Broadcasting Industry Overview

EQU

ITY

RESE

ARC

H RBC Capital Markets, LLCDavid Bank (Analyst)(212) [email protected] Caplan (Associate)(212) [email protected]

Kristina Warmus (Associate)(212) [email protected]

February 4, 2014

Broadcasting Industry OverviewPrimer on the Broadcast TV BusinessThe Local Broadcast TV Business Has Been Structurally Transformed by the Continuously UpwardTrajectory of Retransmission Consent—We believe that local broadcast station retransmission consent,which currently stands ~$1/sub/month, is on a steady trajectory approaching ~$2/sub sometime in thenext four to five years.

• The broadcast industry is expected to see aggregate incremental revenue of nearly $4 billion over thisperiod. While some of this windfall will be redistributed back to the Broadcast Networks providingmuch of the primetime and sports content driving these fees, the positive impact on top line andmargins should be substantial.

Despite the Hype, Core Ad Trends Are Solid—Local TV ad growth should remain in the low to mid single-digit range for our investable time horizon. This should be driven by key ties to the automotive andpolitical advertising cycle, in particular.

In Broadcast TV, the Insatiable Desire for Scale Is Driving Consolidation—Scale is a key element togarnering greater negotiating leverage with the MVPD ecosystem. Further, scale is also a powerful toolin negotiating reverse compensation with the broadcast networks. Negotiating dynamics have arguablyaffected the smaller station groups most dramatically, as smaller station groups generally have the leastleverage. Less leverage for station owners is expected to result in both (1) lower retransmission consentpayments from distributors and (2) higher reverse compensation payments to the broadcast networksthat the stations are affiliated with.

• The ability to take advantage of “as acquired” clauses in retransmission consent agreements shouldalso continue to serve as a major driver of consolidation over the next several years.

Local TV Broadcasters Will Likely, Finally, Be Able to Monetize Their Spectrum—We remain confidentthe FCC is likely to commence the long anticipated Incentive Auction for broadcast spectrum some timein 2015. We would expect, at least a proposed if not completely finalized, FCC sponsored spectrum and"repack" plan at some point in 2014, providing a highly visible catalyst for potential value realization.

Aereo Risk Binary, but Even in Worst Case, We Believe Business Case Is Somewhat Protected andSpectrum Offers Downside Protection—If Aereo prevails in the Supreme Court case, which is expectedto be decided by June 2014, then the multi-year duration of existing retrans contacts, the time and costfor MSOs to deploy equipment to exploit Aereo technology including set-top boxes, and the potentialfor broadcasters to charge retrans fees anyway (even with an Aereo-type product) indicates to us thatany negative impact to the broadcast business case is likely more limited than one might think.

Priced as of prior trading day's market close, EST (unless otherwise noted).All values in USD unless otherwise noted.

For Required Conflicts Disclosures, see Page 48.

Table of Contents

Industry Overview ................................................................................................................ 3

Summary Investment Highlights ........................................................................................... 4

Key Investment Themes ....................................................................................................... 7

The State of the Industry Remains Robust ................................................................................. 7

Overall Advertising Trends Remain Strong Too ....................................................................... 14

Consolidation Has Been Rampant ............................................................................................ 17

Retransmission Consent: Capturing Underlying Content Value and Leveraging “As Acquired” Clauses ..................................................................................................................................... 22

Spectrum: Opportunity, Asset, and a Floor .............................................................................. 24

Key Investor Concerns ........................................................................................................ 32

Aereo – Loopholes, Litigation and Legislation Could Impact the Retransmission Consent Paradigm .................................................................................................................................. 32

Other Risks ............................................................................................................................... 34

Industry Notes .................................................................................................................... 37

Industry Structure .................................................................................................................... 37

Spectrum Summary .................................................................................................................. 38

Broadcasting Industry Overview

February 4, 2014 2

Industry Overview

Exhibit 1: Television Station Company Operations Comparisons

Ticker SBGI NXST GCI LIN GTN MEG*

Company Sinclair Broadcast Group Inc.Nexstar Broadcasting Group,

Inc.Tribune Company Gannett Co., Inc. LIN Media LLC Gray Television, Inc. Media General, Inc.

Price as of: 02/03/2014 $30.09 $46.77 $26.51 $23.62 $10.87 $17.24

2012 Segments/Revenues Sources

Total Company Revenue

Ad revenue is before agency

comnissions

Includes est. BLC contrib.

B'cast includes ad, retrans,

station website, and other.

