shares of his Lionsgate position, reducing his stake in
the Company to 28%.
In March 2015, LGF completed a stock exchange with media mogul John Malone whereby
Lionsgate acquired an ~4.5% stake in Starz (~15% voting) and Dr. Malone receiving a 3.4% stake
in LGF and a seat on the Companys board. In November 2015, Malone-controlled Liberty Global
and Discovery Communications each acquired a 3.4% stake in the Company with each firm
acquiring shares from Mark Rachesky, who now owns ~20% of LGFs outstanding shares.

Recent Developments
Malone/Starz Transaction
In March 2015, Lionsgate exchanged 5 million of its newly issued shares, or ~3.4% of LGFs total on a
pro forma basis, for 4.7 million shares (Series A: 2.1 million; Series B: 2.6 million) in Starz held by
Dr. John Malone. Starz is an integrated global media and entertainment company that operates the Starz
Networks, which is a provider of subscription video programming to U.S. pay-TV distributors. The Starz shares
acquired by the Company currently represent a 4.6% economic interest in Starz, but give LGF nearly 15% of the
voting control (the Series B shares carry super-voting rights). However, LGF has granted an irrevocable proxy to
Dr. Malone to vote the shares with respect to proposals related to extraordinary transactions including sales of
stock, mergers, acquisitions, etc. As part of the transaction, Dr. Malone was appointed to the Lionsgate board.
Subsequent to the transaction CEO Feltheimer commented on the addition of Dr. Malone as a
shareholder/board member stating, And of course we're delighted that John Malone is a Lionsgate shareholder,
a member of our board, and the connection that we have therefore within his orbit of companies in terms of
Discovery, in terms of Liberty Global, in terms of Charter we think it's a very, very valuable relationship, and we
hope we can take advantage of it.

Discovery Communications and Liberty Global Investment

I think Mike and David are two of the best CEOs not just in the entertainment business
or in the media business, but anywhere. Theyve both built global businesses. We think clearly
that our business is becoming more and more global.
CEO Jon Feltheimer on Liberty Global and Discovery CEOs
during LGFs 2Q FY 2016 Earnings Call

Subsequent to the LGF/Malone-Starz transaction, Malone-controlled Discovery Communications and

Liberty Global announced in November 2015 that they would each be acquiring a 3.4% stake in LGF. Both
Discovery and Liberty Global paid approximately $195 million for the stakes acquiring shares from
Mark Racheky, Lionsgates Chairman and largest shareholder, with an ~28% stake prior to the Discovery/Liberty
Global transaction. As part of the Lionsgate transaction, Mike Fries and David Zaslav, CEOs of Discovery and
Liberty Global, respectively, joined Lionsgates board, and both companies entered into separate commercial
arrangements with LGF that provide for access to certain film and TV content across their markets. Malone has

- 15 -
Lions Gate Entertainment Corp.
recently stated that he believes that Discovery needs to needs to get into scripted in a bigger way and
therefore the association with Lionsgate should help fill the void in Discoverys portfolio.

Potential Implications of Malone Involvement Creating a Netflix Rival?

The initial Lionsgate/Starz transaction was a bit curious given that Lionsgate currently has a 31% stake
in premium pay TV channel EPIX, which is viewed as a competitor to Starz. There were a number of theories
about the rationale for the transaction including the potential for Dr. Malone to ultimately utilize Lionsgate as a
platform to reduce tax payments at his other media investments (Discovery Communications, Starz, etc.) given
the fact that Canada-domiciled Lionsgate boasts a relatively low tax rate. With Discovery Communications
taking a stake in Lionsgate, the speculation may be closer to a reality, and we would note that Discovery is
relatively full U.S. taxpayer though it has been actively seeking ways to reduce its tax bill in recent years. While
we believe that a Discovery/Lionsgate tie up would have benefits for both parties, we believe that Malones
involvement with Lionsgate may be part of a broader plan to develop a global rival to Netflix.

In recent years, Dr. Malone has often discussed how cable companies could have developed a very
competitive Netflix type platform, but have failed to capitalize on the opportunity due to their lack of
cooperation/coordination. During Liberty Medias 2013 investor day, Malone stated the following:
So the history of the business [cable] is replete with the industry solving its
balkanization and scale problem through joint effort. I think that that can be done again. I see no
reason why a vehicle, whether its Xfinity, or the equivalent, cant be syndicated. Whether Hulu
could be bought and syndicated. Or whether youve got some entrepreneur is going to come in
and start something from scratch that the industry at large could get behind and give it the
ability to purchase content on a ubiquitous basis. When it comes to providing random access
platforms, essentially, TV everywhere, youve got to be pretty big to have the R&D and the
capital to put it into the servers and the distribution systems to be able to handle it. Smaller
operators just are not able to produce fully in TV everywhere. So somebody has to do it for
them. They can align with it. They can support it. They can bundle it with their broadband
offerings. But they cant create it. And they cant buy the content for it. So it remains, I think, for
organization development to be able to solve that issue.

Perhaps Dr. Malone is the entrepreneur that he alluded to in the aforementioned statement? A year
later, at Libertys 2014 investor day Dr. Malone discussed the over-the-top potential:
Yes, and I think its important on behalf of the pay services which we happen to be
involved in, one of them, that they have relatively low penetration and zero marginal cost. So,
on the one hand, its a wonderful opportunity for them to get out from under the stack and offer
their services at a much lower perceived cost to the consumer, and therefore expect volume
market share increases over time. So, it cuts a lot of different ways. A lot of it is just industrial
relationships that have to be worked through as consumer demands shift.

Malone is no stranger to investing in content companies and we would note that the acquisition of
content was an important part of his strategy when he was building TCI. As barriers to content distribution have
collapsed, Malone obviously believes that not only is the ownership of content going to become increasingly
important, but so will owning the creation of the content. During Liberty Medias shareholder meeting held in
June 2015, Malone stated that Lions Gate could buy Starz and potentially other free radicals in the industry.

The Wall Street Journal, Libertys John Malone Eyes Content Consolidation, June 3, 2015
The Hollywood Reporter, Analyzing John Malones Complex Courtship of Lionsgate, November 18, 2015
As we were going to press with this LGF report, Lionsgate confirmed on 2/4/2016 that it was in discussions with Starz
about a potential combination. We would note that at Liberty Medias 2015 annual investor meeting Malone stated the
following when asked if he would like to acquire Lionsgate, The store is always open. We dont rule anything out.
The Wall Street Journal, Libertys John Malone Eyes Content Consolidation, June 3, 2015
- 16 -
Lions Gate Entertainment Corp.

In conjunction with the aforementioned Liberty Global/Discovery transaction it is worth noting that LGF
founder Frank Giustra stepped down from the Lionsgate board. In our view, this development could make it
easier for Dr. Malone, who now has meaningful representation on LGFs board, to orchestrate his global content
ambitions without the impediment of a company founder.

Pilgrim Studios Acquisition

Just a few days after the Liberty/Discovery investment, Lionsgate announced that it would be making a
strategic investment in Pilgrim studios, which is a leading producer of unscripted programming. Terms of the
deal were not disclosed, but according to, LGF is believed to be acquiring a majority stake for
approximately $200 million. The transaction gives the two companies a combined roster of nearly 80 television
series across 40 networks (prior to the transaction LGF supplied 35 television series to more than 20 different
networks), bolsters LGFs content portfoio and diversifies Lionsgate's content genre by adding significant
expertise in the unscripted programming. Prior to the transaction the majority of LGFs TV content was scripted
programming. Given Malones recent involvement, it is not unsurprising to note that Pilgrim has been a big
supplier of programming to networks of Discovery Communications. The transaction appears to be consistent
with Malones recent emphasis on controlling the creation of content. In 2014, Liberty Global and Discovery
teamed up to acquire All3Media, which is an international production company and another large supplier of
content to Discovery.

Recent Share Price Weakness

Since reaching a deal with Discovery Communications and Liberty Global in November whereby each
company acquired a 3.4% stake from an existing shareholder, Lionsgate shares have declined by ~36%
compared with an ~6% decline in the S&P 500. The share price weakness reflects a number of factors including
a reduction in the Companys 3 year outlook communicated around the time of the Discovery/Liberty Global
deal. During the Companys 2Q FY 2016 earnings call held in November, management reduced its 3-year
outlook (FY 2015-FY 2017) for EBITDA by $100 million. Management stated that it now expects $1.1 billion to
$1.2 billion over the time period compared with its previous expectation for $1.2 billion to $1.3 billion owing to
the poor performance of two recent films including The Last Witch Hunter and American Ultra. In addition, the
November release of Mockingjay 2 was reported to be tracking below its expectations, which may have also
weighed on its shares. We would also note that LGF has a shareholder base that includes a number of hedge
funds and the recent market volatility has likely exacerbated some of the recent selling pressure.

Business Description
LGF is a premier next generation global content leader with a diversified presence in motion picture
production and distribution, television programming and syndication, home entertainment, branded channels,
digital distribution, video games and international distribution and sales. During FY 2015 Lionsgate generated
$2.4 billion of total revenues and had 719 full-time employees in its worldwide operations. Lionsgate reports the
results of its operations in two segments including Motion Pictures (76% of FY 2015 revenues) and Television
Production (24%). The following chart provides a further breakdown of revenues within the Companys
reportable segments:

5, Lionsgate Buys Major Stake In Craig Piligians Pilgrim Studios For $200 Million, November 12, 2015
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Lions Gate Entertainment Corp.

Motion Picture - Segment Components ($ MM) Television Production - Segment Components ($ MM)

Other Home $7
$38 Entertainment 1%
Theatrical $45
$354 8%
Home Domestic
Entertainment International Television
$663 $112 $415
36% 19% 72%


Total Motion Picture FY2015 Revenue: $1,820 MM Total Television Production FY2015 Revenue: $580 MM

Motion Pictures (76% of FY 2015 revenues)

Driven by the global blockbuster Hunger Games and Divergent franchises, Lionsgates motion picture
business has grossed an average of $2 billion at the worldwide box office each of the past three years (2012-
2014). The Lionsgate Motion Picture Group releases more than 40 films annually across nine different labels,
including 15 wide releases a year from its Lionsgate and Summit Entertainment pipelines.

Lionsgates film operations also include Pantelion Films (joint venture with Televisa, serving Hispanic
moviegoers in the U.S.), the urban Codeblack Pictures label, sister company Roadside Attractions (independent
specialty distributor), a growing Lionsgate UK brand, and Lionsgate Premiere, a newly launched label
specializing in multiplatform releases.

Lionsgate/Summit Upcoming Releases

Movie Title Date
Gods of Egypt 2/26/16
The Divergent Series: Allegiant 3/18/16
Criminal (2015) 4/15/16
Now You See Me 2 6/10/16
La La Land 7/15/16
Mechanic: Resurrection 8/26/16
Deepwater Horizon 9/30/16
The Shack 11/18/16
The Divergent Series: Ascendant 6/9/17
Source: Box Office Mojo

Television Production (24% of Revenues)

Lionsgates television business has become a leading supplier of premium scripted content to
broadcast, cable and digital networks with more than 30 television series spanning over 20 different networks
(note: the recently announced acquisition of Pilgrim expands the Companys reach to 80 television series across
40 different networks). The Companys success has been driven by the critically-acclaimed hit series Orange is
the New Black (the most watched series on Netlix), the multiple Emmy Award-winning drama Mad Men, the
smash comedy drama Weeds, Nashville, Manhattan and The Royals. During FY 2016, Lionsgate will launch 16
new series representing one of the strongest slates in its history. In addition to its scripted fare, LGF is also
building a roster of successful game and talk shows including The Wendy Williams Show, Family Feud and
Celebrity Name Game through its Debmar-Mercury distribution and syndication company.

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Lions Gate Entertainment Corp.

Selection of LGF Television Programming

Title Platform
Chasing Life ABC Family
Deadbeat Hulu
Mad Men AMC
Manhattan WGN
Nashville ABC
Nurse Jackie Showtime
Orange Is The New Black Netflix
The Royals E!
Deal With It TBS
Way Out West TruTV
Source: FY 2015 10-K Filing

Lionsgates Film and TV Strategy A Value Investors Approach to the Entertainment Industry
Film Strategy
Within the studio industry, Lionsgate is dwarfed by virtually all of the big six studios, each of which is
part of a much larger media business and has access to greater financial resources. The following table
illustrates the market share positions of the major studios during 2015:

Studio Market Share (Domestic) - By Parent Company ($MM)

January 1December 31, 2015
Market Total 2015
Rank Distributor Share Gross Movies
1 NBC/Universal 22.30% $2,562.50 32
2 Disney 19.80% $2,280.20 11
3 Time Warner (WB/New Line) 16.90% $1,940.60 30
4 News Corporation (Fox) 12.40% $1,422.20 25
5 Sony 8.90% $1,028.30 35
6 Viacom (Paramount) 5.90% $674.70 12
7 Lionsgate 5.90% $673.80 25
8 Weinstein Company 2.60% $301.50 11
9 Relativity 0.60% $74.20 4
10 Open Road Films 0.60% $70.20 6
Source: Box Office Mojo

In order to compete effectively when releasing large films with its bigger studio peers, Lionsgate has
developed a model that requires significantly less financial resources than what its peers typically deploy in the
film production process. A key component of the model is risk mitigation which emphasizes the negotiation of
co-production agreements, pre-licensing of films in most international markets, structuring agreements with
talent that reduces guaranteed payments, and utilization of available tax incentives and structures. While the
model does not allow the Company to capture all of the upside on a successful film, it provides significant
downside protection. We believe that this approach resembles the strategy that many successful value investors
employ whereby greater emphasis is placed on capital preservation/minimizing losses than upside potential.
During the Companys 2Q FY 2016 Earnings call, CFO Jimmy Barge summarized the Companys philosophy:

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Lions Gate Entertainment Corp.

I have said before there is no question that in terms of a huge blockbuster we might be
giving something away on the upside; but we sure like our model in terms of a return on risk
capital and return on invested capital...But in terms of the absolute loss, we really are
minimizing our risk.

Lionsgates upcoming film Gods of Egypt is a good example of the Companys risk mitigation strategy.
The film has a budget of approximately $140 million, but its domestic gap (defined as production capital at risk
per title before marketing spend) is just ~$10 million. In any given year, LGFs average domestic gap is typically
less than $15 million across its ~40-45 film releases.

10+90 Television Model

Lionsgates 2006 acquisition of Debmar-Mercury not only expanded the Company into the television
distribution business, but it brought the Company a unique approach to television syndication. Rather than
produce an expensive pilot, the Company sells a network a 10 episode test run pursuant to its 10+90 model.
If the 10 episodes meet a prescribed ratings threshold, the show would be renewed for 90 more episodes.
Historically, 100 episodes was considered ideal for a show to enter off network syndication, which typically
generates robust levels of profitability. During the Companys 4Q FY 2013 earning call CEO Feltheimer stated
that the 10+90 model had generated more than 500 episodes with hundreds more in the pipeline. Thanks to the
success of the model, LGF expects to realize strong revenue growth and expanding margins as new shows are
developed under the model and existing ones enter syndication windows.

Lionsgate Well Positioned in Evolving Media Landscape

We believe that disruption in the marketplace will play to our natural strengths as a
global content company with few legacy constraints and a culture of innovation. We have a
simple plan, and that's to be one of the world's foremost producers and distributors of premium
content regardless of platform. That's been our strategy for the past 15 years, and whether it's
part of a fat bundle, a skinny bundle or no bundle at all, the bottom line is that people are
watching more content and spending more dollars across more distribution platforms than ever
before. And we believe that we can serve nearly all of them.
Lionsgate CEO Jon Feltheimer on 1Q FY 2016 Earnings Call August 2015,
commenting on media sector volatility in wake of Disney earnings.

