February 5, 2016

Dear Partners,

Coho Capital declined 2.9% in 2015 compared to a gain of 1.4% in the S&P 500. It was a momentum
led market with only a handful of names driving the index higher. The top 10 performing stocks in
the S&P 500 averaged a gain of 44% for the year. Without these stocks, which constitute less than
10% of the S&P’s valuation, the remaining 490 stocks in the S&P 500 would have returned -2.7%.

As we write this, markets have lost their footing with volatility spiking dramatically, a development
which we welcome. In any purchase transaction it is always better to buy from a panicked seller.

Portfolio Activity

We were more active selling equities than buying in the second half of the year, selling shares in a
number of long-term (Yahoo, Softbank, and Cott) as well as short-term (Videocon) holdings.

We sold Yahoo because we lost confidence in the leadership of Marissa Mayer and her ability to
extract value from the core Yahoo business. Our Yahoo thesis was premised upon the Market’s
misappraisal of Yahoo’s ownership stake in Alibaba. Alibaba’s IPO last year highlighted the value of
its business and drove Yahoo shares higher. Over a 3.5 year holding period we realized an
annualized gain of 37%.

We did not do as well on our investment in Softbank, losing 29% over a period of 17 months.
Softbank has four primary stores of value, Alibaba, Sprint, Yahoo Japan and a domestic telecom
business along with hundreds of portfolio companies thrown in for free. We are of the view that
Sprint is permanently impaired. We do not think the company possesses sufficient liquidity to
survive the price war in monthly phone service. Meanwhile, Softbank’s domestic telecom business
has not fared much better, losing 35% of its subscribers last year due to aggressive pricing by
competitors and the loss of exclusivity with Apple phones.

We are still confident in Alibaba’s prospects but with Softbank’s component parts bleeding value we
thought the wisdom of investing in Alibaba through Softbank no longer made sense.

We invested in Cott Corporation because we though the market was not ascribing adequate value to
the company’s transformational acquisition of DS Services’ water distribution business. Shares
rerated higher with Wall Street willing to pay a higher multiple for a higher quality business. We
realized a gain of 58% in a little over a year.
We wrote about Videocon in our 2015 June letter and anticipated holding shares for years to come
due to Videocon’s attractive position in India’s high growth satellite television industry. Two things
became apparent to us in relatively short order with Videocon; one, management was too
promotional for our tastes and two, the economics of the Indian satellite television business were
not nearly as attractive as we had envisioned. For example, while we thought average revenue per
user (ARPUs) would trend higher over time due to consolidation, we realized that pervasive piracy in
India was likely to keep pricing sub-optimal for some time to come. We lost 22% in six months on
our position.

Selling is an underappreciated art in investing. Much verbiage has been spilled on buying but little
on selling. While it is painful to lock in a loss and be publicly wrong about an investment, we
endeavor to invest with the absence of ego. As John Maynard Keynes once quipped, “When the
facts change, I change my mind.”

Story Time

"The power of anecdote is so great that it has a momentum in and of itself. No matter how boring
the facts are, you feel inherently as if you are on a train that has a destination.” Ira Glass – This
American Life

One of the most significant challenges in investing is keeping simple narratives at bay. The human
brain is hard wired to embrace narrative. Story telling is a central feature of the human condition
and enables us to sustain culture, illuminate truths and bind us together in common cause. When
our brains are bombarded with signals, stories create patterns of the noise and surface meaning.

While stories help us make sense of the world, the allure of narrative interpretation leaves us
vulnerable to taking mental shortcuts. Risk management expert, Nassim Taleb referred to this
notion as the “Narrative Fallacy.”

“Explanations bind facts together. They make them all the more easily remembered; they help them
make more sense. Where this propensity can go wrong is when it increases our impression of
understanding.” – Nassim Taleb – The Black Swan

Let me tell you a story. Traditional television is dead. Streaming options, such as Netflix, Amazon
Prime, and Hulu will make traditional broadcast television obsolete. Cord cutting will make
appointment television a relic from a bygone era, as relevant as a radio fireside chat.
The supremacy of streaming television services over broadcast networks is a seductive narrative.
We can all agree that the unparalleled choice of streaming, coupled with commercial free viewing,
has sealed the fate of broadcast television. But what if the rush to frame a narrative around the
future of television obscures important facts?

An examination of television consumption habits supports a different view than conventional

wisdom. For example, television viewing has remained stable with the average person watching
5:14 hours of TV per day in 2014, relative to 4:24 hours in 2010, according to media ratings firm
Nielsen. What’s more, television viewing dominates media consumption by more than two to one,
with adults spending 16 hours of their weekly leisure time on smart phones, tablets and computers,
compared to 37 hours watching television.

Broadcast content remains a mainstay of America’s living rooms, with most families loath to give up
appointment viewing of sports programming, or big event programming such as the Academy
awards. While ratings for cable programming have declined precipitously, ratings for local news
increased 5% last year according to Nielsen. Compare this to cable news with viewership down 8%.

Not only are viewers not fleeing, advertisers continue to see television as the preferred medium to
reach consumers with local television ad revenue up 7% year over year in 2015. Perhaps this is
because broadcast television is available in 100% of households whereas cable advertising is only
available to subscribers.

In short, while broadcast television is a mature industry, it is not in terminal decline. Naturally, our
anti-consensus view prompted exploration of the broadcasting space, which led us to Sinclair
Broadcasting (SBGI).

Sinclair Broadcasting - The Revolution Will Be Televised

Sinclair has been a leading consolidator of local television over the past few years. The company’s
network television stations reach 39% of American living rooms with 172 stations in 81 markets.
Sinclair’s geographic reach gives the company sizable economies of scale in everything from
producing news content to negotiating retransmission fees. Sinclair is the leading affiliate for both
ABC and FOX stations and among the largest NBC and CBS affiliates.