Interactive inc'ls station

websites, LIN Digital, Nami

Media

Internet revenues associated

with stations' websites

Ad revenue is before agency

commissions; Digital related

to local websites

$1.0 bn $0.4 bn $1.1 bn $0.9 bn $0.6 bn $0.4 bn $0.4 bn

KEY OPERATIONAL METRICS (As Reported & RBC Estimates)

Number of Stations2

141 74 42 40 43 40 31

Percent Of Stations with Big 4 Affiliation4

63% 81% 57% 85% 74% 95% 93.5%

Percent Of HHs in Top 25 Markets 21% 10% 70% 73% 5% 0% 30%


Unique Nielsen Markets 71 43 33 31 23 30 28

With Duopoly+ 45 26 9 8 14 8 3

Percent Coverage (Undiscounted) 35% 13% 44% 30% 11% 6% 14%

Percent Coverage (after UHF disc) 20% 7% 27% ~23-24% 8% 4% 10%

Number of Stations2 164 108 42 40 43 55 31

Percent Of Stations with Big 4 Affiliation4 66% 80% 57% 85% 74% 96% 94%



Average TVHH per Station ('000)3 580 302 1,430 1,092 557 197 584

Unique Nielsen Markets 77 56 33 31 23 40 28

With Duopoly+ 49 35 9 8 14 11 3

Percent Coverage (Undiscounted) 39% 16% 44% 30% 11% 7% 14%

Percent Coverage (after UHF disc) 24% 10% 27% ~23-24% 8% 5% 10%

Other Assets Include (not necessarily

comprehensive):

Regional Cable News Channel

(Pending Acquisition)

WGN America, Antenna TV

(also has Publishing assets but

split pending)

Cable News Chans,

Publishing, Capitivate, &

CareerBuilder Lin Digital, Nami Media

Current Net Leverage Ratio1

4.0x 4.9x 2.5x 4.1x 5.5x 4.3x

Pro

-fo

rma

Act

ual

Total TV Revenue

Non-Political Ad67%

Political Ad12%

Retrans

15%

eMedia

5%

Other1%

Publishing59%

Digital

12%

Broadcastin

g25%

All Other

4%

Non-Political Ad77%

Political Ad14%

Interactive7%

Other2%

Non-Political Ad61.3%

Political Ad21.2%

Retrans

8.3%

Internet

6.2%

Other3.0%


Political Ad16.2%

Retrans

9.6%

Digital

2.5%

B'cast (TV Ad)27%

B'cast (Othe

r)9%

Publishing64%


Political Ad9.1%

Retrans (E)18.6%

Barter8.2%

Other5.1%

USD in 000s; SBGI based on 164 pro forma stations as of end of year 2014; 1Includes EBITDA for acquisitions that have closed where available; GCI based on full year 2013, year end expectation given where available; 2Includes stations operated under JSAs/SSAs/etc.; 3TVHH Data is for 2013-2014 television season; 4Only counts stations with a big 4 affiliate on secondary channel once Note: For SBGI station count includes satellites, while big 4 affiliation and top 25/50 market metrics exclude satellites. GCI pro forma numbers exclude KGWZ-LD, WBXN-CA, KTFT-LD; GCI Includes A Flagstaff Satellite Station In Station Count But Doesn't Count It As In Measure Of Duopolies; NXST Includes Low Power and Satellite Stations, LIN & GTN excludes Satellite stations but includes low power (assuming they are not satellites); Generally the assumption is made that coverage of a station equals total households or people in a DMA. Source: Company reports and press releases, RBC Capital Markets estimates


February 4, 2014 3

Summary Investment Highlights The Local Broadcast TV Business Has Been Structurally Transformed by the Continuously Upward Trajectory of Retransmission Consent: We believe that local broadcast station retransmission consent, which currently stands ~$1/sub/month, is on a steady trajectory approaching ~$2/sub some time in the next four to five years. According to SNL Kagan, the broadcast industry will see an aggregate incremental revenue of nearly $4B over this period. While some of this windfall will be redistributed back to the broadcast networks, providing much of the primetime and sports content driving these fees, we believe the positive impact on top line and margins of local station operators will be substantial. We are also not of the opinion that this is a one-time revaluation of the broadcast signal for cable distribution. In the context of content investment, the broadcast networks, which supply the local stations with much of their content, invest far more than top general market cable channels and have viewership levels that are far greater. The broadcasters also tend to have more “must have” programming. As a result, we think there is continued room for expansion of retransmission fees relative to typical cable affiliate fees.

Core TV Advertising Should Grow Low to Mid Singles over the Next Few Years, with Political Advertising Boosting that Figure Further: According to MAGNA GLOBAL, local broadcast TV advertising, including local and national spots, is still expected to grow 4.6% excluding political over the next several years. Political advertising, where local TV dominates in the advertising media landscape and is expected to do so for years to come, will typically add approximately 1,000 bps of advertising growth every “even” year, when elections are held in the United States. This political advertising is not entirely incremental, and we assume a “displacement” factor of 50% is needed to adjust for general market advertising that is pushed out. As a result, Y/Y comparisons that include political ads in even years, but exclude it in odd years, offer a somewhat muddled view of underlying fundamentals. On a two-year “stacked” basis (to comp political years against political years, and vice versa), we would expect TV broadcast revenues for the industry to grow low to mid single digits.

In Broadcast TV, the Insatiable Desire for Scale Is Driving Consolidation: Scale is a key element to getting greater negotiating leverage with multichannel video programming distributors (MVPDs). The more reliant the distributor is on a given programmer’s content, the greater the negotiating leverage that programmer will have in retransmission consent negotiations. An MVPD simply cannot let a major operator “go dark” across the MVPD’s footprint for competitive reasons. Further, scale is a powerful tool in negotiating reverse compensation with the broadcast networks. This is because the loss of a major distribution footprint for the networks has the potential to disrupt business, particularly the advertising business. Negotiating dynamics have arguably affected the smaller station groups most dramatically, as smaller station groups generally have the least leverage. Less leverage for station owners is expected to result in both (1) lower retransmission consent payments from distributors and (2) higher reverse compensation payments to the broadcast networks that the stations are affiliated with. In addition to the benefits from scale, the ability to take advantage of “as acquired” clauses in retransmission consent agreements, will also likely continue to serve as a major driver for consolidation over the next several years.

