The NAB conference is the largest media event in the country, with an estimated 110,000 people in attendance. The Media Finance & Investor portion of that event received record attendance. This was not surprising to us. Many of the media stocks are near 52 week lows and there are many pressing, even complicated issues that face the industry, including the upcoming Spectrum Auctions, Over The Top concerns, Regulatory Issues, and concern about the current advertising environment, to name a few. Consequently, in just two days at the Media conference, investors had a full concept of the investment opportunity in the industry. As such, we believe that this amazing conference, headlined by leaders and experts in the industry, was one of the most important events for investors this year!

MEDIA OUTLOOK

BROADCAST TELEVISION
Investors appear to be avoiding economically sensitive companies given that the risk profile may have increased with the prospect of a slowing global economy and rising U.S. interest rates. Many of the broadcast stocks currently trade near 52-week lows and are down 15.1% from recent highs in the fourth quarter. But, do investors have it right? The fundamentals of the industry this year appear to be strong, with the influx of Political and Olympic advertising, and rising revenue contributions from Retransmission consent. In addition, it seems that investors are discounting the significant opportunity for broadcasters to sell Spectrum in the upcoming Auctions. There appears to be very few companies that have any valuation for the prospect of Spectrum Auction proceeds, save Entravision and Tribune Media. These stocks currently trade at a 11% premium valuation relative to the industry. In our view, stocks such as E.W. Scripps have virtually no value assigned to Spectrum proceeds, which offers investors an option value on the Auction.

BROADCAST RADIO
Two significant events in the latest quarter have significant implications for the rest of the industry: the CBS announcement that it is looking at options for its radio station group, and Cumulus Media’s effort to provide financial flexibility with a debt deal. These events allowed the radio stocks to gain some traction in the quarter. It has been long rumored that a combination of the two companies would offer the ability for Cumulus to structure a deal that would help to deleverage its balance sheet. In addition, it would allow the company to increase its penetration in key markets, allowing the new combined company to be an advertising platform play. We believe that Cumulus’ very high debt leverage may prohibit such a combination. As such, it is not surprising that the rest of the industry is trying to position balance sheets to take advantage of individual radio properties that may come to the market from the larger, leveraged players, including Clear Channel.

PUBLISHING
The Publishing index underperformed the general market in the first quarter, down 4.7% versus a gain of 2.3% as measured by the S&P
500. This performance falls in line with most of the media stocks. In our view, the industry suffered from concerns over the prospect of a
weak global and US economy. However, we believe that there are bright spots in the industry. First, McClatchy received a notification from NYSE that it is in compliance with listing standards. Second, the fourth quarter results in the industry demonstrated further progress on the industry’s transition toward a digital future. Probably, more importantly, Gannett finally received approval for the acquisition of Journal Media, which it quickly then completed. In our view, this sets the stage for further industry consolidation from this acquisition minded company. As such, we believe that the news flow in the industry has turned more positive. In our view, improving sentiment toward the economy could offer significant upside to this out of favor group, especially given the prospect that M&A activity is likely to continue at a heightened pace.

DIGITAL
The Digital Media sector suffered from several surprising announcements from SeaChange, including the termination of its CEO, missed fiscal fourth quarter expectations, and a lowering of expectations from one of the chief drivers of the company’s growth, its relationship with Liberty Global. We believe that the new management team has a lot of building to do, including its credibility and its ability to demonstrate a compelling business model to investors. Value investors are likely to take a look at the company given its large cash position, which equates to roughly $2.11 per share. Should the company deliver on expectations of cash flow growth, the company may return toward building its cash position in its fiscal second quarter.

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