Cord Cutting vs. Cord Shaving

The media narrative on television suggests consumers are cord cutting – replacing cable TV
packages with a broadband connection and a streaming service. While cord cutting is indeed a risk,
we are far from a tipping point. According to Nielsen, pay TV subscribers only dipped 0.1% in 2015
from the year prior. This is far from the dramatic decline portrayed by the media. We surmise that
rather than cord cutting, viewers are electing to cord shave – reduce cable TV content packages to a
“skinny bundle” of must have content. The economics of cord shaving make sense since consumers
still need a broadband connection to consume over the top (OTT) content such as Amazon Prime or
Netflix.

Perhaps paradoxically, cord shaving has highlighted the value of broadcast television rather than
minimized its relevance. Instead of paying for hundreds of arcane channels with niche content,
consumers are free to choose only the channels most important to them. Viewers are happy to part
with Man vs. Food but reluctant to give up local sports programming, news and primetime shows.
An acceleration in skinny bundle adoption is likely to concentrate value into a smaller number of
content providers. Current skinny bundle offerings highlight the core position of broadcast
television with six of the seven skinny bundle offerings containing local network television channels.

Our variant perception rests upon the premise that increasing adoption of skinny bundles is a net
positive for broadcast television rather than a negative. Commentary from Sinclair’s 2015 second
quarter conference call helps signpost this trend:

“It’s important to differentiate that we are not a cable network. I believe that we are and will
continue to be a part of every skinny bundle. ….I like our chances in the skinny bundle because that
means we have fewer competitors on the dial.”

As cord shaving gains momentum, broadcasting networks’ ad inventory will become even more
valuable by virtue of reduced supply of alternative television advertising outlets. This should
enhance the economics of broadcast network companies such as Sinclair.

Retransmission Fees Have De-risked Broadcast Television Business Models

One of the most significant shifts in the economics of television broadcasting over the past five years
has been the growth of retransmission fees. Retransmission fees represent the compensation paid
to television broadcasters from cable and satellite providers in exchange for the right to carry local
channels. The last few years have seen explosive growth in retransmission fees with aggregate
retransmission payments rising from $0.5 billion in 2008 to $6.3B last year. Despite the growth,
there is still significant potential for station operators to increase retransmission fees as legacy
contracts come up for renewal. Sinclair is particularly well-positioned to ramp retransmission fees
with approximately 75% of its cable/satellite subscriber base up for renewal this year.
Media research firm SNL Kagan projects retransmission fees will jump by two thirds over the next
five years to $10.3 billion. The case for continued growth in retransmission fees is strong with data
showing that broadcast television remains significantly under-monetized. For example, while
broadcast television accounts for 40% of television viewership it only accounts for 10% of affiliate
fees suggesting there is ample room to raise fees.

The Best Democracy Money Can Buy

Political advertising is a significant contributor to broadcaster revenues but varies with the election
calendar. While political advertising has always been an important contributor to television station
owners’ revenues, the Supreme Court’s Citizens United ruling in 2010 opened the flood gates. The
decision removed limits on political spending by corporations and unions resulting in a windfall for
local TV stations.

Political ad spending in 2016 is poised to shatter records. Wells Fargo projects $6 billion in
spending, a 16% increase over the 2012 election. With television spending on the election through
August of last year up 900% compared to the same period in 2012, we think Wells Fargo’s estimate
will be handily topped. The gusher of spending will disproportionately benefit TV stations, which
have typically captured 66% of political spending according to Wells Fargo. Sinclair should be a
prime beneficiary of increased political spending with stations in 21 state capitals and ten swing
states.

Spectrum Provides an Imminent Catalyst

Sinclair’s spectrum assets should provide additional lift to the shares and help provide downside
protection. The company believes it can monetize $2 billion worth of spectrum in the Federal
Communications Commission’s March 2016 auction. The numbers stem from a station by station
independent analysis conducted by investment bank Greenhill. Potential values could be much
higher. In 2012, Wells Fargo estimated that Sinclair could sell $3 billion worth of spectrum assets
without compromising cash flow. Sinclair has stated that selling $2 billion worth of spectrum will
only result in a 3% impact to broadcast cash flow.

There is of course no guarantee that Sinclair realizes $2 billion from its sale of excess spectrum, but
if estimates prove correct, the impact on shares would be significant equating to 69% of Sinclair’s
current market cap.
Compelling Valuation

Sinclair’s valuation is compelling. The company has guided to an average of $4.55 in free cash flow
per year over the next two years equivalent to a 14.9% free cash flow yield. (Due to the spike in
political ad revenues during elections it is best to analyze broadcasters on a two year basis) This is
more appropriate for a business in run-off. We think a 10% FCF yield is sufficiently punitive for a
business in flux, yielding a share price of $45+. Success in the spectrum auction could tack on
another 30-50% to share gains.

While the official narrative says otherwise, broadcast television is not going away any time soon.
The shift toward skinny bundles makes broadcast channels more relevant, not less. The acceleration
of retransmission fees, industry consolidation and increased political spend have made the
broadcast business much more predictable. While we find Sinclair shares attractive for the
underlying economics of the broadcast television industry, we like the fact that the FCC spectrum
auction will provide a near-term catalyst to realizing value.

Sinclair is an example of how the best investments are found where no one else is looking. After all,
we can only find mispriced securities if we face limited competition from fellow buyers. Yale’s Chief
Investment Officer, David Swensen, referred to such investments as “uncomfortably idiosyncratic
positions.” Such a position can make one uncomfortable, but if there is one thing we have learned
in over a decade of investing, it’s that “many great investments start with discomfort.” – Howard
Marks

Respectfully yours,

Jake Rosser
Managing Partner
Coho Capital Management