Spectrum Assets Provide Monetization Opportunities and Offer Longer-term Optionality on Use: Finally, local TV broadcasters will likely be given the opportunity to monetize their spectrum. We continue to believe the FCC will likely commence a long anticipated broadcast spectrum Incentive Auction sometime in 2015. We would expect at least a proposed if not finalized FCC-sponsored spectrum auction and "repack" plan at some point during 2014, which would provide a highly visible catalyst for potential value realization. We expect spectrum value to vary based on local TV broadcasters, in addition to, potentially, a variety of


February 4, 2014 4

technical and regulatory factors. We have laid out a valuation framework for spectrum on pages 26-30 of this report. We also believe that station operators will not face with an “all or nothing” proposition. It may be possible to monetize some of a station’s spectrum while retaining enough to continue to broadcast over the air. Today, it is possible for a station to sell its spectrum and share spectrum with another station, which would allow both to broadcast over the same band of spectrum. However, it may require a new standard to allow both stations to broadcast in “full HD” at the same time—sports, in particular, demands higher data usage than low-action content. Longer term, we think the direct use of spectrum could be more valuable to broadcasters. Again, this would be especially true with the potential for migration to a new digital broadcast standard (ATSC 3.0).

Reverse Compensation Creates Risk and Unknowns…But These Are Primarily Longer-term Concerns: One of the biggest financial unknowns for local broadcasters is the longer-term impact of reverse compensation on the financial model for broadcast network TV affiliates. While the affiliates should continue to benefit from material step-ups in retransmission consent over the next few years, the broadcast networks are fully aware of the monetization local stations are realizing. Much of this monetization is generated on the basis of network TV content, such as sports and primetime series, provided by the broadcast networks. Our sense from the channels is that, ultimately, the networks will claim a share of the retrans revenue stream in the range of 50-75% despite the likely protestations of local station groups. We also believe that the larger the station group, the closer toward the lower end of that 50-75% range the network’s share will be (and vice versa). That said, whatever risks exist will likely take years to play out entirely, and as a result, we do not think investors have enough information to incorporate them into the investment thesis yet. As we see some players in the industry negotiate these deals, we will probably get a better sense of how the dynamic plays out. However, if terms are not publicized, we will still need to wait for the impact to show through in company financials before we really know the full impact.

Aereo Risk to the Retransmission Consent Revenue Stream Is Binary, Potentially Damaging, but Unlikely: We do not view the Aereo service itself as a challenge to the broadcast business model. However, we think the ability of the MVPD universe to co-opt the technology for use as an end-run around retransmission consent revenue would be detrimental to the business model. While the broadcast networks could convert to cable networks, it is unclear what the fate of the network affiliates would be. The affiliates could be wrapped into the network cable deals, creating a series of local cable networks. On the other hand, the affiliates could simply be left out in the cold, forcing a reinvention of the local broadcast TV business model with the stations shifting back to an ad-supported model. A worst case for local station groups, where broadcast networks become cable channels without local affiliates, presents significant downside risk to the core local broadcast TV station business. However, we think such an outcome is unlikely (see previously published notes

1 and our discussion in the section entitled Aereo – Loopholes, Litigation and Legislation

Could Impact the Retransmission Consent Paradigm for more details) and would take years. Further, even if the Aereo model were to offer a retransmission consent “end-run,” it would probably take years to implement as it would likely require new set-top box technology and customer service support for MSOs to run parallel cable and Aereo-style solutions, as well as the expiration of existing retransmission consent agreements with MSOs. We do not believe the existing retransmission consent agreements with MSOs would be abrogated by a ruling favorable for Aereo. Additionally, spectrum should offer valuation support in such a case.

1 Media Investors Should Get Ready for More Newsflow On Aereo Litigation (May 23, 2012), Our Call with a Legal Expert on Aereo (July 19, 2012), and Aereo Implications Reach into the Cloud; Outcome Likely Favors Broadcasters (January 13, 2014)


February 4, 2014 5

We think support of localism from some regulators and policy markers gives these parties a vested interest in the viability of the broadcast model, since the existence of local TV stations is important to disseminate everything from typical, everyday news to evacuation information in case of emergencies. As a result, we suspect government intervention could occur under circumstances where a technological innovation might dislocate the subscription revenue stream for local broadcast TV. Further, our own regulatory channel sources have indicated to us that Aereo-type technology might conform to the letter of the law but not to the spirit of the law.