In our view, LGF is well positioned amidst the current disruption that is taking place in the media
industry as it is agnostic as to distribution platform. In addition, there are a number of important industry trends
that have occurred both in the film and TV industries that LGF should be able to capitalize on in the coming

Increased Demand for Quality Content

Emerging digital platforms have ushered in a new golden age of television
worldwide.From Europe to Australia digital buyers are reshaping the television ecosystem as
new emerging online platforms create price competition for content in markets where little or no
competition previously existed.
Lionsgates FY 2015 Letter to Shareholders

During FY 2015, LGF distributed 1,800 hours of programming around the world representing a four-fold
increase from 3 years ago. The emergence of OTT providers (Netflix, Hulu, Amazon, etc.) coupled with
consumers insatiable appetite for content have created a significant amount of demand for the type of quality
content that LGF produces. According to FX, the number of scripted dramas increased by 9% in 2015 to 409
(not depicted in the below chart) vs. 2014 and 94% since 2009.

The Wall Street Journal, Glut of Scripted TV Content Troubles Hollywood, December 16, 2015
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Lions Gate Entertainment Corp.

Number of Scripted Original Series

Broadcast, Cable, and Online Services, 2009-2014

400 371
339 27 Online
300 280
260 Broadcast
15 145
250 8 129
211 213
200 2 4 120
117 Pay Cable
150 122 114
100 Basic Cable
21 25 151 164
50 102 116
66 70
2009 2010 2011 2012 2013 2014

Source: FX Network research via Entertainment One, The Mark Gordon Company, October 2015

Not only are there more buyers of content, but existing players are looking to secure more content than
they have historically. For example, many traditional pay-TV distributors are seeking to acquire so-called
stacking rights (full season episodes that can be viewed via VOD platforms) for popular television shows. In
order to better compete with streaming services such as Netflix, securing stacking rights helps facilitate more
Video on Demand viewing and can have a favorable impact on a cable companies operating results (more
dynamic ad insertions). Within international markets, there have been several recent instances of established
distributors contemplating joint bidding on content in response to streaming companies securing exclusive rights
to popular programming. The success of Netflix has been a boon for content owners as prices have risen
significantly for TV series with Netflix often offering to pay 120% to 150% of a shows costs for global rights.
Netflix CEO Reed Hastings recently stated, Weve gotten enormous support from content owners for one
reasonwere outbidding local players, with Hastings noting that prices are significantly higher than just four
years ago due to Netflix. With the potential for more non-traditional (Apple, Google, etc.) players to enter the
OTT space, we believe that demand, and pricing for quality content should continue to be robust. As Kevin
Beggs, Chairman of Lionsgates Television group stated on LGFs 1Q FY 2016 earnings call, Obviously, Netflix
is the clear category leader, but that creates a lot of opportunity for competitors like Hulu and Amazon to catch
up. Those are opportunities for us. It should be noted that the increased demand for content is not limited to
television series. LGF recently noted that it licensed Mockingjay 1 (film released in 2014 which was the third
installment in the Hunger Games series) to a record 18 digital platforms, six of which didnt exist when Lionsgate
launched the first Hunger Games in 2012.

Increased Content Consumption

Another important consideration driving increased demand for content is consumers insatiable appetite
for video programming. Streaming services such as Netflix have made it easy for consumers to access and view
content resulting in more consumption. While traditionally TV viewing has declined, digital consumption has
more than offset the decline.

The Wall Street Journal, Netflixs Global Growth Faces New Threats, January 17, 2016
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Lions Gate Entertainment Corp.

Average Time Spent per Day with Video by U.S. Adults

by Media, 2011-2015, hrs:mins

Source: eMarketer, April 2015

New/Accelerated Windows
The emergence of new windows in the Film and TV industries is having a favorable impact on a studios
profitability. While day and date release (simultaneous release of a film in a studio and online) will unlikely be
embraced for large films, it does make sense for smaller niche oriented releases. The benefit for a content
company such as LGF is the ability to monetize its content much earlier than before. The windows in the TV
industry are also narrowing. For example, Lionsgate drama Manhattan, which airs on cable network WGN
America, can be seen on Hulu Plus the day after appearing on the network.

Fewer Films Being Produced by Studios

In recent years, the large studios have reduced the number of films they release focusing primarily on
franchise films with strong intellectual property and boasting sequel/prequel potential. In addition, smaller
independent film companies have also been cutting the number of films they make. In November 2015, The
Weinstein Company announced that it would reduce its annual film output to ~8-10 films from ~18 previously.
In our view, the retrenchment in the industry should create an opportunity for Lionsgate. During LGFs
1Q FY 2016 earnings call CEO Feltheimer stated, so theres no question that we see the ability to fill the
pipeline, not only with product that we own 10% or 75% or 50% depending on co-financing partners, but projects
we just take that we like. In order to better capitalize on the opportunity, Lionsgate announced in April 2015 that
it had created Lionsgate Premier, which is expected to encompass a diverse slate of ~15 films annually that will
be released in theaters as well as a number of digital platforms.

Library Provide Stability to Motion Pictures Segment Results

Lionsgate handles a prestigious and prolific library of approximately 16,000 motion
picture and television titles that is an important source of recurring revenue and serves as the
foundation for the growth of the Company's core businesses.
Recent Lionsgate Earnings Press Release

While studio production businesses have traditionally been characterized by uneven levels of
profitability, the changing media landscape has created a stronger business model. As we noted above, there
has been an increased demand for content as new distribution platforms have emerged. LGF has benefited
from this development as it has been able to better monetize its library of old film and TV shows.

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Lions Gate Entertainment Corp.

Revenue Derived from Lionsgates Film/TV Library ($MM)


$493 $500
Revenue $MM

$400 $371 $374

$300 $274


FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015

Source: Company Presentation; Annual Shareholder Letters, Earnings Transcripts

Lionsgtes film/TV library generates a high margin revenue stream and a nice source of free cash flow.
Management recently stated that the cash flow margin of the library during FY 2015 was ~38%. At present the
library currently represents about 27% of the Motion Pictures segment revenue though a portion of the library is
recognized within the Television Production segment.

Motion Pictures - Selected Financial Summary ($MM)

6 Mos. 6 Mos.
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2015 FY 2016
Revenues $1,233.9 $1,119.4 $1,229.5 $1,190.3 $2,329.1 $2,182.9 $1,820.1 $729.9 $629.3
Gross Segment Contribution ($21.0) $156.1 $191.8 $130.9 $463.8 $491.8 $437.3 $172.3 $104.8
% Margin -1.7% 13.9% 15.6% 11.0% 19.9% 22.5% 24.0% 23.6% 16.7%
Segment Profit ($70.7) $108.9 $143.4 $75.5 $396.6 $425.0 $363.8 $136.7 $67.8
% Margin -5.7% 9.7% 11.7% 6.3% 17.0% 19.5% 20.0% 18.7% 10.8%

While the Companys successful franchises, including The Hunger Games, Twilight and Divergent have
been the primary driver of recent results, we would not dismiss the contribution from the Companys library.
During the Companys 1Q FY 2016 earnings conference call, CEO Feltheimer made the following comments
about forecasting of revenues from LGFs library:
What I would note is that we continue to find that historically, because that there
continues to be new buyers all the time, that historically we keep seeing what we call creep,
which is over each period, I would say year to year, we actually have to upgrade, not
downgrade our film ultimates because there are new buyers and we find we have been too
conservative about them.

Accordingly, we would not be surprised if the library, which has generated a ~7% CAGR since FY 2009,
continues to provide a nice source of revenue and cash flow for the Company. Included in the Companys
16,000 title library are the Hunger Games, Twilight, and Saw franchises, as well as Dirty Dancing, Reservoir
Dogs, and Terminator 2: Judgment Day.

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Lions Gate Entertainment Corp.

Demand For Premium Content Drives Robust Television Results

Over the past 6 years, LGFs Television Production revenues have increased at a 17% CAGR and
reached $580 million in FY 2015 up from $222 million in FY 2009. Meanwhile, profitability has expanded as well
with margins increasing by nearly 450 basis points.

Television Production - Selected Financial Summary ($MM)

6 Mos. 6 Mos.
FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2015 FY 2016
Revenues $222.2 $350.9 $353.2 $397.3 $379.0 $447.4 $579.5 $272.3 $256.4
Gross Segment Contribution $19.3 $39.4 $48.0 $64.7 $35.9 $29.6 $55.1 $34.5 $32.7
% Margin 8.7% 11.2% 13.6% 16.3% 9.5% 6.6% 9.5% 12.7% 12.8%
Segment Profit $6.1 $29.7 $36.5 $53.8 $23.9 $16.9 $41.8 $27.6 $23.8
% Margin 2.8% 8.5% 10.3% 13.5% 6.3% 3.8% 7.2% 10.1% 9.3%

While the TV Production segment results have been robust, management is forecasting significant
improvement from recent levels. Management recently confirmed that it is still tracking towards its target to
achieve over $100 million of gross contribution from the TV production segment sometime in the 2016/2017 time
frame. It should be noted that this would represent a significant improvement over the $47 million of gross
contribution the segment has averaged over the past 5 years. As we noted earlier, the TV business is benefiting
from increased video consumption and increased demand for high quality programs from new distribution
platforms. LGFs future TV results should be aided by 16 new series that are expected to launch in FY 2016,
which compares to 6 new series in FY 2015 (five were renewed). In addition to the potential from a growing
contribution from new series, the Companys existing series will likely provide a meaningful contribution to future
results, as series tend to become more profitable as they move through the syndication cycle. In our view,
Orange is the New Black could be a significant boon for the Company as it moves into its second cycle. We
believe that LGF will have significant leverage when the series exclusivity with Netflix runs out (not disclosed
but LGF has stated that second cycle revenues for the series will likely be recognized in FY 2017). Netflix will
likely want to negotiate to have its exclusive rights extended and we believe that there would likely be a
significant number of bidders willing to pay a premium for the series if Netflix is unable to retain its exclusivity
(Orange is the New Black is currently exclusive to Netflix in most regions of the world).

Hunger Games Uncertainty Can Lionsgate find a Successor to its Popular Franchise?
The Success of The Hunger Games has been a large driver of LGFs revenue growth and profitability in
recent years. The series of four films has generated nearly $3 billion in worldwide box office sales since the first
film was released in 2012 (last film Mockingjay 2 debuted in November 2015), placing it as the 15th highest
grossing film series of all time. Replacing the contribution from the series will be a tall order, but LGF has a
number of current films that are on their way to becoming strong multi-picture franchises as well as a solid
pipeline of films that could be franchises. While it is unlikely that any of the Companys current or pipeline films
will be as successful as The Hunger Games, we dont believe that the Company needs to come up with another
Hunger Games to continue its revenue and profitability growth. Rather, we believe that the Company should be
able to sustain its results with only a few modestly successful films. Further, we note that there are a number of
factors that should enable the Company to continue to capitalize on the Hunger Games success including a
series of short films that are currently being produced and location-based entertainment opportunities
(discussed in further detail in a later section). In addition, we note that Lionsgate recently announced that it is
exploring the potential to introduce prequels to The Hunger Games that would help the Company further
monetize the series appeal. Finally, the strong results of the TV business could also help to offset some of the
decline as a franchise begins to wind down. It is interesting to note that management believes that the value of a
strong TV show in syndication would be at least equal to one, and possibly two, films in a franchise.

LGF has a strong slate of films in its pipeline, many of which could develop into successful franchises in
the mold of Hunger Games and Twilight. During FY 2016, LGF expects to release approximately 45 films from
its 9 labels including 15 wide releases (films released nationally or to more than ~600 theaters). The number of
wide released is expected to expand to 20 during FY 2017.

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Lions Gate Entertainment Corp.

Potential Franchises in Current Slate of Films

Divergent While critical reaction to the Divergent series (series of four films based on three
novels by author Veronica Roth) has been mixed, the first film, which was released in 2014, grossed
more than $150 million at the domestic box office and nearly $300 million worldwide. The second
film in the series, Insurgent, has grossed approximately $300 million as well. The final two films (last
book split into two films) in the series are scheduled for release in 2016 (Allegiant) and 2017
(Ascendant). The combination of the first two films strong worldwide box office performance and
book sales, which have more than doubled to ~35 million from the time of the release of the first film
gives management confidence that the franchise continues to have tremendous potential.
Now You See Me 2 The original film (Now You See Me), which was released in 2013, grossed
more than $350 million worldwide. According to Lionsgate, Now You See Me 2 is positioned to build
on the original film with its global appeal enhanced by an international ensemble cast and
production, which took place on three continents. Now You See Me 2 is scheduled for release in
June 2016 and planning is already underway for a third film in what is expected to become LGFs
newest franchise.

Potential Franchises in Development Stage

There is no guarantee that a promising film or potential project will become a future franchise let alone
make for a successful initial film. In recent months there have been two films that the Company considered to be
franchise material that ended up being disappointments at the box office including American Ultra (staring Jesse
Eisenberg) and The Last Witch Hunter (Vin Diesel). American Ultra was released in August 2015 and has
generated ~$15 million at the box office compared with an estimated budget of $28 million, while The Last Witch
Hunter has grossed ~$124 million to date since October 2015 vs. an initial budget of $90 million. Despite these
recent underperformers, we believe that the Company has identified some potential films and IP that could turn
out to be strong performers, including:
The Odyssey In April 2015, LGF announced that Francis Lawrence will reunite with his Hunger
Games creative team for an epic multi-picture property based on The Odyssey. Production on The
Odyssey is expected to begin in early 2016. Management has high expectations for The Odyssey
and recently stated during its 1Q FY 2016 earnings call held in August 2015 that As we move
closer to a production start in the first half of next year, were increasingly convinced that The
Odyssey movies will become tentpoles in our upcoming slate.
Gods of Egypt This high budget film (~$140 million) is scheduled for release in late February
2016 and was directed by Alex Proyas.
Kingkiller Chronicle In October 2015, Lionsgate acquired the Kingkiller Chronicle book series as
part of a multiplatform rights deal reached with author Patrick Rothfuss. The Kingkiller Chronicle
books trail only the Game of Thrones in terms of best-sellers in modern epic fantasy. There have
been approximately 10 million copies of The Kingkiller Chronicle series of books and novellas sold
to date, with the first two books (The Name of the Wind and The Wise Mans Fear) recognized as
bestsellers by the New York Times. The third book in the series has yet to be released.
Hasbro Relationship In July 2015, Lionsgate announced that it had reached an agreement with
Hasbro to create a movie based on the Monopoly board game. Monopoly, which was initially
released in 1903, has been played by more than 1 billion people in 114 countries around the world
and has been translated into 47 different languages. Following on the heels of the Monopoly
agreement, LGF announced in August 2015 that it would reach an agreement with Hasbro for My
Little Pony, which is current in production with Emmy Award winning actress Kristin Chenoweth.
LGF management believes that both the Monopoly and Hasbro properties are repeatable
franchises. The series of agreements with Hasbro is not unexpected given that Lionsgate Vice
Chairman Michael Burns currently serves on the Hasbro board and the fact that many Lionsgate
executives have longstanding relationships with Hasbro. Accordingly, we would not be surprised if
there are additional projects established between the two companies.
Saban Brands Partnership In FY 2014, LGF announced a partnership with Saban brands for a
series of live action films based on the Power Rangers brand. According to the agreement, Saban

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Lions Gate Entertainment Corp.

brands will produce a live-action film based on the 1990s TV series Mighty Morphin Power Rangers
with Lionsgate serving as the distributor. However, LGF noted that the relationship could be
expanded at some point. The Power Rangers film is scheduled to be released in January 2017.
Studio Canal Partnership In November 2015, LGF acquired the U.S. rights to three films from
Studio Canal including the animated 3-D family adventure film Robinson Crusoe.

