A TOUGH QUARTER AHEAD?

We believe that the lackluster general economy and weak national television environment likely will position many media companies for a disappointing second quarter. National advertising is very economically sensitive and the weakness seems to have permeated into virtually all media sectors. However, economic prospects seemingly appear more favorable in the second half. In addition, CBS indicated that it is wrapping up its upfront market, a good step toward creating some stability in the network advertising environment, used as a benchmark for national advertising in virtually all mediums. In our view, the advertising environment should improve in the second half, creating a positive environment for media stocks. We encourage investors not to overreact regarding the prospect for second quarter disappointments and build positions in advance of the quarter results.

MEDIA OUTLOOK

TELEVISION
Despite current weak national advertising trends, investors seem to be given the broadcast stocks another look. Broadcast television stocks are the only media group that has performed well, up nearly 12% versus 0.2% for the general market. In our view, investors appear to be setting sights on political advertising in 2016, but also seem to be positioning for spectrum auctions, which appear possible in the first half of 2016. We are not surprised by the strong performance. Typically, television stocks perform well in the year prior to an Olympic and Election year. Over the past 25 years, the television stocks were up an average 25% in the odd number years and were up an average 12% in the even numbered, election years. The spectrum auctions likely will add a new wrinkle in next year’s stock performance.

RADIO
The pace of the sell-off in radio stocks accelerated in the second quarter, with the stocks down nearly 11% versus down roughly 3% in the first quarter 2015. We believe that investors looked to other industry segments with better near term fundamentals and shield away from highly leveraged companies. For the industry, there appears to be very little to get really excited about unless there is an upturn in the general economy and thus advertising. We find some exceptions to this, particularly in the shares of Townsquare and Salem Media. Townsquare has growing live events and direct services businesses that add luster to its fundamentals. Salem, on the other hand, has a compelling benefit from Political elections as the leading conservative, Christian focused company. We encourage investors not to write this sector off. When it comes back, it has a lot of opportunity to out-perform most media sectors.

PUBLISHING
The publishing stocks were the worst performing sector, down 26% versus the general market as measured by the S&P 500, up a modest 0.2%. In our view, some investors sold off newspaper holdings from recent spin-offs. But, some investors appear to be bracing for a difficult second quarter, which is likely to reflect weak retail print advertising. We believe that retail advertisers have been experimenting from time to time with various media alternatives given print circulation declines. However, there are very few forms of advertising that is as engaging as print total market coverage products. As such, some of the retail advertising tends to cycle back. Given the significant drop in publisher’s valuations, we believe that the stocks appear to be washed out.

DIGITAL
The media technology stocks underperformed the S&P 500 in the first half of the year, down 8.7% versus a gain of 0.2%, respectively. Importantly, not all media technology stocks suffered similarly in the quarter. SeaChange, for instance, increased 9% in the comparable time frame. The company was able to beat expectations for the first time in at least seven quarters. Management has recently revised its fiscal full year 2016 guidance to reflect what it knows now, not what it may achieve.

MEDIA BRIEFS

TELEVISION
6/30/15 TEGNA invests in The Video Call Center, LLC
TEGNA Inc., formerly Gannett Co., Inc., announced it has invested in The Video Call Center, LLC, a video technology and content company. The technology will be used by TEGNA Media, the largest independent station group of major network affiliates in the top 25 markets, reaching approximately one-third of all television households nationwide.

6/29/15 Sinclair Broadcast Group Joint Venture with former Walt Disney CEO Michael Eisner
The deal allows for the development of talk shows, game shows, court shows and comedy programs.

6/28/15 Airwaves Auction
Tom Wheeler, chairman of the FCC, said “There will be an incentive auction in the first quarter of 2016.” The earlier the auction the earlier broadcasters can monetize their spectrum holdings more quickly.

RADIO
6/23/15 Jelli Raises $21M for Its “AdWords for Audio”
Platform Jelli, an ad platform for radio broadcasters to digitize how they fill space on their airwaves, raised funds to grow its business as it prepares to expand to other kinds of audio services. Investors included iHeart Media and UMG.

6/23/15 HD Radio Patent Case Dismissed
A federal judge in Delaware has dismissed the long-running HD Radio patent infringement suit against 14 radio ownership groups after an apparent settlement. A related suit brought by HD Radio developer iBiquity Digital Corp. also was dismissed, suggesting a comprehensive but undisclosed resolution to this patent dispute.

4/01/15 Townsquare Media Announces Successful Completion of Refinancing Townsquare Media, Inc. has closed on an offering of $300 million in aggregate principal amount of its 6.5% senior notes due 2023. The company also has entered into a new $325 million senior secured credit facility, including a new seven-year, $275 million term loan facility and a new five-year, $50 million revolving credit facility.

PUBLISHING
6/29/15 Gannett Completes Company Split to Move Forward as the Nation’s Largest Local-to-National Media Company
Gannett Co., Inc. has completed a spin-off transaction, creating two publicly traded companies. The new Gannett, the largest and most diversified publishing company with a portfolio of 92 domestic media markets, Newsquest, a leading UK regional news publisher and flagship national brand USA TODAY, is led by chief executive officer Robert Dickey, former president of the Gannett U.S. Community Publishing Division.

6/08/15 McClatchy Reduces Debt $41.3 Million
The McClatchy Company announced that it had repurchased $41.3 million in aggregate principal amount of its 5.75% notes due 2017 at par plus accrued and unpaid interest in a privately negotiated transaction.

5/21/15 Tribune Publishing Company Completes Acquisition of The San Diego Union-Tribune for $85 Million
Tribune Publishing Company announced that it completed the acquisition of MLIM, LLC, owner of The San Diego Union-Tribune, as well as nine community weeklies and related digital properties in San Diego County.

DIGITAL
5/26/15 TiVo Acquires Cubiware to Increase International Distribution
TiVo Inc., a leader in the advanced television entertainment market, has acquired Cubiware, an innovative provider of cost-effective software solutions for emerging market Pay-TV operators. Cubiware will expand TiVo’s international presence in 25 countries and positions TiVo to offer a broader array of compelling, cost effective solutions for Pay-TV operators across the world.

5/13/15 Rovi Activist Engaged Wins Two Board Seats, Ousts Chairman
Engaged Capital, the activist investor with about 0.6 percent of the stock, criticized Rovi’s performance, strategy, costs, capital allocation, compensation and governance.

4/22/15 ARRIS to Acquire Pace plc for $2.1 Billion in Stock and Cash
ARRIS Group, Inc., a global innovator in broadband media technology, and Pace plc. have agreed that ARRIS will acquire Pace for aggregate stock and cash consideration of US$2.1 billion (£1.4 billion). The acquisition is expected to be accretive.

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