In other words, using one line of logic, Aereo may not be considered to be engaging in a public performance under certain interpretations—specifically in the context of the Cablevision DVR case where the 2nd Circuit determined a remote DVR service did not violate copyright law. On the other hand, we believe the intention of the Copyright Act was to capture such a system. A distinction can be drawn between Aereo’s point of view that public performance should be determined based on the actual transmission, while the broadcasters would argue the focus should be on the underlying work. Additionally, a legal Aereo, along with any company that adopts similar technology, would then face the question of whether or not it is an MVPD and subject to must-carry/retransmission consent rules. Further, a tie at the Supreme Court level, certainly a possibility given Justice Alito’s potential recusal, would result in each District Court ruling holding in each respective district. Given our belief that a national solution is necessary to provide an “end-run” around retrans for most MSOs, conflicting rulings at the District level could also be an “effective” win for the broadcasters.

In aggregate, we believe the broadcasters will eventually prevail from a business perspective. That said, Aereo is in the midst of a number of legal proceedings with the broadcast industry including a Supreme Court case, although all other outstanding litigation may be on hold until the Supreme Court rules. A negative outcome at any stage, even though it might not be a final determination of the ability for MVPDs to bypass retrans, could cause volatility in the stock price.

Undoubtedly, there will be other technological innovations and the specter of regulatory revisions from time to time in connection with an evolving media ecosystem. They too should create headline noise as well as real, longer term potential for disruption. However, we see the existing ecosystem as being fairly resilient for years to come.


February 4, 2014 6

Key Investment Themes

The State of the Industry Remains Robust TV, generally, and local broadcasting maintain a strong position in the media ecosystem, despite many noisy headlines.

Overall TV Viewership Is Strong

In the face of an increasingly fragmented media landscape that now includes online entertainment and social platforms, TV viewership has been shockingly stable.

Exhibit 2: Live TV Viewership Has Been Roughly Stable over the Last Several Years

4:22 4:23 4:22 4:24 4:18

0:16 0:18 0:21 0:22 0:250:10 0:11 0:13 0:13 0:140:15 0:14 0:12 0:10 0:10

0:00

1:00

2:00

3:00

4:00

5:00

3Q2009 3Q2010 3Q2011 3Q2012 3Q2013

Live TV DVR Playback Video Games DVD Playback

Source: Nielsen, RBC Capital Markets

The TV Station Business Also Remains Surprisingly Robust

The station business saw significant declines in revenue and profits leading up to and through the 2008 financial crisis. However, since bottoming in 2009, revenue and margins have grown steadily, driven by three key factors:

1. Secular growth in retransmission consent revenues (see page 22 for more details) 2. A significant recovery in automotive advertising, and closely related automotive sales,

off a 2009 bottom (see page 16 for more details), and 3. To a lesser extent, strong growth in political advertising, one of the largest local

advertising categories during election years (see page 17 for more details).


February 4, 2014 7

Exhibit 3: Top and Bottom Line Trends Turned Positive for the TV Broadcast Sector Following the 2008 Financial Crisis

($3)

$0

$3

$6

$9

$12

$15

$18

$21

$24

$27

$30

$33

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Advertising Revenues Retransmission Fees Network-Compensation Fees

Reverse-Retransmission Payments Net Income

Units in $B Source: SNL Kagan, Free Press research, RBC Capital Markets

We estimate that approximately 80% or more of TV station expenses are fixed costs, in the short term. Additionally, we believe that roughly 100% of relatively new and quickly growing retransmission consent revenues should flow through to EBIT. Because of the low variable cost component in the TV station business, we would expect significant growth in top line to offer strong growth in profits as well. This effect was seen over the past couple of years as margins have trended upward since 2008/09. However, we note that certain factors may result in realized incremental margins below 80%, such as growth in reverse compensation or M&A related costs resulting from the aggressive acquisition environment over the past several years. Further, a significant proportion of top line growth has been driven by acquisitions, and while scale presents attractive margin opportunities, it should be obvious that these businesses are not expected to be acquired at anything close to the fixed-cost based incremental 80% margin.


February 4, 2014 8

Exhibit 4: As Revenues Have Grown Over the Past Several Years, So Have Margins

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (YTDthru Q3)

Mar

gin

Op

erat

ing

Rev

enu

e Fo

r P

ub

lic S

tati

on

Gro

up

s ($

MM

)

Total Operating Revenues ($ MM) Average Broadcast Cash Flow Margin

Remember, margins are expected to be lower in odd years, given significantly lower political advertising revenue

Note: As of 3Q13. Includes Belo Corp., Gray TV, LIN TV, Nexstar Broadcasting, Sinclair Broadcast Group, Inc Source: SNL Kagan, RBC Capital Markets

TV’s position in the broader media ecosystem is surprisingly strong on both an absolute and relative basis, despite an ecosystem that has seen years of fragmentation. On an absolute basis, as demonstrated on page 7, live TV has held a relatively constant share of a person’s day. On a relative basis, as we demonstrate below, the share of ad dollars spend on TV, versus other media, aligns appropriately with the prevalence of TV in the consumer’s day.

TV Dominates Consumer’s Time and Advertiser’s Spending: The Ratio Between the Two Suggests Limited Vulnerability to Ad Spend Moving away from TV

Compared to other media, the share of time consumers spend watching TV roughly equals the share of media ad spend allocated to TV. While we would not argue with the assertion that the share of advertising spent on digital will likely increase, we believe that the most vulnerable forms of media are those that have a higher share of total ad dollars than time spent, such as print.