Additional Growth Opportunities

SVOD Services
Lionsgate has recently rolled out two streaming services including its Lionsgate Entertainment World
streaming service with Alibaba in China (August 2014) and The Tribeca Shortlist (October 2015). In addition, the
Companys third SVOD services Comic-Con is expected to launch in 2016. LGF has already announced its first
original series for the platform. The services are not only extending the reach of Lionsgate content around the
world, but they are helping LGF identify and acquire new IP globally. In the case of The Tribeca Shortlist and
Comic-Con platforms, LGF is hoping to establish branded platforms where it will be able to communicate with its
audiences on a daily basis. During the Companys 2Q FY 2016 earnings call held in November, LGF stated that
it expects to announce additional streaming services in the near future. While the investment to launch SVOD
services is not without its costs, management has stated that it is developing its over-the-top channels in a very
disciplined way. Furthermore, Lionsgate believes that it will likely enter into strategic partnerships on the OTT
channels to help fund investment and management has noted that it has already been approached by a number
of interested parties.

Notwithstanding recent economic challenges, China will likely present LGF with meaningful future
growth opportunities. China is expected to generate $6.5 billion at the box office in 2018 (vs. $4.8 billion in 2014)
with $3.5 billion derived from local language films. LGF has released 17 films in China over the past 3 years and
the fast growing box office in the country presents tremendous opportunities. To capitalize on this growth, in FY
2015 LGF established a corporate presence in Beijing and formed content partnerships with Hunan TV and
Broadcasting Intermediary Co. Ltd. and the Alibaba Group. During the Companys 2Q FY 2016 earnings call in
November 2015, LGF had noted that it has established a content licensing agreement with all of the major
platforms in the country. According to the following graphic, there are a meaningful number of subscribers to the
major platforms in the country.

Monthly Unique Visitors (Millions)

Source: .iResearch, Bernstein Analysis, via DHX Media Ltd. presentation, 2015

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Lions Gate Entertainment Corp.

Industry Consolidation Major Studios Could be on the Block

We believe that Lionsgate could be the beneficiary of opportunistic M&A within the studio industry.
While there are advantages to being a small player within the industry, LGF has not dismissed the potential
benefits that a combination with a large studio peer could provide. During LGFs 3Q FY 2015 earnings call held
in early 2015 CEO John Feltheimer stated the following:
I think obviously, any time that you have leverage in any market, theres always some
potential benefits. We like our model. We would hate to think that any kind of partnership,
merger, acquisition, in either direction would change that model too significantly. But one has to
recognize the value of leverage. And obviously, in every acquisition and every strategic
imperative that we look at, we're thinking about all of those potential advantages.

Lionsgates strong balance sheet (discussed in further detail below) as well as its potential access to
significantly greater financial resources with Dr. Malones involvement could enable it to take advantage of
opportunities that may emerge within the industry. Specifically, there is the potential that three major studios
could come on the block in the not too distant future including Paramount Pictures, MGM and Sony Pictures.
Paramount is currently owned by Viacom, but its controlling shareholder is Sumner Redstone (age 92) who is
believed to be in failing health according to recent press reports (in early February 2016 Redstone stepped
down as chairman at both CBS and Viacom). In the event that Redstone, who has previously proclaimed that he
would live forever, passes there could be the need for a liquidity event in order to help pay what is likely to be a
hefty estate tax bill. In 2010, MGM emerged from bankruptcy with its shares currently trading via the distressed
desks of most major investment banks. Given the fact that MGM is believed to be held by many hedge funds
coupled with recent market volatility and poor hedge fund industry returns, we would not be surprised if a
liquidity event is soon sought by its shareholders. While MGM did file an S-1 pursuant to the JOBS Act in 2012,
attaining liquidity via the public markets could be challenging for the foreseeable future as the IPO market has
come to a halt (no IPOs in January 2016). It is interesting to note that both LGF and MGM have a stake in EPIX
(LGF 31%; MGM 19%) and as a result we believe that the two companies would likely be logical merger
partners. (Carl Icahn unsuccessfully tried to combine the companies during 2010 and recent press reports have
suggested that Lions Gate has repeatedly tried to acquire MGM. ) Finally, Sony has taken a number of steps in
recent years to return to profitability including spinning off and/or divesting its TV, Video and Audio, and
Personal computer business. Accordingly, we would not rule out the potential that Sony decides to separate its
Film unit at some point though we believe that nothing is imminent at Sony. It is worth highlighting that CEO
Feltheimer previously served as an executive at Sonys film and TV business prior to being appointed as
Lionsgates CEO in 2000. Although a major transaction is not without its risks, we believe that there would be
significant revenue and cost synergies if the Company were to merge with/acquire one of the aforementioned

Electronic Sell Through

With consumers continuing to build their digital film collections, Electronic Sell Through (EST) has
emerged as a meaningful revenue and profitability driver for studios. EST involves the digital sale of a film for
unlimited viewing that can be accessed through multiple platforms including the Internet, mobile and cable.
While industry sales of packaged media has continued to decline, the growth in digital is now more than
offsetting the weakness of the physical medium. During 2015, industry EST revenues increased by 18% to
$1.9 billion according to data from industry researcher DEG and have nearly doubled in the last three years after
surpassing the $1 billion sales level in just 2013. Notably, digital revenues boast significantly higher revenues
than packaged media, which has a favorable impact on studio profitability.

The Wall Street Journal, Libertys John Malone Eyes Content Consolidation, June 3, 2015
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Lions Gate Entertainment Corp.

Electronic Sell-through Growth is Offsetting the Decline in Physical Sales

Average Variable U.S.
Industry Consumer Spend in Millions Contribution Margins

Source: Time Warner/WB presentation, October 2014

Comcasts 2013 entry into the EST market has been a big boost for industry EST revenues and it is
worth noting that Lionsgate was the first outside studio to license its content to the Xfinity digital store. During
LGFs 1Q FY 2016, management noted that it is experiencing tremendous growth in EST and IVOD, which is
expected to help boost full year operating margins by as much as 500 bps. While sales of packaged media have
continued to decline (packaged media sales declined by 12% to $6.1 billion in 2015 compared with $16.6 billion
in 2006), there could be some stabilization on the horizon with the introduction of Ultra HD Blue-ray in 2016.
With LGF starting to remaster its top older film/tv titles in Ultra HD, the Companys library could also be a
beneficiary as consumers embrace the new format. The adoption of Ultra HD TVs has gained momentum with
~4 million units shipped in 2015 and 33% of consumers indicating that they may purchase an Ultra HD TV in the
next three years according to a recent study conducted by the Consumer Electronics Association.

Location-Based Entertainment and Video Games

Location-Based Entertainment In FY 2014, LGF began to explore theme park attractions and
other location-based entertainment opportunities around the world as a way to capture ancillary
revenues from its valuable IP. The first location-based initiative developed by the Company was a
Hunger Games Traveling museum, which has demonstrated good early results. The first stop on the
Hunger Games tour was at the Discovery Times Square venue where the exhibition generated
record first week ticket sales for any property at the venue. The exhibition is expected to move to
the Innovation Hangar at San Francisco's Palace of Fine Arts Exhibition Hall in February 2016. In
addition to the traveling museum, a Hunger Games stage show is set to open near Wembley
Stadium in London during the summer of 2016. Perhaps the largest opportunity will come from the
Lionsgate Zone that is being integrated with the Motiongate theme park that is set to open up in the
fall of 2016. Lionsgate recently stated that it expects to generate tens of millions of dollars of
incremental EBITDA from its location-based entertainment initiatives.
Video Games LGF announced that it would be expanding into the fast growing gaming space in
FY 2015. In LGF FY 2015 letter to shareholders, management stated that its video game initiative is
based on a multifaceted strategy designed to extend its current film and television strategy to new
audiences, invest in game companies with unique properties and strong growth potential and
source exciting new intellectual property on a global basis. During FY 2015, LGF made investments
and established partnerships with a number of game related companies including Telltale Games,
Next Games, Kabam, Starbreeze StudiosKing, Respawn Entertainment, Mobcrush and Fifth
Journey. The Companys gaming initiatives also includes pursuing opportunities in eSports, which is
one of the fastest growing areas of game content in the world. As part of its gaming strategy, LGF
has also identified the virtual reality industry as an important area for future growth. While LGFs
gaming ambitions are not without its risks, management appears to be approaching the industry
with a similar disciplined approach that it utilizes for the film/TV business. During LGFs 1Q FY 2016
earnings call CEO Feltheimer stated, I should add were also not making the kind of investments
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Lions Gate Entertainment Corp.

that youre seeing from studios in the past. We dont see significant losses at all, if any. I do
believe youre going to start seeing some decent contribution in FY 2017.

Lionsgate Boasts Valuable and Understated Investments

We believe that Lionsgate holds a number of valuable investments in media and entertainment
companies that are not fully appreciated by investors. As of September 30, 2015, the carrying amount of LGFs
various investments was approximately $475 million, but we believe the intrinsic value of its investments is likely
significantly higher.

EPIX (31.2% stake)

After failing to reach an output agreement with CBS-owned Showtime when its agreement expired in
2007, Viacom-owned Paramount (which was affiliated with Showtime until Viacom and CBS split in 2005)
announced that it would be forming a new premium pay-TV channel by teaming up with studio peers Lionsgate
and MGM. Both Lionsgate and MGM had similar output deals with Showtime that expired at the end of 2008. In
2009, the consortium launched Epix, a premium channel and VOD service. The investment has been a success
for the studio partners with EPIX becoming profitable and cash flow positive in just its second year of operation.
In recent years, Epix has experienced strong growth in revenues and profitability as it has expanded distribution.

Epix - Selected Financial Summary ($MM)

6 Mos. 6 Mos.
FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2015 FY 2016
Revenues $0.3 $200.6 $326.1 $338.0 $353.4 $442.8 $187.3 $216.6
% Growth n/m 63% 4% 5% 25% - 16%
Operating Income ($99.8) ($31.6) $72.3 $78.6 $90.7 $166.6 $56.2 $71.4
% Margin n/m n/m 22.2% 23.3% 25.7% 37.6% 30.0% 33.0%

Available Homes N/A +30mm +30mm +30mm +43MM +50mm

During FY 2015, Epix expanded its distribution footprint by 60% as it extended its carriage agreement
with Amazon and rolled out its service to new distributors including Time Warner Cable, Bright House Networks
and AT&T (u-Verse). At the end of FY 2015, EPIX was available in approximately 50 million homes, up from 30
million in FY 2013. While Epix has experienced good growth recently, there could be some near term
headwinds. In September 2015, EPIXs agreement with Netflix, which provided Netflix subscribers access to
Epixs films lapsed. While Epix has signed an agreement with Hulu, which commenced when the Netflix
agreement expired, we suspect that there will be some near term financial impact as Hulu (~9 million subs) is
unlikely paying as much as Netflix (~75 million subs) was for the Epix content. While the Netflix loss is
disappointing, there could be a silver lining. Now that Epix no longer has a relationship with Netflix coupled with
the fact that Epix recently signed an agreement with Hulu (partially owned by Comcasts NBCU), its possible
that Comcast, which is one of the largest pay-TV distributors in the U.S., could come to an agreement with Epix,
to make the channel available to its subscribers. AT&Ts acquisition of DirecTV (~20 million video subs) in July
2015 could also open the door for increased distribution. Epix is currently available to AT&Ts u-Verse
subscribers and we would not be surprised if an agreement is made to provide the service the DTV subs that
have been recently brought into the fold. If Epix is able to secure distribution agreements with both Comcast and
DirecTV, Epixs distribution would nearly double and be available to over 90 million subs. During LGFs 2Q FY
2016 earnings call held in November 2015, management noted that Epix is having conversations with the
remaining MSOs not just in terms of their linear package, but those looking to expand in OTT areas. Epixs
recent push into original programming could also provide the impetus for the services adoption by Comcast and
DirecTV. In May 2015, Epix announced that it would be ordering original series from Lionsgate (Graves) and
Paramount (Berlin Station) with a series from MGM likely to follow. Through September 2010, Lionsgate
invested $80.4 million in EPIX with Lionsgate receiving $28 million in distributions since its original investment in
April 2008.

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Lions Gate Entertainment Corp.

Pop (50% stake)

In January 2009, LGF acquired TV Guide Network including its digital properties (TV and
TV Guide Mobile) for $255 million from Macrovision Solutions (now Rovi). In July 2009, LGF sold a 49% stake in
TV Guide Network to private equity firm One Equity Partners due to pressure from activist investor Carl Icahn. In
March 2013, CBS acquired One Equitys stake in TV Guide Network and subsequently reached a deal to
acquire the ~50% stake in TV Guide Networks digital properties that it didnt already own (the acquired
properties were folded into CBS Interactive). Following the acquisition of CBS stake in the network, LGF stated
that it believed that CBS programming resources and experience coupled with Lionsgates content leadership
would help TVGN achieve its potential as a successful highly distributed and branded cable network. In 2015,
TV Guide Network was rebranded as Pop and boasted over 400 hours of programming including syndication
acquisitions (Beverly Hills, 90210; 7th Heaven), new projects and current series (Rock the Boat: New Kids on
the Block, The Story Behind, Big Brother: After Dark). While the network has been reporting losses in recent
years, its outlook is improving. LGFs FY 2015 Shareholder Letter stated that Pop is consistently competitive
with its peer group of networks in rating and had achieved 8 straight quarters of year-over-year ratings growth.
Pop was carried in about 80 million homes at the end of FY 2015, but the network announced in January 2016
that it expected to be in an additional 8 million homes in the next few months. The increase in the subscriber
base should go a long way toward improving the Companys profitability, reflecting higher subscriber fees and
advertising revenues (more potential viewers). In 2015, Pop renewed Schitts Creek, a highly acclaimed original
scripted comedy series for a second season with 13 new episodes expected to air in 2016.

Other Investments
Summary of Additional Investments
Name Ownership Description
Atom Tickets 18.0% Movie ticketing application for Android and IOS
Celestial Tiger Entertainment 16.0% Vertically integrated entertainment company based in Asia
Defy Media 16.0% Producer and owner of digital content targeted fo 13 to 34 year olds
Pantelion Films 49.0% JV with Televisa that produces, acquires and distributes Spanish
language films targeted for Hispanic moviegoers in the U.S.
Roadside Attractions 43.0% Independent film distribution company
Telltale Games 14.0% Leading developer of video games for all major interactive platforms
Tribeca Shortlist 75.0% SVOD service
Next Games n/m Mobile games developer headquartered in Finland.