Exhibit 5: TV’s Share of Consumer Time and Advertising Expenditure Are Roughly Even

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Radio Print TV Online + OtherDigital

Mobile (nonvoice) Other

Shar

e o

f…

Time Spent Ad Dollars

Source: emarketer, RBC Capital Markets

TV Is Still the Primary Source of News for Americans

On an anecdotal basis, we have noticed that most investors appear skeptical that many people are still “watching broadcast news.” These investors generally do not seem to see a place in the ecosystem for broadcast news, considering the 24-hour news cycle and the


February 4, 2014 9

immediate and near-universal availability of more personalized news online. Given the constant availability of other news sources, the scheduled nature of broadcast news doesn’t appear to fit in an environment where news can break at any time.

In the instant gratification society we have arguably become, investors might doubt whether people will watch news programming pre-scheduled for a limited number of hours during the day. However, in our opinion, the data does not holistically support this assertion—with more adults citing broadcast television as their primary source of news compared to other forms of media.

Exhibit 6: Broadcast TV Remains the Dominant Primary News Source

Broadcast Television,

37.4%

Cable News Channels,

10.2%Radio, 6.0%

Newspapers, 10.1%

Internet, 17.2%

Public TV, 7.2%

Mobile, 1.6%

No Primary Source, 10.4%

Note: Share Of P18+, Data from TVB TV Basics Report last updated June 2012 (TVB Media Comparisons Study 2012. Knowledge Networks Inc. Custom Survey.) Source: tvb.org, RBC Capital Markets

Local News Is a Key Contributor to Station Revenue Within broadcast television, local broadcast stations are the primary source of news for more adults than the major broadcast networks. And, even broken out from the major broadcast networks, local broadcast stations are more frequently the primary source of news for Americans than cable news channels.


February 4, 2014 10

Exhibit 7: Local Broadcast Stations Remain the Primary Source of News When Compared to the Major Broadcast Networks and Cable News Channels

Major Broadcast Networks,

17.7%

Local Broadcast Stations, 19.7%

Cable News Channels,

10.2%Radio, 6.0%

Newspapers, 10.1%

Internet, 17.2%

Public TV, 7.2%

Mobile, 1.6%

No Primary Source, 10.4%

Note: Share Of P18+, Data from TVB TV Basics Report last updated June 2012 (TVB Media Comparisons Study 2012. Knowledge Networks Inc. Custom Survey) Source: tvb.org, RBC Capital Markets

Exhibit 8: Local Broadcast Stations Also Reach a Larger Percentage of Americans than the Major Broadcast Networks and Cable News Channels

Percent Of Americans Reached

71%

65%

38%

Local TV News Network TV News Cable TV News

Note: Based on February 2013 Nielsen data Source: Pew Research Center (journalism.org), RBC Capital Markets

A significant proportion of local TV station revenue is generated by news programming. This is likely not surprising given the importance of local broadcast TV news in the greater news landscape. In fact, the contribution to revenue from news approached 50% in 2011, and has risen over the last decade “along with the amount of news time stations air” according to the Pew Research Center.

2

2 stateofthemedia.org


February 4, 2014 11

http://stateofthemedia.org/2013/local-tv-audience-declines-as-revenue-bounces-back/local-tv-by-the-numbers/

Exhibit 9: News Accounts for a Growing and Substantial Portion of Local TV Revenue

0%

10%

20%

30%

40%

50%

60%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Shar

e O

f Lo

cal S

tati

on

Rev

enu

e

Source: Research Center (stateofthemedia.org); original based on RTNDA/Hofstra University surveys of news directors at commercial TV stations, RBC Capital Markets

It is, however, important to note that local news viewership has declined across the day in recent years, and that trend continued in 2012. However, despite declining viewership when we consider the more positive factors described above, we continue to think local broadcast TV news has an important role to play in the consumer’s life, and thus, should continue to receive a meaningful share of advertising dollars.

Exhibit 10: Local News Viewership Is Declining

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012

Loca

l New

s V

iew

ersh

ip (

MM

of

Vie

wer

s)

Morning News Early Evening News Late News

Notes from original Pew Research Center chart: “Numbers represent ABC, CBS, Fox, and NBC affiliates. March 2009 ratings are not comparable to the traditional winter sweeps period, February, and are not included here.” Source: Pew Research Center (stateofthemedia.org); original based on Nielsen Media Research data, RBC Capital Markets

Local Stations Are Also an Important Source for Other Key Local Information Beyond news, local broadcast TV stations are the primary source of a variety of other local information, such as traffic, weather, and sports.


February 4, 2014 12

Exhibit 11: Local Broadcast Stations Are Also the Primary Source for a Variety of Other Local Information

Primary Source For Local Weather, Traffic or Sports

Major Broadcast Networks,

14.6%

Local Broadcast Stations, 35.1%

Cable News Channels, 3.6%

Radio, 6.5%

Newspapers, 2.4%

Internet, 17.1%

Public TV, 6.7%

Mobile Device, 6.3%

Other/Don’t Know, 7.7%

Note: Share Of P18+, Data from TVB TV Basics Report last updated June 2012 (TVB Media Comparisons Study 2012. Knowledge Networks Inc. Custom Survey.) Source: tvb.org, RBC Capital Markets

Local Stations Also Offer Competitive Pricing to Network Spot TV pricing is competitive with Networks scatter, and according to TVB “the competitiveness has improved year to year in the four key dayparts where [spot and network scatter] go head-to-head: Early Morning, Early News, Prime and Late Night.”