Recent Results and Outlook

Lionsgate Summary Results ($MM)
6 Months 6 Months
FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2015 FY 2016
Revenues $1,582.7 $1,587.6 $2,708.1 $2,630.3 $2,399.6 $1,002.3 $885.7
% Change 0.3% 70.6% -2.9% -8.8% -11.6%
Adjusted EBITDA* $77.3 $71.6 $329.7 $370.8 $384.9 $147.7 $62.9
Adj. EBITDA Margin 4.9% 4.5% 12.2% 14.1% 16.0% 14.7% 7.1%
Free Cash Flow $9.7 -$86.9 $280.7 $258.3 $261.6 $109.0 $83.0
FCF Conversion (FCF/Adj. EBITDA) 12.6% n/m 85.2% 69.6% 68.0% 73.8% 131.9%
Stock Based Compensation $32.5 $25.0 $35.8 $60.5 $79.9 $33.5 $34.0
*Note: Lionsgate's calculation of Adjusted EBITDA excludes expenses associated with non-cash stock-based compensation.
These expenses are highlighted above.

For the three year period ending FY 2015, LGF generated nearly $1.1 billion in adjusted EBITDA, which
was nearly $100 million more than its guidance for those years. FY 2015 represented the third straight year the
LGF has generated FCF in excess of $250 million.

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Lions Gate Entertainment Corp.

In November 2015, LGF reduced its outlook for adjusted EBITDA for the three year period ending
FY 2017 by $100 million ($1.1 billion to $1.2 billion vs. previous outlook of $1.2 billion to $1.3 billion). While
recent disappointments at the box office had an impact (The Last Witch Hunter and American Ultra) were called
out), management noted the biggest factor for the reduction was the timing of future releases as some future
films were moved into FY 2018.

Balance Sheet Well Positioned to Take Advantage of Share Price Weakness

At September 30, 2015, LGFs leverage (net debt/3year average adjusted EBITDA) stood at 3.9x. While
this level may appear elevated the business generates a meaningful amount of free cash flow as evidenced by
its strong free cash flow to adjusted EBITDA conversion ratio average over the past three years. In our view
LGFs free cash flow generation should enable it to take advantage of recent share price weakness via share
buybacks. Over the past two years, the Company has deployed $145 million towards share buybacks,
repurchasing 5.3 million shares at an average cost of $27.11 a share. At September 30 , LGF had ~$90 million
of available of capacity on its current $300 million buyback authorization. However, it warrants mention that in
early February 2016, LGF management increased the authorization to $468 million, providing ~$250 million of
future capacity.

Valuation and Conclusion

In our view, the recent sell-off in shares of LGF are presenting investors with an excellent opportunity to
own shares in a first rate content Company with multiple future growth avenues. While there is plenty of
uncertainty in the media industry, Lionsgate, as an owner of high quality content, is poised to benefit from the
current disruption as it is agnostic as to distribution platform. LGF is the beneficiary of a number of powerful
industry trends including the increased demand for content from emerging distribution players and consumers
insatiable appetite for high quality content. In our view, the recent investments in LGF by media mogul Dr. John
Malone and his related companies (Discovery Communications and Liberty Global) reinforce our view of LGFs
strong industry positioning. Dr. Malones involvement also creates some interesting optionality that could create
an enormous amount of shareholder value. Dr. Malone continues to believe the pay-TV industry can establish a
content vehicle/service that could rival Netflix and we would not be surprised if LGF plays a meaningful role in
his future content ambitions.

In deriving our valuation for LGF, we have applied a 12x multiple to our projection for the operating profit
of LGFs two main segments including Motion Pictures and Television production. We believe this represents a
conservative approach and would note that it represents a discount the multiples of subscription-based
entertainment companies over the years. In addition, we would note that the multiple is also discounted relative
to the acquisition of high quality studios/IP companies including Pixar (16.5x forward EBITDA in 2006) and the
15x EBITDA multiple that Disney is believed to have paid for Lucasfilms in 2012.

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Lions Gate Entertainment Corp.

LGF Estimate of Intrinsic Value

Value ($MM)
Motion Pictures @ 12x 2018E Segment Profit $4,341
Television Production @ 12x 2018E Segment Profit $879
Corp Expense/Other Shared Services @ 8x 2018E Amount ($738)
2018E Net Debt ($999)
31.2% of Epix @ 12x 2018E Operating Income $672
50% of 88MM of Pop Subs @ $15 Per Subscriber $660
4.7mm of Starz @ Current Market Value $134
Other Investments $250
Equity Value $5,199

2018E Shares Outstanding 153.0

Estimate of Intrinsic Value (Per Share) $33.99

Implied Upside to Intrinsic Value Estimate 30.0%

The following table illustrates LGFs valuation at various multiples applied to our estimate 2018E segment profit
for the Motion Pictures and Television Production segments:

Multiple Applied to FY 2018E Motion Pictures Segment Profit

$33.99 9.0x 10.0x 11.0x 12.0x 13.0x 14.0x 15.0x
9.0x $25.45 $27.82 $30.18 $32.55 $34.91 $37.28 $39.64
Multiple Applied

Segment Profit

TV Production

10.0x $25.93 $28.30 $30.66 $33.03 $35.39 $37.76 $40.12

to FY 2018E

11.0x $26.41 $28.78 $31.14 $33.51 $35.87 $38.24 $40.60


12.0x $26.89 $29.26 $31.62 $33.99 $36.35 $38.72 $41.08

13.0x $27.37 $29.74 $32.10 $34.47 $36.83 $39.19 $41.56
14.0x $27.85 $30.21 $32.58 $34.94 $37.31 $39.67 $42.04
15.0x $28.33 $30.69 $33.06 $35.42 $37.79 $40.15 $42.52

Overview of Key Valuation Assumptions/Projections

Segment Operating Income While it is difficult to precisely forecast future results for the Motion
Pictures segment giving the timing of future releases, we note that our current projection for 2018
segment profit of $362 million is on par with FY 2015 levels and roughly 10% below the average
segment profit between FY 2012 and FY 2015. For the TV production business, our 2018E segment
profit of $73.3 million represents a meaningful increase from the $42 million segment profit
generated in 2015. In deriving our TV segment profit estimate, we note that our projected TV gross
segment contribution is just $92.6 million, which is well below the over $100 million management
said it expects to realize in the FY 2016/FY 2017 time frame.
Epix We have applied a 12x multiple to our 2018E operating income projection for LGFs 31%
stake in Epix. It should be noted that our operating income projection does not give Epix any credit
for the potential to increase its distribution substantially with either DirecTV/AT&T or Comcast.
If Epix is able to reach an agreement with one or both of these distributors there would be
meaningful upside to our projections. We believe that the multiple we have assigned to Epix is
conservative in light of its robust profitability with its mid 30% operating margins on par with those of
industry juggernaut HBO. We would also note that the multiple represents a substantial discount to
Netlixs valuation (22x 2018E EBITDA).

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Lions Gate Entertainment Corp.

Pop We have assigned a $15 per sub valuation for the LGFs 50% stake in Pop. The valuation is
in line with the per sub multiples of precedent under-developed cable network transactions over the
years. Pop has gained traction in recent years following CBS involvement/investment in 2013 and
we would note that CBS has a call option to purchase a portion of LGFs stake in the network
beginning in 2018.
Starz We have valued LGFs stake in Starz at current market value. In our view, this is a
conservative approach as we believe that Starzs current public market price is not reflective of its
intrinsic value.
FCF and Share Repurchases Over the next three years (FY 2016-FY 2018), we project LGF will
generate an average of $218 million in free cash flow (20% below the average for the proceeding
three year period (FY 2013-FY 2015). We currently project that LGF will utilize 50% of its annual
free cash flow generation, or $265 million to repurchase shares at an average cost of ~$30 a share.

The Companys risks include, but are not limited to, an inability to develop successful film or TV content,
failure to adequately monetize its film/TV library, loss of, or inability to retain key personnel, and the potential
that the Company pursues unfavorable M&A activity.

Analyst Certification
Asset Analysis Focus certifies that the views expressed in this report accurately reflect the personal
views of our analysts about the subject securities and issuers mentioned. We also certify that no part of our
analysts compensation was, is, or will be, directly or indirectly, related to the specific views expressed in this report.

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Lions Gate Entertainment Corp.


(Amounts in thousands)

ASSETS Sept. 30, 2015 March 31, 2015

Cash and cash equivalents $ 170,417 $ 102,697
Restricted cash 2,508 2,508
Accounts receivable, net of reserves for returns and allowances 881,474 891,880
Investment in films and television programs, net 1,557,084 1,381,829
Property and equipment, net 30,094 26,651
Investments 474,290 438,298
Goodwill 323,328 323,328
Other assets 75,835 74,784
Deferred tax assets 50,196 50,114
TOTAL ASSETS $ 3,565,226 $ 3,292,089

Senior revolving credit facility $ $
5.25% Senior Notes 225,000 225,000
Term Loan 400,000 375,000
Accounts payable and accrued liabilities 282,412 332,473
Participations and residuals 516,673 471,661
Film obligations and production loans 904,091 656,755
Convertible senior subordinated notes 98,979 114,126
Deferred revenue 250,524 274,787
TOTAL LIABILITIES 2,677,679 2,449,802
Shareholders Equity:
Common shares, no par value 884,182 830,786
Retained earnings (accumulated deficit) (11,405) 13,720
Accumulated other comprehensive income (loss) 14,770 (2,219)

- 34 -
January 29, 2016
Volume XLII, Issue I

Time Warner Inc.

Dow Jones Indus: 16,466.30 Initially Probed: Volume XXVIII, Issue VII @ $13.06
S&P 500: 1,940.24 Last Probed: Volume XLI, Issue XI & XII @ $64.26
Russell 2000: 1,035.38 Trigger: No
Index Component: S&P 500 Type of Situation: Business Value, Consumer Franchise

Price: $ 70.44
Shares Outstanding (MM): 810.2
Fully Diluted (MM) (% Increase): 824.1 (1.7%)

Average Daily Volume (MM): 7.8

Market Cap (MM): $ 58,071
Enterprise Value (MM): $ 77,070
Percentage Closely Held: Insiders <1%
52-Week High/Low: $ 91.34/62.94

Trailing Twelve Months

Price/Earnings: 16.5x Introduction
Price/Stated Book Value: 2.5x Time Warner Inc. (TWX or the Company) is
a leading media and entertainment conglomerate. Time
Total Debt (MM): $ 22,927 Warners stable of businesses include the leading film
Implied Upside to Estimate of and TV production studio (Warner Bros.), the dominant
Intrinsic Value: 65% premium pay TV network (HBO), and Turner Networks
Dividend: $1.40 collection of top cable networks (including TNT, TBS,
Payout 31.4% CNN, and Cartoon Network).
Yield 2.0% TWX shares are up modestly since AAF last
profiled the Company in February 2014 ahead of the
Net Revenue Per Share: spin-off of its publishing business. However, shares
2014 $ 31.00 have declined over 20% from a peak above $90 in mid-
2013 $ 28.07 2015 reflecting a return of extreme investor concern
2012 $ 25.94 that the traditional pay TV business is being disrupted
by the Internet. However, we believe TWX is particularly
Earnings Per Share: well positioned to manage this technological transition,
2014 $ 4.41 and at just 9.6x 2015E EV/EBITDA, shares reflect
2013 $ 3.56 excessive pessimism. As the leading producer of
2012 $ 2.73 television programming, TWXs Warner Bros. studio is
actually a beneficiary of the growing demand for high
Fiscal Year Ends: December 31 quality original programming across broadcast, cable,
Company Address: One Time Warner Center and Internet SVOD providers. Its film slate also looks
New York, NY 10019 promising over the next 5 years as Warner leverages its
Telephone: 212-484-8000 leading DC Comics IP (including Batman, Wonder
Chairman/CEO: Jeffrey L. Bewkes Woman, Justice League, Aquaman, etc.) as well as the
Clients of Boyar Asset Management, Inc. own 55,175 shares of Time Lego franchise and a new series from the Harry Potter
Warner Inc. common stock at a cost of $28.49 per share. creator. At Turner Networks, management forecasts
Analysts employed by Boyars Intrinsic Value Research LLC own double-digit annual growth in affiliate fees in the coming
shares of TWX common stock. years. The Company has locked up premium sports

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Time Warner Inc.

rights well into the next decade, and we believe its networks focus on live sports, news, and childrens content
position it well to navigate the OTT transition. Last but certainly not least, we believe HBO is the crown jewel of
the TV industry. Its must-have wholly owned content, existing a la carte premium pricing structure, and under-
penetration (both domestically and globally) position HBO to benefit from the adoption of an Internet-delivered
platform. We estimate HBO could increase operating income by >50% over time by capturing more of the
differential between its retail and wholesale pricing, aided by the roll-out of the HBO NOW standalone Internet

In estimating TWXs intrinsic value, we conservatively project all segments fail to achieve the double-
digit annual AOI growth projections for 2013-2018 as laid out by TWX in late 2014 (even after accounting for the
currency headwinds that have subsequently developed). Using a sum-of-the-parts model, we also apply market-
level multiples to Turner (9.5x EBITDA) and Warner (10x EBITDA) despite their unique advantages. Valuing
HBO at a premium 13.5x EBITDA multiple (though a large discount to Netflixs current 22x 2018E EV/EBITDA
multiple), we derive a forward-looking (2018E) intrinsic value estimate of $116 per share implying ~20% IRR
potential over the next 3 years.

Despite the surge in January 2016, TWX shares still currently trade nearly 20% below Foxs bid for the
Company in mid-2014. We believe growing investor unrest could lead TWX executives/board to re-evaluate a
sale or split-up of the Company. As we detail, we believe potential conflicts with Turner/Warner is keeping HBO
from more aggressively pursuing an OTT model. A spin-off of HBO would remove this conflict, and would allow
HBO to garner the premium multiple it deserves while enabling Turner/Warner to pursue scale-building M&A on
its own. Absent a break-up, we would not dismiss renewed interest in TWX from Fox or others if TWX shares
continue to flounder. In the meantime, TWX continues to rapidly return cash to shareholders with a combined
dividend (2.0%) and share repurchase yield of close to 10%.

Background: TWX in Play

Asset Analysis Focus last devoted a full profile to Time Warner in February 2014, ahead of the
Companys spinoff of its Publishing business (now independently traded as Time Inc., ticker: TIME). At the time
(no pun intended), we valued TIME at approximately $20/share (adjusted for the 1-for-8 spinoff ratio) utilizing a
conservative valuation multiple in light of the apparent secular decline plaguing its print magazine business.
TIME shares initially traded as high as $25/share after the June 2014 spinoff but have recently plummeted to
$14 as the company struggles to manage faster than anticipated revenue declines. For these reasons, at this
point we remain on the sidelines regarding TIME. But the performance of TIME (at <3% of TWXs pre-separation
value) was never going to significantly impact the total returns earned by TWX shareholders. More importantly,
in February 2014 we discussed how the spinoff of TIME (with the awareness that this was the third spinoff under
chairman and CEO Jeff Bewkes tenure) as well as the decision to begin separately disclosing HBO divisional
financials in 4Q 2014 could portend more drastic change at Time Warner. We noted,
At the least, this could be a catalyst for investors to begin to properly ascribe a
premium multiple to HBO. More optimistically, we would not dismiss the possibility that TWX
eventually considers a separation of Turner and/or HBO. We believe either business would
command a premium valuation as a standalone company, and would also present an attractive
acquisition target.

Fox Bids for TWX, is Rebuffed

Time Warner became an acquisition target much faster than we could have imagined, with Rupert
Murdochs 21st Century Fox (FOX) bidding to acquire all of TWX just one month after the TIME spinoff was
completed in June 2014. On July 16, 2014, Fox confirmed it had made a proposal to acquire all of Time Warner
but that the Time Warner Board of Directors declined to pursue our proposal. TWX confirmed it rejected FOXs
offer of $32.42/share in cash plus non-voting FOXA shares at a ratio of 1.531 per TWX share, with an initial
takeout value equal to ~$85/share. TWX shares initially traded in the ~$82-$85 range despite FOX shares
trading down ~10% following the announcement as investors anticipated Fox would raise its bid.

However, TWX refused to negotiate and another bid never emerged from Fox. In rejecting the
overtures, TWX cited the premium value of TWXs assets and the valuation risk in accepting FOX shares and
ceding control to Murdoch. TWX also suggested there were governance, operational, and regulatory risks to

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Time Warner Inc.

executing a combination. On August 5, 2014, Fox officially announced they had withdrawn their initial proposal.
Rupert Murdoch provided a public statement explaining the decision:
We viewed a combination with Time Warner as a unique opportunity to bring together
two great companies, each with celebrated content and brands. Our proposal had significant
strategic merit and compelling financial rationale and our approach had always been friendly.
However, Time Warner management and its Board refused to engage with us to explore an
offer which was highly compelling. Additionally, the reaction in our share price since our
proposal was made undervalues our stock and makes the transaction unattractive to Fox
shareholders. These factors, coupled with our commitment to be both disciplined in our
approach to the combination and focused on delivering value for the Fox shareholders, has led
us to withdraw our offer.

Time Warner shares traded down to the low-to-mid $70s in the weeks following Foxs announcement
that it had abandoned acquisition efforts. Jeff Bewkes and the rest of the executive team never directly
addressed the Fox deal beyond the initial statements in July 2014, but in October 2014 the Company held an
investor meeting essentially to sell its investors on their decision to remain independent and to provide details
on their long-term strategy. Mr. Bewkes described the Companys strong performance under his leadership
(Mr. Bewkes became CEO in 2008) as TWX transitioned into a pure play global content company. TWX
highlighted ongoing initiatives to leverage its premium content globally by embracing new technology, which
management believes will allow the Company to successfully navigate the ongoing disruptions to the traditional
video business. By far the most significant announcement made in this department was that HBO would
introduce an over-the-top (OTT; distributed independently of traditional MVPD partners cable bundles)
Internet-delivered subscription video-on-demand (SVOD) service in the U.S. in 2015. More broadly, at the
meeting TWX management laid out ambitious growth targets including EPS targets of close to $6 for 2016 and
above $8 for 2018 versus $4.15 in adjusted EPS reported in 2014.

For a while investors appeared to approve TWXs decision to remain independent, with shares peaking
above $90 in July 2015. However, shares declined below $80 by August as the entire media sector moved
sharply lower in sympathy with the weak ESPN subscriber numbers and downgraded growth outlook provided
by Disney CEO Bob Iger on their 2Q15 conference call. TWX was also forced to drastically cut its $6 2016 EPS
outlook all the way down to $5.25 by November 2015. This was principally due to the pernicious effects of the
U.S. dollar surge, which is up ~25% (trade weighted) since mid-2014 and is forecast to dent Time Warners EPS
by ~$0.50 or greater in 2015 and 2016. But TWX also cited the weakening U.S. cable subscriber trends as well
as increased expectations for higher technology and programming investments going forward as the Company
tries to maintain its competitive position. The sharp negative turn in investor sentiment toward the programming
industry, exacerbated by the recent market correction, continued to punish TWX shares in late 2015, sending
them to $64.47 by year-end. This came despite TWX reaffirming its 2015 outlook on August 5 and again in
November. (TWX CFO Howard Averill recently disclosed full-year 2015 adjusted EPS will come at or above the
high end of its $4.60-$4.70 guidance.)

The market outlook toward TWX shares (at least in relative terms) has again drastically reversed course
due to a resurgence in M&A speculation in January 2016 as our report headed to the printing press. This began
on Jan. 6 with reports that activists including Corvex and potentially even Icahn Partners were buying shares of
TWX with the intention of demanding a sale/split-up. Other unsubstantiated rumors included that Fox was
considering taking another run at the Company as were others. While the flurry of speculation remains
unconfirmed, nonetheless TWX is a top-performing stock in the S&P 500 YTD at +9% versus (5%) for the Index.

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TWX Key Events, 2014-2016


Fox confirms it $90
offered to acquire Jan. 2016:
TWX for ~$85/share Rumors resurface
that TWX is an $85
activist or takeover
candidate. $80
2014: AAF July 2015:
profiles TWX Media stocks $75
at $67.13 crater on negative
commentary from
October 2014: Disney/ESPN
TWX holds analyst
August 2014: day, reveals HBO $65
Fox officially NOW plans
November 2015:
abandons bid
HBO reports 3Q15 $60
for TWX
June 2014: results and reduces
TWX completes long-term outlook
spinoff of publishing $55
business, Time Inc.

Reassessing the Case to Sell or Break-up Time Warner

The Time Warner boards apparent decision to refuse to negotiate with Fox rightfully has been
questionedespecially with the benefit of hindsight, as shares currently trade ~20% below the reported initial
offer price. But in our view, the initial ~12.6x TTM EV/EBITDA valuation offered by Fox (and significantly lower
following the decline in Foxs share price) did not fully reflect Time Warners top-quality content and HBOs
uniquely attractive position in the premium pay TV business. While we do not know whether TWX could have
extracted a satisfactory valuation if it engaged with Fox or conducted a full-fledged sale process, we believe
TWX still appeared better positioned to create long term shareholder value by executing its internal growth
strategies. The recent foreign exchange headwinds were essentially unpredictable, and in our view the
development of a bear market in media shares has overly punished TWX shares. Furthermore, additional
potential bidders like AT&T (DirecTV), Verizon (purchase of Vodafones Verizon Wireless stake), and Comcast
(TWC merger, subsequently blocked) were dealing with mega acquisitions of their own in 2014 and could be in
better position to participate in a TWX sale process at a later date.

Making the Case for an HBO Spinoff

While the Fox bid has demonstrated that a sale of the entire Company is not beyond the realm of
possibilities, we continue to believe the simpler first step to unlocking TWXs sum-of-the-parts intrinsic value
would be to spin off HBO as an independent company. While we believe all of TWXs assets are attractive, HBO
is the crown jewel. HBOs brand and tremendous library of owned content cannot be replicated. HBO is the
most desired, go-to network partner for top talent, and as detailed later the quality and breadth of HBOs slate of
wholly-owned original programming only continues to grow. As an underpenetrated, unbundled, premium priced,
ad-free network, HBO is uniquely well positioned to grow subscribers and profits in an otherwise mature to
declining domestic pay TV environment. HBO also has a vast global reach between its 90 million-plus
international subscribers and top-quality pay TV partners in some mature markets, with ~25% of revenue from
overseas and this proportion expected to grow over time.

If HBO were spun off as an independent company, we expect it would garner the highest valuation
multiple among its domestic cable network peers. AAF has also frequently highlighted the valuation disconnect
between TWX shares and Netflix to suggest the value that could be unlocked by a spinoff of HBO. We
recognize that HBO and Netflix still operate different business models and are in different stages of

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growth/monetization (as analyzed in greater detail later in this report), and HBO is unlikely to garner a valuation
multiple anywhere close to Netflixs current level. But we believe this comparison is still useful given the huge
gap. While Netflix continues to burn cash, even looking out at analyst consensus figures 2-3 years out, Netflix
trades 33x 2017E and 22x 2018E consensus EV/EBITDA. This is conservatively based on Netflixs current
enterprise value, while Netflix is currently burning ~$1 billion in cash per year ($921 million in 2015 with a similar
rate projected for 2016). By comparison, TWX currently trades at just 9.6x 2015E EV/EBITDA. Even assuming
an independent HBO were afforded a significant discount at 13.5x 2018E EV/EBITDA, we estimate HBO would
be worth ~$33 billion (enterprise value) or 50% of Time Warners entire current market cap after allocating
current net debt and corporate overhead across TWXs divisions, respectively. This implies the rest of Time
Warner is being valued at just ~8.3x 2015E EV/EBITDA versus an industry average closer to 10x. In contrast,
we believe a slimmed down TWX (i.e. Turner and Warner divisions) would command an above-average multiple
as a standalone entity.

Netflix vs. TWX Current Valuation ($ Millions)

Netflix Time Warner

Enterprise Value (MM) $ 40,368 Enterprise Value (MM) $ 77,070
EV/EBITDA (2015) 100.3x EV/EBITDA (2015E) 9.6x
EV/EBITDA (2016E) 80.1x EV/EBITDA (2016E) 9.2x
EV/EBITDA (2017E) 33.4x EV/EBITDA (2017E) 8.9x
EV/EBITDA (2018E) 22.0x EV/EBITDA (2018E) 8.0x
Source: FactSet consensus estimates for Netflix, 2/1/2016. AAF estimates for TWX.
Based on current enterprise values.

Responding to the Case Against a Separation

To date, CEO Bewkes and Time Warner management have expressed the firm belief that the Company
is best positioned for the future in its current structure. Their thesis has generally revolved around the idea that
there are positive synergies between the Warner studios and the Turner and HBO cable networks. Additional
factors cited by management or analysts include the reduced business risk profile and superior negotiating
power derived from the conglomerate structure. Some analysts have also cited the potential negative impact to
Turner from HBO more aggressively going over-the-top or unbundling, and thereby hastening the break-up of
the bundle and basic cable subscriber losses.

We believe these arguments fail to hold water. Historically, HBO has independently acquired and
produced nearly all of its original television content. HBO first broke with this tradition in 2012, picking up
The Leftovers from Warner in its first outside deal. At the time, HBO head of programming Michael Lombardo
suggested HBO had become more open to these deals due to growing competition for content. HBO
subsequently picked up a second Warner-produced series, Westworld, which stars Anthony Hopkins and Ed
Harris and is currently in production with release expected in 2016. But while TWX management has talked up
this growing partnership, two series in 4 years does not exactly make Warner a meaningful content partner for
HBO (and barely a blip on the radar screen for Warner Bros.). HBO does currently license Warners theatrical
film content as well, but this is just one of HBOs several film output deals. Furthermore, in theory all these
agreements are negotiated at arms length and any contractual transfer of value to HBO would negatively
impact Warner or vice versa. We see minimal incremental synergies from closer coordination as traditional
Warner and HBO programming have little overlap and Warner is best served by shopping its content across the

Regarding the relationship between HBO and Turner, we would note that their affiliate agreements are
negotiated independently and have very different economic characteristics (for both the networks and from the
MVPD perspective). Additionally, the argument that creating an independent HBO would excessively damage
Turner appears suspect. At this point, HBOs fledgling OTT product HBO NOW (detailed later) only targets
households who already have cut the cable cord and we would not expect any moves from HBO alone to
radically hasten the pace of cord cutting. And to the extent economic considerations at Turner may be holding

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back HBO from more aggressively pursuing the appropriate strategy to respond to the changing media
landscape, this only supports the thesis that HBO should be made independent. Furthermore, we believe any
incremental sub losses at Turner that could theoretically be attributable to HBO would be far outweighed by the
incremental shareholder value unlocked with the creation of a separate HBO stock.

HBO Spin Most Viable Iteration

We do not necessarily believe TWX is permanently wedded to the current corporate structure, and the
growing investor pressure could eventually force the management/board to reconsider the conglomerate
structure. In our view, a spinoff of HBO is the most viable option, as HBO is most independent and most likely to
garner a premium valuation multiple as a standalone entity. In theory, any form of splitting up the three business
units is plausible. The creation of an independent Turner stock could also have some benefits, such as providing
a separate cable network stock with which to pursue horizontal consolidation without fear that HBO (or Warner)
will be undervalued. But unlike Warner/HBO, Warner is a somewhat more substantial studio partner for original
content on Turner channels. Notably, both Turner CEO John Martin and Mr. Bewkes have emphasized growing
this link over time. The two divisions have also formed a closer partnership for producing childrens content. This
includes supplying leading programming on Cartoon Network (e.g. Teen Titans Go!) and leveraging Warner and
DC Comics iconic intellectual property and library content on the Boomerang channel/brand globally. In addition
to supporting more original programming, the close relationship with Warner can help Turner obtain full in-
season stacking rights to Warner shows to help improve the viewer experience. Nonetheless, we would temper
any talk of the synergies between Warner and Turner. Turner still remains a relatively minor source of revenue
for Warner and the results from partnering appear mixed at best to date. Turner recorded $526 million in
programming charges in 2014 at least partially attributable to series licensed from programming ($388 million
net of $138 in intercompany profits from licensing by Warner). TNT also recently revealed they will not move
forward with much-publicized development of a show, Titans, that was to be adapted by Warner from
DC Comics IP. Considering these factors, we would not necessarily preclude the possibility of another iteration
in the breakup of TWX.

Summary: To Spin or Not To Spin?

Positive Negative
Free up HBO to Pursue OTT Strategy Loss of theoretical synergies between Warner and HBO?
Upward revaluation of standalone HBO stock HBO OTT spurs cord cutting, sub losses for Turner?
Pursue strategic M&A without suffering Duplicative corporate costs
conglomerate discount
Optimize leverage across businesses
More directly incentivize management teams

Assessing the Outlook for HBO (19% of 2015E TWX Revenue; 24% 2015E Adj. OIBDA)
Time Warners Home Box Office (HBO) segment includes the flagship HBO premium pay TV service as
well as its lower priced sister service Cinemax. HBO has approximately 34 million domestic household
subscribers who receive access to the flagship HBO and a multiplex of up to 20 channels (including SD and HD
channels) and video-on-demand content. Cinemax counts another ~13 million domestic subscribers to its
multiplex which also includes a 15 channel multiplex, VOD, and a similar MAX GO Internet VOD offering.
Internationally, HBO is available in 65 countries and HBO claims to have 92 million international subscribers to
its channels including unconsolidated JVs (excluding 16 million subscribers in India that were transferred to
Turner in January 2015). Including international broadcast and pay TV partners who license HBO content (often
under the Home of HBO slogan), HBO reaches over 150 territories. The HBO GO platform is also available to
subscribers in well over 20 countries, offering Internet-delivered access to both current content and HBOs full
back library. In April 2015, HBO domestically launched HBO NOW, a SVOD service comparable to HBO GO but
not requiring a cable subscription, with limited partners including Apple.

HBO also generates revenue from original films, home entertainment sales and through domestic and
international syndication of its original programming. More recently, HBO has added an incremental revenue
stream by licensing some of its library content to SVOD services. Notably, in April 2014 HBO signed its first
domestic SVOD licensing deal, partnering with Amazon. The licensed HBO original content has a 3 year window

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from initial airing until availability on Amazon Prime Video on Demand and excludes some popular shows like
Game of Thrones. The content also remains available to HBO subscribers. Terms were not disclosed.

Historical Financial Performance

TWX initially disclosed HBO segment-level financials in February 2014 (dating back to 2011), and HBO
continued to post strong financial performance since we last profiled the Company in early 2014. HBOs revenue
grew 20% from 2011 to $5.4 billion in 2014, and increased another 4% YTD 3Q15 despite international
headwinds including foreign exchange. This has principally been driven by domestic subscribership growth.
Crucially, this mid single-digit annual revenue growth has been accompanied by ~180 bps in Adj. OIBDA margin
expansion from 2011-2014 (to a very healthy 34.8%) and another 80 bps expansion in 2015 YTD. This
translates to an 8% CAGR in adj. OIBDA from 2011-2014 and 6% growth YTD 3Q15.