3 In fact, the

aggregate price for a thousand viewers in each of the key overlapping dayparts is roughly equal for spot TV and Network scatter.

However, we would be remiss not to note that replicating a national buy through spot purchases is more complicated. What could be done with a single network scatter purchase would take 210 separate transactions in the spot TV ad market. Additionally, if an advertiser wished to only to focus on particular markets, it may have to pay a premium. For example, advertising in only the top 10 markets may demand a double-digit CPM premium over network scatter.

4

3 tvb.org 4 adweek.com


February 4, 2014 13

http://www.tvb.org/trends/SQAD

http://www.adweek.com/news/advertising-branding/cheaper-dozen-tvb-challenges-broadcast-efficiencies-138758

Exhibit 12: Spot Advertising Can Offer Attractive Pricing

$14.83$19.37

$44.81

$17.47

$96.48

$22.11$18.81

$37.06

$19.51

$97.49

Early Morning Early News Primetime Late Night Total 4 Dayparts

Network Scatter vs. Spot TV CPM

DMA Network

A25-54

Note: Updated For 1Q14; Data from TVB Analysis of SQAD National and Local Market Cost Estimate Data Source: tvb.org, RBC Capital Markets

Overall Advertising Trends Remain Strong Too The broadcasting business relies heavily on the local ad marketplace. Generally, we would expect local advertisers to be more likely to aggressively pullback in a recession, and this was certainly evident in local advertising in the late 2000s. Since 2009, local advertising has largely stabilized, but it has yet to recover to previous levels.

While we would not argue against the theory that local advertisers are exposed to more macro risk, we would also point out that industry expectations over the near term are actually fairly favorable, with MAGNA GLOBAL estimating that local broadcast TV advertising will grow 4.6%, excluding political advertising, over the next several years.

Ways Advertisers Buy Ads

National (Network) Ads—Purchases of advertising on national networks (such as the CBS or ABC Network—a local station group would not see these revenues).

National Spot Ads—Advertisers of “nationally distributed” products purchase advertising through local stations and buy across multiple markets.

Local Spot Ads—Local businesses buy advertising directly from local stations in a single market.

______________________ Source: Vogel, RBC Capital Markets


February 4, 2014 14

Exhibit 13: Local Ad Revenue Trends

CAGR 2009-15E

Local Cable TV (ex-political): 6.3% Local TV (ex-political): 4.7%

Local Broadcast TV (ex-political): 4.3% Local Media Advertising (ex-political): 0.1%

CAGR 2013-15E

Local Cable TV (ex-political): 4.7% Local TV (ex-political): 4.5%

Local Broadcast TV (ex-political): 4.4% Local Media Advertising (ex-political): 1.3%

2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Local Cable TV (ex-political) $4.0 bn $4.1 bn $3.8 bn $3.4 bn $3.9 bn $4.2 bn $4.4 bn $4.4 bn $4.6 bn $4.9 bn

Local Broadcast TV (ex-political) $17.3 bn $18.1 bn $16.2 bn $13.9 bn $15.0 bn $15.4 bn $15.9 bn $16.5 bn $17.1 bn $17.9 bn

Local TV (ex-political) $21.2 bn $22.2 bn $20.0 bn $17.3 bn $18.8 bn $19.6 bn $20.2 bn $20.9 bn $21.8 bn $22.8 bn

Local Media Advertising (ex-political) $97.2 bn $94.4 bn $82.5 bn $65.1 bn $66.0 bn $65.3 bn $64.8 bn $63.8 bn $63.9 bn $65.4 bn

YoY Growth - Local Cable TV (ex-political) 4.0% -7.6% -11.6% 14.1% 8.5% 4.1% 2.0% 4.4% 5.0%

YoY Growth - Local Broadcast TV (ex-political) 4.9% -10.6% -14.1% 7.7% 3.0% 2.7% 3.9% 4.1% 4.7%

YoY Growth - Local TV (ex-political) 4.7% -10.0% -13.6% 9.0% 4.2% 3.0% 3.5% 4.2% 4.8%

YoY Growth - Local Media Advertising (ex-political) -2.8% -12.6% -21.1% 1.4% -1.1% -0.8% -1.4% 0.2% 2.3%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

$0

$20

$40

$60

$80

$100

Gro

wth

Tota

l U.S

. A

d R

even

ue

(B)

Source: Magna Global, RBC Capital Markets estimates

Automotive advertising is a significant contributor to net time sales. At one station group, Sinclair, automotive advertising provided approximately 21% of advertising in 2012. During election years, political advertising is also a major contributor to revenue. Again using Sinclair as an example, in 2012 political advertising was responsible for 14% of total advertising revenue. Additionally, services, schools, retail, fast food, and paid programming are also meaningful contributors.