HBO Historical Performance ($ millions)

2011 2012 2013 2014 2014 2015
Subscription Revenue $ 3,768 $ 4,010 $ 4,231 $ 4,578 $ 3,427 $ 3,560
Content Revenue $ 730 $ 676 $ 658 $ 820 $ 633 $ 643
Revenue (total) $ 4,498 $ 4,686 $ 4,890 $ 5,398 $ 4,060 $ 4,203

Adj. OIBDA $ 1,485 $ 1,639 $ 1,778 $ 1,881 $ 1,465 $ 1,553

Adj. OIBDA margin 33.0% 35.0% 36.4% 34.8% 36.1% 36.9%
Operating Income $ 1,402 $ 1,547 $ 1,791 $ 1,786 $ 1,392 $ 1,485
Operating Margin 31.2% 33.0% 36.6% 33.1% 34.3% 35.3%

At the October 2014 analyst day management laid out forecasts for a low double-digit CAGR in AOI
from 2013 to 2018, implying HBO underachieved in 2014-2015. However, we would note that the sharp rise in
the U.S. dollar has created a meaningful foreign exchange translation headwind since mid-2014. Looking
forward, at the current rates some of this headwind will carry into 2016. Additionally, a step up investment in
technology and marketing could dent earnings going forward. With these headwinds, it looks increasingly
unlikely HBO will reach its 2018 targets. However, as we detail in the following sections, we believe HBO has
multiple levers to accelerate growth including content investment and international expansion. Furthermore, as
we detail, the ongoing transition to an Internet delivered or OTT service could help accelerate subscribership
and revenue and we believe this transition could be more profit-enhancing over time than the market appears to

Competitive Position and Growth Outlook: Leading Programming Continues to Expand

The growing competition for high quality original program has been widely reported in recent years. This
includes greater emphasis on original scripted series from TV networks as well as the entry of SVOD services
like Amazon Prime, Hulu, YouTube, and most dramatically, Netflix into originals. Since its first foray into
originals 4 years ago, Netflix drastically expanded its original program spending to ~$5.7 billion in cash
programming costs globally in 2015 ($3.4 billion on an amortization basis) with over 450 hours of original
programming. Netflix forecasts 600 hours or original programming in 2016.

Over the years, AAF has detailed our disagreement with the investment communitys fears that the rise
of Netflix and other OTT services would derail HBOs growth. At this point, we believe this issue can be put to
rest. Netflix has continued to outperform (at least from a top-line perspective), exceeding 43 million domestic
subscribers at year-end 2015. However, this has not noticeably impeded HBOs steady growth over the past 5
years. Furthermore, as the following chart illustrates, the entire U.S. premium pay TV industry has demonstrated
similar durability in subscribership in the face of Netflixs rise despite the rest of the cable TV industry suffering
from net subscriber losses. This reflects a number of factors including the must have, high quality nature of
premium programming (especially HBO) and the fact that these services were effectively already offered a la
carte (not subject to unbundling risk) and remained underpenetrated (unlike mature cable networks).

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Premium Pay TV Network Subscribers, U.S. ( millions)

Source: Accenture, SNL Kagan

From a programming standpoint, HBO continues to build on its leadership position. As it stands today,
HBO offers over 2,000 hours of exclusive content including ~100 hours each of original scripted and unscripted
programming per year and growing. In 2015, HBO received 126 Primetime Emmy nominations, leading all
networks for the 15th consecutive year (Netflix received 34 and Amazon received 12). HBO ultimately won a
record-setting 43 awards. HBO continues to churn out new hits, while Game of Thrones has become the most
popular series in HBO history. Season 6 premieres in April 2016 with at least 2 more seasons already under
contract. HBO is still the most desirable place to go for top talent given its large, affluent subscriber base, the
associated large production budget, the ad-free and uncensored nature of premium channels, and HBOs
reputation for allowing a high degree of creative freedom. While competition for content does continue to grow,
we see no reason this positive feedback loop would erode for HBO.

In fact, looking forward, HBO appears to be strengthening its content lead with new projects that will
expand its thematic and demographic reach. For example:
Childrens Programming: HBO is pushing more substantially into childrens programming with the
launch of an HBO Kids branded thematic library. This push is being led by Sesame Street, which
just launched a 35-episode (30 min. per episode) season that will premiere on HBO for the first
News and Commentary: HBO has expanded its reach in edgy news and social commentary that
aims at younger demographics. This includes an expanded 4-year deal through 2018 with Vice,
which now produces a weekly news-oriented show; the addition of Last Week Tonight with John
Oliver from the former Daily Show correspondent; and a wide-ranging 4-year production deal
recently signed with Jon Stewart that will include short-form digital production and options on news
series and films.
Sports: In 2015, HBO signed a multiyear deal with leading sports commentator Bill Simmons to
launch a weekly talk show in 2016. Mr. Simmons will also develop new content including podcasts,
shows and documentaries and help expand HBOs original sports programming outside of boxing.

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Cinemax Original Programming: Cinemax, which historically has principally offered older films, has
begun to develop original programming and had relative success with series including Banshee and
The Knick.

Leading Film Slate Provides Flexibility

It also should not be overlooked that HBO offers the best-in-class premium film content among all pay
TV networks and SVOD providers. Films still account for a majority of viewing hours on HBO, and HBO spends
a whopping ~$1 billion per year on acquired films and series. HBO has first-run (post-theatrical and initial DVD
window) film rights with leading producers Warner, Fox, and Universal Pictures, and Summit. For example, HBO
has rights to a majority of the top 25 theatrical films from 2014 (based on domestic box office revenue).

The growth of SVOD services has made the bidding for film rights more competitive in recent years, as
exemplified by Netflixs aggressive bidding in December 2012 to win rights to Disneys first run theatrical content
from Starz beginning in 2016. However, Internet VOD (e.g. iTunes) availability has also arguably reduced the
value of these rights. As illustrated below, HBOs own data suggests that films are becoming less popular
among viewers as they migrate toward newer platforms that offer more content options. As of 2014, HBO
reported that theatrical films contributed 75% of total subscriber viewing hours on linear TV channels, but this
dropped to 49% on HBO on demand and just 26% online via HBO GO. More recently Netflix management has
also suggested the company is unlikely to pursue such blockbuster deals like Disney in the future. Netflix also
declined to renew their deal with Epix in 2015. To the extent that these rights become too expensive in the
future and/or HBO sees better value elsewhere, we would anticipate HBO to redirect some of this substantial
budget into original programming. If HBO were to reduce its film spending by ~50%, this would free up upwards
of $500 million for incremental programming spending. Notably, peers Showtime and Starz have been executing
on a similar strategic shift in recent years with favorable results.

HBO: Theatrical Films Share of Viewership by Platform

Source: HBO presentation, October 2014

Upside from Mitigating Piracy

HBO produces some of the most pirated content on the web. According to TorrentFreak, HBOs Game
of Thrones was the most downloaded (illegally) program in 2015 at over 2x the rate of the #2, the record-
breaking cable series The Walking Dead. In addition to illegal downloads, according to some researchers HBO
password sharing is endemic. HBO denies this; TWX CEO Jeff Bewkes has commented to the effect that he
was happy to see HBO GO password sharing, and in 2014 HBO CEO Richard Plepler called it not a problem
and a terrific marketing vehicle for the next generation of vehicles. While we sympathize with this view, we
believe it is time for HBO to crack down on the number of concurrent streams allowed per user. Netflix, for

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example, has long limited subscribers to 2 concurrent streams and just announced in January 2016 that it will
crack down on VPN use internationally. If technology (and an OTT product) allows HBO to meaningfully reduce
piracy over time, this could have a meaningful favorable economic impact.

Assessing HBO versus Netflix Financials

As it stands today, HBOs margin structure (35.3% operating margin YTD 3Q15) compares very
favorably to Netflixs. Netflix reported a 32.9% contribution margin (which notably excludes SG&A and
technology and development costs) in 2015 within its more mature domestic streaming business and just a
17.0% contribution margin for its total (domestic plus international) streaming business. Including all operating
expenses, Netflixs consolidated operating margin was just 4.5% in 2015. By comparison, even after adding
back HBOs share of TWX corporate costs (on a percentage of revenue basis), HBO would have reported
34.1% operating margins YTD 3Q15.

HBOs higher margin can be viewed from multiple angles. Obviously, we view this as a positive today as
HBO has a proven high profitability business model. While Netflixs domestic business continues to grow
margins as it gains scale, the long-term returns on its accelerated foray into international markets and original
content remain unclear. On the other hand, one could argue these high margins leave HBO vulnerable to attack
from Netflix and other OTT competitors like Amazon who are willing to spend profligately on content with far
lower profit thresholds. While there may be some truth to this, HBOs strong margins and growing revenue base
provide a buffer for TWX to continue to increase its spending on original content and new technology.

Additionally, it should be highlighted HBO has made the strategic decision to maintain a premium
pricing model (and higher margins) as opposed to maximizing subscriber growth. HBOs typical non-promotional
retail price ranges from $15-$20/month depending on the MVPD. MVPDs frequently market discounted
introductory rates for HBO, so the average effective retail ARPU is mostly likely somewhat below $15we
conservatively assume $13. By comparison, Netflix has 43.4 million paid streaming subs domestically as of
year-end 2015, paying an average of $8.50 per monthmeaning HBO is priced at >50% average premium to
Netflix on a retail basis. Netflixs higher subscriber count and superior growth rates should be viewed in this
context; were HBO to trade margin for revenue and significantly reduce its retail price to Netflixs levels and
market OTT, we suspect the U.S. subscriber base could easily grow ~50% in a few years time. Of course, we
would not recommend this strategy today nor does HBO appear to have any interest in using more discounting
in order to ramp subscriber growth. In fact, there is growing pressure on Netflix to increase its price given its
cash burn and we would expect Netflixs price to converge closer to HBO (retail price) over time. Just in January
2016, Netflix announced it will be phasing out the $8/month HD-streaming tier. Netflix could face heavy
subscriber churn if it attempts to raise prices more quickly.

Massive Potential to Recapture MVPD Margin?

We believe a closer look at HBOs operating model, particularly as it compares to those of Netflix and
other streaming services, highlights both HBOs current value and the potential incremental long term value that
could be created as HBO moves toward an Internet-delivered model. As it stands today, HBOs wholesale
model utilizing MVPD partners reduces net revenue (retail subscriber level revenue is not reported) but
increases reported margins, with most distribution, marketing, and customer service costs (above the revenue
line) outsourced to the distributors in exchange for a cut of the subscription revenues. As illustrated below, our
analysis suggests HBO is effectively paying nearly $5/month and ceding 37% of gross retail-level revenue to its
distributors. Of course, these distributors play a key role in marketing the product, delivering it to consumers
televisions, providing billing and customer support. However, this take rate, which translates to ~$2.0
billion/year, appears exorbitant. Adding in Cinemax, we estimate MVPDs generate $2.6 billion domestically (in
excess of the affiliate fees passed on to TWX) from selling HBO and Cinemax.

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Time Warner Inc.

Comparing HBO Retail and Net ARPU vs. Netflix

HBO subscription rev. (2015E, $MM) $ 4,761 Netflix U.S. Streaming Rev. (2015) $ 4,181
Assumed % domestic 80% Ending Paid Subs (4Q15) 43.40
Implied domestic subscription rev. $ 3,809 Avg. Paid Subs (2015) 40.91
Retail ARPU $ 8.50
Est. subs - HBO domestic (MM) 33.5
Est. subs - Cinemax domestic 13.0
Assumed monetization ratio (HBO vs. Cinemax) 2.5x
Implied % total sub. rev. from HBO domestic 69%
Implied HBO dom. ARPU, net (monthly) $ 8.20
Est. HBO dom. Avg. Retail Price $ 13.00
Implied MVPD take, HBO $ 1,929
Est. Cinemax ARPU, net (monthly) $ 3.28
Est. Cinemax Avg. Domestic Retail Price $ 7.00
Implied MVPD take, Cinemax $ 580
Est. U.S. MVPD Margin $ on HBO/Cinemax: $ 2,509

Given these dynamics, we believe HBO will be in a uniquely strong position as its carriage agreements
come up for renewal over the next few years. HBO subscribership and peak viewership have grown nicely, the
economics of which have not fully accrued to HBO as contracts typically extend 3-6 years and may include fixed
price elements. And unlike basic cable networks which are increasingly being viewed as a cost center for
MVPDs, TWX/HBO can directly point to the large incremental high margin revenue stream HBO generates for
its MVPD partners. As a result, we would expect the gap between HBOs wholesale and retail prices to narrow
over time.

HBO also appears ideally positioned to navigate the potential transition to an Internet-delivered model.
Unlike basic cable channels, HBO has an existing subscriber base that has opted to purchase HBO a la carte at
a premium price point. Additionally, because of the current wholesale pricing dynamics HBO (like other premium
networks) is in a superior negotiating position to be able to roll-out an Internet delivered platform with new
distribution partners without necessarily jeopardizing its current MVPD relationships.

Following the recent decision by premium pay TV rival Starz (as well as Showtime) to offer a standalone
SVOD service in partnership with Amazon, Starz CEO Chris Albrecht provided some commentary that helps
shed light on how premium pay TV executives view the risks these deals pose to their relationship with
traditional MVPDs:
The rule of thumb has always been new distributors dont get the same deal that the
old distributors get. And it seems fair to us and it seems a way that we can look at our long-time
partners and go, you want that rate, well let me give you that rate.
Starz CEO Chris Albrecht, UBS Media Conference, December 8, 2015

HBO NOW: First Step to OTT Model?

In April 2015, HBO took a major first step toward an OTT model by launching a new standalone
Internet-delivered product, HBO NOW. While HBO already offered the HBO GO Internet-delivered platform,
HBO GO is only available for cable customers who already subscribe to HBO. The new product features
essentially all of the content offered by HBO/HBO GO and is aimed at the 10 million-plus Internet-only
households. HBO NOW was initially launched exclusively with Apple (via Apple TV and iTunes/App store) and
Cablevision (Optimum) at a $15/month retail price. Subsequently, HBO NOW distribution has been expanded so
consumers can purchase it through the HBO NOW app on Apple, Google (Android), Amazon, and Roku
devices. While HBO has not disclosed HBO NOW subscriber numbers, management has stated they are
pleased with their progress and some analysts have speculated the app gained over 1 million subscribers within
the first few months. HBO has also noted that roughly half of the ~10 million U.S. broadband subscribers who do
not have cable already subscribed to Netflix, making them prime candidates for HBO NOW.

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We suspect HBO is retaining a significantly higher share of HBO NOWs retail-level revenue from its
new distributors Apple/Google, etc. than it does from its traditional MVPD partners. Even assuming Apple takes
its traditional 30% on in-app purchases (and we do not necessarily believe HBO did not negotiate a lower rate),
this translates to a far lower distribution cost (30% vs. our estimated 37% for traditional HBO) and higher gross
revenue for HBO ($10.50 versus $8.50) than under its traditional MVPD model.

While HBO has reached out to Internet providers to partner on HBO NOW, to date Cablevision and
Verizon are the only ISPs who have partnered with HBO to market HBO NOW to subscribers. We suspect
traditional MVPDs will remain hesitant to embrace HBO NOW, but will have little negotiating power to stop
HBOs plans. However, major broadband partners like Comcast and Time Warner Cable have begun to make
HBO more accessible to subscribers by offering them on top of skinny basic cable bundles.

Long-Term OTT Potential

Longer-term, we expect HBO to explore a true direct-to-consumer OTT model a la Netflix. This would
entail significant upfront investments in building customer service/billing infrastructure and streaming delivery
technology as well as related ongoing costs. HBO would also likely need to increase its marketing budget to
build consumer awareness. However, given the large wholesale price discounts that HBO currently cedes to
MVPDs, we believe these costs are not insurmountable. Netflix serves as a valuable proxy here. It is impossible
to compare Netflix to HBO domestically with precision, as we do not have full revenue or cost structures for both
companies domestic businesses. But customer service and payment processing costs are included in the
domestic streaming business $2.5 billion cost of revenues. With Netflix recording $3.4 billion in amortized
streaming programming expense during the year globally, this suggests OTT-related costs of revenue
ex-programming were unlikely to total much more than $500 million. Netflix spent another $318 million on
marketing the streaming service domestically. Additionally, Netflix spent $650.8 million across the company on
technology and development costs including payroll. Netflix has a large staff to develop proprietary technology
and its user interface, and Netflix also utilizes Amazon Web Services (AWS) cloud computing as well as
additional third parties. Allocating these costs to Netflixs segments proportionally to revenue, this implies
another $401 million in technology and development costs for the domestic streaming business. Adding these
costs together, this translates to ~$1.2 billion in OTT-related costs for a business with a comparable top-line to
HBO domestically.

Netflix Domestic Streaming Segment (FY15)

Subscribers (12/31/15) 43.4
Revenues $ 4,180.3
Cost of revenues $ 2,487.2
Marketing $ 317.6
Contribution Profit $ 1,375.5
Contribution margin 32.9%
Est. tech & development expense
(proportional to % consolidated rev.) $ 401.3
% rev. 9.6%

Est. G&A (proportional to rev.) $ 251.2

% rev. 6.0%

Est. Operating Income $ 723.1

Operating Margin 17.3%

Undoubtedly, Netflix is years ahead of HBO in developing its Internet platform and HBO would likely
need to invest incrementally upfront to develop and market its own product or pay a premium to outsource
certain operations. (HBO relied on MLB Advanced Media to launch the HBO NOW platform after previously
having challenges running HBO GO during peak times on its own.) But given our estimates that HBO could add
$2.5 billion in revenue by moving from a wholesale model to a $13 ARPU OTT model (assuming no change in

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subs), even with a substantially higher cost structure than Netflix this could translate to a vast improvement in
profit. For example, if HBO could capture 50% of this incremental revenue as profit while allocating the other
50% (equivalent to our estimate of Netflixs OTT costs), this would translate to a nearly 70% increase in
operating income. Subscriber growth or a higher ARPU offers incremental upside to this figure. A transition to
OTT would clearly present significant subscriber friction challenges, but this could be limited if HBO maintains a
dual (traditional MVPD and unbundled/OTT) model for an extended period of time. At the least, we believe even
the threat of OTT could improve HBOs bargaining power with MVPDs. TWXs decision to increase investment
in technology at HBO should be viewed in this light.

International Potential
Internationally, HBO still has a wide range of models varying from operating its own premium pay TV
network to SVOD (e.g. HBO Nordic) to licensing its content to major regional TV networks. While HBO does not
provide international segment financials, in October 2014 TWX disclosed that international accounted for 25% of
HBO revenue. The international share is likely far higher for HBOs content revenue line ($830mm TTM 3Q15)
versus subscription revenue ($4.7 billion) as HBO primarily licenses its original content to major pay TV
networks in the largest international markets (e.g. with Sky in the U.K., Germany, and Italy; with Orange and
Canal-Plus in France; and with Foxtel in Australia). For example, in 2014 HBO also disclosed it averaged only a
miniscule $0.13-$0.14 ARPU across its 90 million international subscribersreflecting the heavy concentration
in emerging markets that have less developed pay TV environments and where HBO has less original language
content. However, the Company is beginning to invest more heavily in local content and this ARPU should
steadily grow over time as pay TV takes hold globally. For example, HBO Latin America now boasts over 100
hours of original local language, locally produced content in Spanish and Portuguese.

Internet-delivered/OTT platforms should also enable HBO to reach more subscribers internationally,
especially in larger markets. HBO GO is already available in well over 20 countries and the Company is moving
forward with plans to offer standalone Internet SVOD services internationally. HBO Nordic, for example, already
has ~650k subs. HBO recently announced plans to launch a digital streaming SVOD service across Latin
America and the Caribbean, beginning with Colombia in December 2015. The Colombia service is offered at
$9.50 per month initially in partnership with broadband provider ETB. HBO management has also recently
suggested the Company could back away from its licensed programming model in some major developed
countries. For example, HBO plans to offer an independent streaming service in Spain by the end of 2016. HBO
is in no rush to cut ties with profitable licensing partners like Sky (current deal extends to 2020) and Bell in
Canada but this remains a distinct possibility longer term. This could allow HBO to capture more revenue,
spread technology costs across a wider platform, and better position the Company to bid for content rights on a
global basis.

In valuing HBO, we recognize the business is unlikely to be able to transition to a principally OTT model
or capture a majority of the estimated $2.5 billion in U.S. MVPD margins in the next few years. Internationally,
currency and macroeconomic factors remain headwinds and the international pay TV market will take time to
mature. Nonetheless, we see highly attractive upside for HBO even with modest assumptions. Our key
assumptions include:
HBO adds 1.5 million U.S. subscribers annually from 2015-2018, roughly in line with the estimated
1-2 million estimated average annual additions in recent years.
HBO domestic ARPU (net of distributors take) rises steadily from $8/month in 2014 to $10/month
by 2018.
International subscription growth averages 7.5% per annum.
HBO ramps up spending on originals and sports by nearly 50% from 2014 to 2018, partially funded
by modest growth in expenditures on acquired films and syndicated series of less than 10%.
Other expenses grow at mid single-digit annual rates as HBO invests in international operations and

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Time Warner Inc.

Based on these assumptions, we project HBOs Adj. OIBDA (equivalent to EBITDA in this case)
margins remain roughly flat and Adj. OIBDA grows at a 6.9% CAGR from just under $2 billion in 2015 to
$2.4 billion in 2018well below managements low-double-digit AOI growth target. This presents plenty of
upside from faster subscriber additions, lower programming growth, better operating expense controls, and/or
faster effective ARPU growth toward HBOs $15 retail price. As discussed, we believe HBO should be afforded
a premium multiple that reflects its best-in-class content, superior business model (to traditional cable) and
unique strategic flexibility as cable deals with the development of OTT services. Applying a 13.5x EV/EBITDA
multiple to 2018E EBITDA (versus Netflixs current 22x 2018 consensus EV/EBTIDA multiple), we estimate
HBOs intrinsic value could approach $33 billion.

HBO Intrinsic Value Estimate

(2018E, $ Millions)
Adj. OIBDA $ 2,419
multiple 13.5x
Enterprise Value $ 32,662

Turner Networks (35% 2015E Revenue; 55% 2015E Adj. OIBDA)

Time Warners Turner Networks division includes a leading portfolio of cable networks. In the U.S., this
includes TBS, TNT, CNN, HLN, Cartoon Network/AdultSwim, TruTV, Boomerang, and Turner Classic Movies.
Turner reaches over 200 countries around the world with these brands as well as local channels. TBS and TNT
consistently rank among the top 5 U.S. cable networks by ratings, while Cartoon Network consistently draws
leading total-day viewership among key demographics. Undoubtedly, Turner faces the same headwinds as the
broader pay TV industry in the U.S. Pay TV subscribership has been flat to slightly down since the last
recession, but declines accelerated in 2015 with over 1 million households cutting the cord during the first
3 quarters. However, as detailed in the following sections, we believe Turner Networks is relatively well placed
to manage these trends for several reasons.

U.S. Pay TV Subscriber Quarterly Net Change (millions)

Source: Wall Street Journal, MoffettNathanson

Top Sports Programming

Sports content remains a key differentiating factor in the increasingly competitive battle for viewers. The
live, must-have nature of sports is attractive from an advertising perspective and tends to garner premium
affiliate fees from pay TV MVPDs. Within the past few years, TNT and TBS have locked up a prime swath of

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sports rights extending well into the next decade in some cases, which we believe provides a strong foundation
for growth. These rights include:
NCAA Basketball: Turner signed a 14-year, $10.8 billion contract (alongside CBS) that provides it
with NCAA Championship (March Madness) games through 2024, including the final four games in
alternating years.
NBA: In October 2014, TNT participated (alongside ESPN and ABC) in a 9 year extension for NBA
rights that extends through the 2024-2025 season. TNT is paying $10.5 billion out of a $24 billion
package and will see its rights expand from 52 to 64 games per year in 2016.
MLB: Turner has an 8-year deal with Major League Baseball that extends through 2021, at an
average cost of $325 million per year. The deal also includes TV Everywhere/streaming rights for
cable subscribers.
Golf: Turner holds broadcast rights to the Professional Golfers Association tour through 2019,
including the PGA Championship.

New Management Leading Original Programming Initiatives at TNT, TBS

Time Warner has replaced much of Turners senior management in recent years and one of the new
teams top goals it to reinvigorate the original programming slate. Well regarded former TWX CFO John Martin
took over Turner as chairman and CEO in 2014, shortly after David Levy was appointed president. In November
2014, TWX also brought in former Fox head programmer Kevin Reilly as president of TBS and TNT and chief
creative officer for all of Turner. In managements view, TNT and TBS needed to more aggressively go after
younger demographics. This has included a refocus on edgy comedy with a younger skew at TBS. At TNT,
there is a refocus on high quality dramatic original series. Management wants to take more risks with
programming and also focus on multi-gender programming to balance the sports programming. While recent
viewership trends are mixed (roughly flat at TBS and down low double-digits at TNT in 2015), we believe this is
the rights strategy for the long term. Turner is also making it a strategic priority to maintain complete in-season
and even past-season stacking rights to its programming so they can offer all episodes on-demand (including
via TV Everywhere in some cases) to better allow viewers to catch up and to attract new viewers in-season.

News Division Improving

CNN has seen a ratings resurgence since 2014 under the able leadership of president Jeff Zucker.
CNNs primetime viewership was up 38% in 2015 to place it strongly as the #2 rated cable news network. Sister
network HLN (formerly Headline News) also displaced rival MSNBC as the third-rated news network in 2015
based on total day viewership among adults 25-54. Meanwhile, mobile was the most viewed
online news property with an average of 1.4 billion monthly views in 2015. We would also stress that the live
nature of news makes its advertising revenue relatively impervious to DVR skipping and provides some
additional resistance to cord shaving.

Multiplatform Views (Monthly) News Network Ratings, 2015

CNN 1.4B % Change % Change
Yahoo News 1.3B Primetime Y/Y Total Days Y/Y
Fox News 955mm Fox News 1,829,000 +3% 1,089,000 +13%
BuzzFeed 716mm CNN 730,000 +38% 493,000 +23% 701mm MSNBC 596,000 -1% 356,000 +2%
MSN News 660mm HLN 322,000 -5% 285,000 +10%
Source: comScore, Nielsen, CNN

Childrens Programming
There is growing competition for childrens programming, which is often viewed as must have for
parents. Turner offers popular childrens programming on Cartoon Network and Boomerang, while also offering
popular shows that appeal to adults on these channels later at night. As MVPDs evaluate slimmer cable
bundles, this should help keep the Turner Networks inside these bundles.

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Time Warner Inc.

International Growth
Turner has a highly attractive international footprint, with roughly 30% of revenue coming from abroad.
For example, Turner ranks as the top programmer in Latin America. Turner has also recently made efforts to
boost Boomerangs international distribution, rebranding the channel in many countries and improving its locally-
formatted programming. CNN is the most widely distributed news network globally, reaching over 293 million
international households with 44 global editorial bureaus.

Financial Outlook Remains Strong

Turner posted strong profit growth in recent years, with AOI growing at a 13% CAGR from 2008-2013 to
$3.5 billion due to ~850 bps of margin expansion on top of mid-to-high single-digit revenue growth. Looking
forward, in late 2014 Turner provided its outlook for continued low double-digit AOI growth over the next 5 years
to 2018. This outlook reflected relatively strong top-line visibility as Turner will have completed affiliate renewal
agreements for all its top 10 MVPDs between 2013-2016. The Company expects to record a very strong,
low-teens domestic affiliate fee growth in the coming years as fees catch up with its strong viewership and
growing premium sports content. Internationally, Turner sees high single-digit to low-double-digit growth driven
by subscribership growth. However, Turners 2018 forecast now looks more challenging as revenue growth will
be tempered by currency headwinds ($135 million YTD 3Q15 or 2% of Turner revenue), and the advertising
environment remains uncertain. Advertising revenue was roughly flat YTD 3Q15 (+0.5%), but TWX
management recently noted that advertising exceeded expectations in 4Q15 and expressed optimism for 2016.
There is also some risk from the acceleration of cable sub losses in 2015, although Turner has noted that its
channels have been included in the largest MVPDs new skinny bundles to date and they do not expect this to

Despite these headwinds, Turner managed to grow Adj. OIBDA by 14.6% YTD 3Q15 (excluding
restructuring and programming write-downs in 2014). This principally reflects the timing of programming costs
as the NASCAR deal lapsed in 2015. Turner will need to continue to control these expenses going forward if it is
to meet its ROI target, given the currency/ad headwinds. As the new sports contracts kick in and Turner ramps
up spending on originals at TNT/TBS, TWX expects programming expense growth to accelerate to double-digit
rates by 2017 before averaging out at high single-digits over the medium term. Turner has done a good job
tempering programming expense with operating and overhead cost savings in recent years. Turner reduced its
workforce by ~10% in 2015, enabling non-programming costs of revenue to remain roughly flat since 2012 and
SG&A to decline by 8% YTD 3Q15.

Turner Networks Financial Highlights ($ millions)

Fiscal Year YTD 3Q
2011 2012 2013 2014 2014 2015
Subscription $ 4,398 $ 4,660 $ 4,896 $ 5,263 $ 3,966 $ 4,007
Advertising $ 4,196 $ 4,315 $ 4,534 $ 4,568 $ 3,414 $ 3,431
Content & Other $ 572 $ 552 $ 553 $ 565 $ 409 $ 497
Total Revenue $ 9,166 $ 9,527 $ 9,983 $10,396 $ 7,789 $ 7,935
Programming costs:
Originals and sports $ 2,392 $ 2,498 $ 2,647 $ 3,069 $ 2,356 $ 2,112
Acquired films and syndicated series $ 906 $ 890 $ 946 $ 1,213 $ 1,002 $ 572
Adj. OIBDA $ 3,306 $ 3,597 $ 3,788 $ 3,331 $ 2,354 $ 3,484
Margin 36.1% 37.8% 37.9% 32.0% 30.2% 43.9%
Adj. OIBDA ex. write-offs & restructuring NA NA $ 3,954 $ 4,106 $ 3,059 $ 3,507
Margin NA NA 39.6% 39.5% 39.3% 44.2%

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Outlook and Valuation

Looking forward to 2018, in light of the ongoing challenges in the pay TV environment and international
economic headwinds (including currency), we project Turner will struggle to meet its double-digit 2013-2018 AOI
growth target. Our key assumptions include:
Annual subscription growth of 8% versus TWX guidance of low-teens domestically and high single-digit
to low-double-digits internationally.
Advertising growth remains subdued at 2% per annum.
Total annual revenue growth of ~5%.
Annual programming expense growth averages ~10% as Turner continues to invest in originals and
sports at 12%-plus average annual rates, partially offset by flat spending on films and syndicated
Turner continues to manage other direct operating expenses to low single-digit annual growth.