Exhibit 14: Contribution to Total Net Time Sales at a Local Station Group (SBGI)

Automotive21%

Political14%

Services14%

Schools6%

Retail/Department stores

5%

Other*40%

2012

Automotive21%

Services16%

Schools9%

Retail/Department stores

5%

Fast Food7%

Paid programmi

ng5%

Other*37%

2011

*Other includes all categories for which the contribution to net time sales during the period was less than 5% Source: Company reports, RBC Capital Markets


February 4, 2014 15

In recent years, total automotive ad spending in the US has grown considerably—from a 2009 low of roughly $12B to an estimate of $16.6B in 2013E.

Exhibit 15: US Automotive Ad Spending

$18.4B

$20.5B $21.0B$19.8B

$18.5B

$15.6B

$12.0B

$14.2B$15.3B

$16.1B $16.6B12%

2%

-6% -6%

-16%-23%

18%

7% 6%3%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

$0.0B

$5.0B

$10.0B

$15.0B

$20.0B

$25.0B

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E

Gro

wth

Ad

Sp

en

din

g

16.716.917.016.616.2

13.2

10.411.6

12.8

14.515.6

0MM

4MM

8MM

12MM

16MM

20MM

2003 2005 2007 2009 2011 2013

Ve

hic

le S

ale

s

Source: Kantar, TNS, AdAge Datacenter, Autodata, RBC Capital Markets estimates

Specifically, in the local broadcast station marketplace, an even more extreme drop-off in 2009 was evident followed by a significant recovery over the past several years.

Exhibit 16: US Automotive and Dealer Spending in the Spot Ad Market

255

221

0

$5.2bn$4.8bn

$5.1bn

$4.6bn

$3.7bn

$2.3bn

$3.4bn $3.5bn

$4.1bn

-7.7%

6.1%

-9.1%

-19.2%

-39.7%

51.5%

3.5%

16.6%

-60%

-40%

-20%

0%

20%

40%

60%

$0bn

$1bn

$2bn

$3bn

$4bn

$5bn

$6bn

2004 2005 2006 2007 2008 2009 2010 2011 2012

Gro

wth

Ad

Sp

en

din

g

Source: Kantar, tvb.org, RBC Capital Markets

Additionally, political ad spending has grown considerably in recent years, and we expect it to continue to do so, although the rate of growth is expected to decelerate somewhat, generally. It is also worth noting that growth in mid-term years is typically lower than in years with a presidential election.


February 4, 2014 16

Exhibit 17: Local TV Political Advertising

-15%

-10%

-5%

0%

5%

10%

15%

20%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E

Gro

wth

U.S

. Ad

Rev

enu

e (b

n)

Local Broadcast and Local Cable TV Political Advertising 2 Year CAGR - Local Broadcast and Local Cable TV Political Advertising

2010-2014E CAGR for Local Broadcast and Local Cable TV Political Advertising: 9.5%

Source: Magna Global, RBC Capital Markets estimates

Consolidation Has Been Rampant Several key factors have driven significant and rapid industry consolidation including:

1. the ability to drive retransmission consent revenue growth from the core value proposition; i.e., quality and popularity of programming relative to cable channels, and from increased leverage for larger station groups,

2. the ability to realize “automatic” step-ups in retransmission consent payment rates following an acquisition due to the presence of “as acquired” clauses in many existing retransmission consent agreements, and

3. relatively healthy fundamental advertising trends.

A number of major transactions were announced in 2013. Some of the most notable transactions are Meredith’s acquisition of three stations from Gannett, Sinclair’s acquisition of Allbritton, Gannett’s acquisition of Belo, and Media General’s acquisition of Young Broadcasting. That said, there are many other significant deals that were announced in 2013 and in the prior several years.


February 4, 2014 17

Exhibit 18: Transaction Comps

Release

Date

Closing

Date Buyer Seller

Deal Value

($ mil.)

Full Power

Stations

Class-A

Stations

Low Power

Stations

Avg. Broadcast

Cash Flow Multiple

23-Dec-13 Meredith Corporation Gannett Co.; Sander Media LLC 177 1 8.5x

23-Dec-13 Meredith Corporation Gannett Co.; Sander Media LLC 231 2 7.6x

19-Dec-13 Nexstar Broadcasting Group, Inc. Gray Television, Inc. 34 4 1 7.2x

20-Nov-13 Gray Television Inc.; Excalibur Broadcasting LLC Hoak Media LLC; Parker Broadcasting Inc. 335 19 1 9.8x

06-Nov-13 Nexstar Broadcasting Group, Inc. Grant Company Inc. 88 7 6.9x

25-Sep-13 Sinclair Broadcast Group, Inc. CP Media, LLC 90 7 1 8.9x

16-Sep-13 Nexstar Broadcasting Group, Inc. Citadel Communications, LLC 88 3 10.0x

29-Jul-13 Sinclair Broadcast Group, Inc. Allbritton Communications Company 975 8 2 10.0x

01-Jul-13 27-Dec-13 Tribune Company Oak Hill Capital Partners, L.P. 2,725 20 14 9.7x

17-Jun-13 Landover 5 LLC Mako Communications LLC et al. 46 5 40

13-Jun-13 23-Dec-13 Gannett Co., Inc. Belo Corp. 2,215 20 1 16 8.1x

12-Jun-13 Sander Media LLC Belo Corp. 102 6 16

06-Jun-13 12-Nov-13 Media General, Inc. Young Broadcasting LLC 685 16 7.9x

04-Jun-13 03-Oct-13 Sinclair Broadcast Group, Inc. TTBG, LLC 115 6 2 7.9x

24-Apr-13

Nexstar Broadcasting Group; Mission

Broadcasting Inc.