Taken together, our assumptions imply Turners adjusted OIBDA growth slows from over 10% in 2015
to an average of little more than 3% per annum over 2016-2018, reflecting over 200 bps of margin contraction.
We believe these assumptions conservatively reflect pay TV subscribership and viewership continues to decline
in the U.S. while international markets fail to rebound meaningfully. This leaves plenty of upside if these
conditions improve and/or Turner takes more aggressive steps to cut overhead and rein in programming
expense growth.

From a valuation perspective, clearly the recent developments in the media sector have depressed
network multiples. Turners leading peers (CBS, FOX, DIS, AMCX, DISCA, etc.) currently trade at an average of
~9.5x EV/EBITDA, representing valuation multiple contraction of roughly 1 to 2 turns of EBITDA over the past
year or so. We believe Turner warrants a premium multiple given its strong #1 or #2 market position in the most
attractive content categories of sports, news, and childrens entertainment. Management has proactively locked
up key sports rights well into the next decade, and is still only entering their second year of what appears to be a
prudent strategy of repositioning TNT and TBS to appeal to younger audiences. We believe Turner is relatively
well positioned to manage any transition to the Internet over time given the relative low cost of its networks
(compared to viewership) and the live, must-have nature of sports and news. Turner also has relatively strong
international exposure, where the pay TV business has yet to reach maturity. Nonetheless, we assume only a
market multiple of 9.5x EV/EBITDA in estimating Turners intrinsic value. Looking out to 2018, this implies an
enterprise value in excess of $47 billion.

Turner Networks Intrinsic Value Estimate

(2018E, $ Millions)
Adj. OIBDA $ 5,026
multiple 9.5x
Enterprise Value $ 47,742

Warner Bros. Outlook: Best Years Ahead (46% 2015E Revenue; 22% 2015E Adj. OIBDA)
As one of the original Big Six major studios with unique IP and leading production assets across film
and television dramas, we believe Warner is well situated to thrive in the new media landscape.

Unique IP Powers Strong Film Slate

The theatrical film business is generally characterized by high upfront costs and very unpredictable
results, which has kept all but a very few studios from gaining scale. However, Warner is as a top-2 film
producer year in and year out as its global reach, unique IP, and a broad average annual slate of ~20 films
allows it to produce relatively consistent annual box office revenue of ~$2 billion. Looking forward, we expect
Warners theatrical film business to grow over time as emerging market growth begins to outweigh the mature
domestic market. We are particularly comforted by the strong core slate based around proven franchises and
recognizable IP that Warner has laid out for the next 5 years. As illustrated in the following table, this includes at

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least 11 films based on DC Comics properties, including Batman v. Superman in 2016 and another Batman
movie tentatively scheduled for 2017. Additional franchise films include new Lego movies and a new series
developed by Harry Potter creator J.K. Rowling called Fantastic Beasts.

Warner Upcoming Film Slate Highlights

2016 2017 2018 2019 2020
Fantastic Beasts The Lego Batman Movie Fantastic Beasts Lego Brick Race Fantastic Beasts
Batman v. Superman Lego Ninjago Movie The Lego Movie 2 Shazam Cyborg
Suicide Squad Batman The Flash Justice League 2 Green Lantern
Wonder Woman Aquaman
Justice League

Warners film business has not been without its challenges, though. The decline in DVD and other home
video/electronic delivery sales in particular has been a drag on the theatrical business for many, many years;
Warners revenue declined from $3.5 billion in 2007 to $1.9 billion in 2014. But this headwind is shrinking and
although electronic sell-through has not fully replaced DVD revenue, it is much higher margin. The decline in
home video also has been partially offset by growing television licensing (licensing Warner movies) revenue
fueled by the global expansion of premium pay TV businesses like HBO as well as the surge of new SVOD
bidders like Netflix. Warners revenue from television licensing of theatrical product should surpass home video
in 2016.

Booming Demand for Original Television Programming & Gaming

Not only is Warner a leading film studio, but it has been the #1 TV production studio globally almost
every year looking back the past 15 years. Unlike programming networks, this makes Warner the beneficiary of
growing competition for original series. To give an idea of the demand growth, FX CEO John Landgraf recently
noted that their research indicates scripted TV content has grown by a whopping 94% just since 2009. Warner
has produced many of the leading shows on broadcast and cable over this time, and has projected its broadcast
and cable production would ~double from 2014-2019. The DC Comics IP also benefits Warners television
business; Warner had 8 different series based on DC properties on the air in 2015. Warner is already beginning
to reap the benefits of higher original programming demand as well as far more competitive bidding for
syndication rights due to the growth of SVOD services like Netflix. This is reflected in Warners recent results;
television product revenue expanded 26% from $4.1 billion in 2010 to $5.1 billion in 2014 and was up another
14% YTD 3Q15. This despite the steady drop in revenue from home video (DVD, rental) sources; television
licensing revenue specifically grew 13.6% in 2014 and was up 16.9% YTD 3Q15 to $3.5 billion.

Warner also has the largest video game business of any major studio and has seen outsized success
recently. Warner was the #1 videogame publisher YTD 3Q15 in the U.S. led by Mortal Kombat, Mad Max, and
new titles leveraging the Lego and Batman franchises. Videogame & Other revenue skyrocketed 67% Y/Y to
$1.7 billion YTD 3Q15. Warners strong IP allowed the Company to release 12 titles in the first 9 months of 2015
and should enable continued success in gaming. The strong DC Comics film slate should also drive consumer
products sales over time.

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Time Warner Inc.

Warner Bros. Historical Financial Highlights ($ Millions)

Fiscal Year YTD
2011 2012 2013 2014 3Q14 3Q15
Theatrical product:
Theatrical film $ 2,101 $ 1,894 $ 2,158 $ 1,969 $1,264 $1,302
Home video and electronic delivery 2,866 2,175 2,118 1,913 1,335 1,185
Television licensing 1,578 1,746 1,652 1,686 1,274 1,146
Consumer products and other 164 227 191 271 184 203
Total theatrical product 6,709 6,042 6,119 5,839 4,057 3,836
Television product:
Television licensing 3,371 3,652 3,628 4,121 2,967 3,469
Home video and electronic delivery 877 787 719 584 368 341
Consumer products and other 246 393 34 394 278 306
Total television product 4,494 4,832 4,690 5,099 3,613 4,116
Videogame & Other 1,435 1,144 1,503 1,588 1,041 1,735
Total Revenue $12,638 $12,018 $12,312 $12,526 $8,711 $9,687

Adj. OIBDA ex-restructuring $1,704 $1,642 $1,755 $1,807 $1,200 $1,325

Margin 13.5% 13.7% 14.3% 14.4% 13.8% 13.7%

Outlook and Valuation

In the Companys October 2014 analyst day, Warner chairman and CEO Kevin Tsujihara laid out long
term targets for high single-digit AOI growth. This was premised on generating operating leverage from low-to-
mid single-digit annual revenue growth combined with low single-digit annual expense growth. In our view, these
objectives look easily achievable, driven by a strong film slate and the long-term tailwinds from international
demand across film and television (including SVOD growth internationally). Revenue already grew 11.2% and
Adj. OIBDA increased 15% YTD 3Q15 (10.4% excluding restructuring charges) to $1.3 billion due to strong
television licensing and the additional benefit from unprecedented videogame success. Looking forward, we
project revenue growth moderates to an average of ~4% per year over the next 3 years. Assuming just slightly
more than 100 bps in Adj. OIBDA margin expansion from 2014 to 2018 (excluding restructuring costs in 2014),
this implies Warner Bros. Adj. OIBDA could approach $2.4 billion by 2018.

There are no pure play major studio comps to reference (Lions Gate, also profiled in this issue of AAF,
may be the closest but is far smaller), but analysts have historically applied high single-digit or low double-digit
EV/EBITDA multiples to the Big Six studios. We believe Warner deserves a premium to studios like Paramount
(Viacom) and Universal (Sony) given its superior IP from DC Comics and other franchises as well as its leading
scale in television. This has allowed Warner to produce more consistent results on an annual basis. As a
reference, Disney paid hefty premiums to acquire several IP-rich studios over the past decade including
$4.1 billion for Lucasfilm in December 2012, $4 billion for Marvel in 2009, and $7.4 billion (16.5x forward
EBITDA) for Pixar in 2006. Furthermore, we would expect multiples to expand over time as television/SVOD
becomes a bigger source of revenue and the home video/domestic film headwinds become less impactful to the
bottom line. Nonetheless, we apply a more conservative 10x 2018E EV/EBITDA multiple to derive a $24 billion
forward-looking intrinsic value (enterprise value) estimate for Warner Bros.

Warner Bros. Intrinsic Value Estimate

(2018E, $ Millions)
Adj. OIBDA $ 2,382
multiple 10x
Enterprise Value $ 23,820

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Time Warner Inc.

Valuation and Conclusion: Compelling Sum-of-the-Parts Discount

Time Warner has long been a favorite AAF media name due to its collection of premier content and
distribution assets including a top-two global studio, the leading premium pay TV network globally, and a
collection of unique cable networks. We have also viewed the Company as well managed under chairman and
CEO Jeff Bewkes, who has opportunistically spun out 3 companies since taking over in 2008 and steadily
guided each of the remaining businesses with a view toward the long term. However, we moved to the sidelines
from mid-2014-2015 as TWX shares ran up following Foxs $85/share bid for the Company (rebuffed by TWXs
board). With the subsequent frenzied sell-off in media stocks, TWX shares again look attractive. While TWX has
drastically outperformed (+9%) in 2016 following a resurgence in activist/takeover speculation, shares still trade
nearly 20% below Foxs 2014 bid.

The Fox bid provides us with comfort that the downside to TWX shares is modest, while we see far
higher upside to intrinsic value on a sum-of-the-parts basis. Looking out 3 years to the end of 2018, we believe
HBO could easily support a premium multiple compared to the broader programming industry of
13.5x EV/EBITDA. By comparison, Netflix currently trades at 22x consensus 2018E EBITDA. Notably, we
project HBO grows EBITDA by just $441 million or 22% from 2015-2018. This is well below TWXs double-digit
annual AOI goal, and barely scratches the surface of the $1.2 billion we estimate HBO could potentially free up
from carriage renegotiations/OTT transition in the U.S. Applying more typical market multiples to Turner
Networks (9.5x EBITDA) and Warner Bros. (10x EBITDA) and taking out corporate expenses (10x EBITDA;
conservative in a takeout scenario) and net debt, our forward-looking intrinsic value estimate is approximately
$116 per share. This translates to ~20% IRR looking out to the end of 2018. We would re-emphasize that our
projections assume significantly lower growth than TWX managements own 2018 forecasts at all 3 divisions.

TWX Sum-of-the-Parts Intrinsic Value ($MM)

Warner Bros. @ 10x OIBDA $23,820
HBO Networks @ 13.5x OIBDA $32,662
Turner Networks @ 9.5x OIBDA $47,742
Less 10x 2018E Corporate Expenses ($4,220)
Total: $100,005
Net Debt 2018E ($22,327)
Investments @ Book Value $2,154
Equity Value $79,832
Diluted Shares Outstanding (MM) 2018E 688
TWX Estimated Intrinsic Value per Share $116.03

Current price $70.44

Implied Upside 64.7%
Implied IRR @ 12/31/2018 inc. dividends 20.1%

With TWX shares trading far below Foxs ~$85 bid one and half years later, investor pressure appears
to be reaching the boiling point. With TWX reportedly drawing the attention of activist investors, we believe the
board will more intensely review its options in 2016-2017. A further split-up of TWX may be on the table, with
HBO a logical spin-off candidate. TWX chairman and CEO Jeff Bewkes has a tremendous track record of
separating businesses to unlock shareholder value (spinning of Time Warner Cable, AOL, and Time Inc.) and
despite his commentary, we do not believe he is wedded to keeping TWX in its current form long-term. The
synergies between Turner/Warner and HBO appear modest at best, and are far outweighed by the potential
upside from creating a standalone HBO. As we have analyzed, HBOs low wholesale ARPU versus its
$15/month retail price suggests HBO is ceding as much as $2.5 billion per year to its U.S. MVPDs. When
compared to Netflixs cost structure, this suggests HBO has plenty of room to increase profits over the long term

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by migrating to an independent distribution (OTT) model over time. The launch of HBO NOW in 2015 was a
modest first step, but Turner and Warners much tighter interconnections to the existing TV structure may be
holding back TWX from more aggressively developing an OTT model at HBO. As SVOD competitors like Netflix
expand their original production budget and rapidly move toward a global licensing model, this OTT imperative
only grows. An independent HBO could also look to form closer relationships with international premium pay TV
partners (including via M&A, JVs, and joint production). Interestingly, at least to the outsider it appears it was
only Foxs pursuit of Time Warner (July-August 2014) and subsequent investor pressure that led TWX to
accelerate its OTT timeline for HBO (HBO NOW was announced in October 2014).

If the TWX board fails to take action, TWX could again draw the attention of Fox or other peers. Many
industry insiders expect a wave of consolidation in response to MVPD consolidation and the OTT threat, and
TWX is an ideal dance partner as a content-rich media company without a controlling shareholder. Absent M&A
or corporate restructuring, we expect TWX to continue to return cash in excess of its outsized free cash flow
(close to $4 billion FCF expected in 2015). TWX has spent a massive $15.5 billion on share repurchases since
the start of 2012 (average price: ~$63/share) and steadily raised the dividend (2.0% current yield) while
maintaining a moderately leveraged (~3x EBITDA) balance sheet. We believe these repurchases will compound
value for long-term shareholders.

Risks that Time Warner may not achieve our estimate of the Companys intrinsic value include, but are
not limited to, general economic weakness impacting the Companys businesses; lost cable network distribution
or failure to reach distribution agreements on favorable terms; a downturn in advertising revenues; international
macroeconomic and foreign currency exposure; increased competition for network programming; failure to
achieve success in studio content production and original programming; loss of third party content at HBO; and
loss of key management personnel.

Analyst Certification
Asset Analysis Focus certifies that the views expressed in this report accurately reflect the personal
views of our analysts about the subject securities and issuers mentioned. We also certify that no part of our
analysts compensation was, is, or will be, directly or indirectly, related to the specific views expressed in this

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Time Warner Inc.


(Unaudited; in millions)

ASSETS Sept. 30, 2015 Dec. 31, 2014

Current assets:
Cash and equivalents $ 1,774 $ 2,618
Receivables, less allowances 7,322 7,720
Inventories 1,973 1,700
Deferred income taxes 184 184
Prepaid expenses and other current assets 886 958
Total current assets 12,139 13,180
Noncurrent inventories and theatrical film and television
production costs 7,294 6,841
Investments, including available-for-sale securities 2,154 2,326
Property, plant and equipment, net 2,569 2,655
Intangible assets subject to amortization, net 1,001 1,141
Intangible assets not subject to amortization 7,027 7,032
Goodwill 27,702 27,565
Other assets 2,788 2,406
TOTAL ASSETS $ 62,674 $ 63,146


Current liabilities:
Accounts payable and accrued liabilities $ 7,597 $ 7,507
Deferred revenue 607 579
Debt due within one year 199 1,118
Total current liabilities 8,403 9,204
Long-term debt 22,728 21,263
Deferred income taxes 2,006 2,204
Deferred revenue 293 315
Other noncurrent liabilities 5,567 5,684
Redeemable noncontrolling interest 29
Common stock, $0.01 par value 17 17
Additional paid-in capital 148,309 149,282
Treasury stock, at cost (45,048) (42,445)
Accumulated other comprehensive loss, net (1,392) (1,164)
Accumulated deficit (78,238) (81,214)
TOTAL EQUITY 23,648 24,476

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