Communications Corp of America; White Knight

Broadcasting Inc. 270 14 2 6 7.9x

11-Apr-13 08-Aug-13 Sinclair Broadcast Group, Inc. Fisher Communications, Inc. 301 16 5 6 8.0x

28-Feb-13 22-Nov-13 Sinclair Broadcast Group, Inc. Barrington Broadcasting Group, LLC 370 22 2 7.2x

25-Feb-13 01-May-13 Sinclair Broadcast Group, Inc. Cox Enterprises, Inc. 99 5 6.6x

12-Feb-13 19-Mar-13 Comcast Corporation General Electric Company 1,793 25 1 2 8.6x

12-Feb-13 01-Jul-13 NRJ Holdings, LLC Local Media TV Holdings, LLC 59 2

12-Feb-13 12-Feb-13 Comcast Corporation LIN TV Corp. 602

03-Dec-12 01-Dec-12 Sinclair Broadcast Group, Inc. Newport Television LLC 54 1 8.4x

05-Nov-12 01-Feb-13 Nexstar Broadcasting Group, Inc. Newport Television LLC 35 2 1

04-Sep-12 06-Dec-12 Journal Communications, Inc. Landmark Media Enterprises, LLC 215 1 10.6x

19-Aug-12 01-Jan-13 Mission Broadcasting, Inc. Newport Television LLC 60 2 8.5x

09-Aug-12 30-Nov-12 Sinclair Broadcast Group, Inc. Bay Television, Inc. 40 1 8.2x

19-Jul-12 01-Dec-12 Nexstar Broadcasting Group, Inc. Newport Television LLC 226 9 1 3 9.0x

19-Jul-12 01-Dec-12 Sinclair Broadcast Group, Inc. Newport Television LLC 413 8 9.8x

19-Jul-12 03-Dec-12 Cox Enterprises, Inc. Newport Television LLC 235 4 8.5x

07-May-12 12-Oct-12 LIN TV Corp. New Vision Television, LLC 342 15 1 4 9.7x

02-Apr-12 10-Aug-12 NRJ Holdings, LLC International Media Group, Inc. 45 2 1

12-Dec-11 30-Mar-12 CBS Corporation WLNY Holdings, Inc. 55 1

02-Nov-11 01-Apr-12 Sinclair Broadcast Group, Inc. Freedom Communications, Inc. 385 8 8.7x

03-Oct-11 30-Dec-11 E. W. Scripps Company McGraw-Hill Companies, Inc. 212 4 5 10.0x

27-Sep-11 19-Jan-12 NRJ Holdings, LLC WTVE-TV Associates, LLC 30 1

08-Sep-11 01-Jan-12 Sinclair Broadcast Group, Inc. Cerberus Capital Management, L.P. 200 5 2 8.5x

26-Jan-11 01-Jul-11 Meruelo Group NBC Universal, Inc. 40 1 2

03-Jan-11 05-Apr-11 Southeastern Media Acquisition, Inc. Community Newspaper Holdings, Inc. 74 4

Source: SNL Kagan, RBC Capital Markets

“Super Group” Formation and Implications The local broadcast TV station industry is relatively concentrated. According to Free Press, “thirteen companies control 85 percent of the ABC, CBS, FOX and NBC stations in the nation’s 25 largest media markets *while+ ten companies control 55 percent of all local TV advertising revenues.”

5 While consolidation is not a new phenomena within the local

broadcast TV industry, in the past “consolidation generally involved the national networks buying the major affiliates in the largest markets,” while in the past several years the aggressive acquirers have been non-owned and operated station groups, largely focused on “small and medium-sized markets.”

6 Aggressive acquisitions by these non-owned and

operated station groups have formed so-called “super groups”.

5 Turner, S. Derek. Cease to Resist: How the FCC’s Failure to Enforce Its Rules Created a New Wave of Media Consolidation. Free Press. October 2013 6 Turner, S. Derek. Cease to Resist: How the FCC’s Failure to Enforce Its Rules Created a New Wave of Media Consolidation. Free Press. October 2013


February 4, 2014 18

For an idea of scale, since the beginning of 2011, five “super groups”—Sinclair, Gannett, Media General, Nexstar and Tribune—have announced approximately $10B in total combined acquisitions, according to SNL Kagan and based on our calculations.

Exhibit 19: Deal Volume Has Accelerated Substantially in Recent Years

Total Value of Full Power Station Acquisitions ($B)

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

1992 1995 1998 2001 2004 2007 2010 8/23/13

Tota

l Fu

ll P

ow

er T

V S

ales

($

B)

Total Number of Full Power Stations Acquired

0

50

100

150

200

250

2002 2004 2006 2008 2010 2012

Notes provided by Free Press—For Broadcast TV Deals: Values “Values exclude construction permits, partials, debt for equity swaps, recapitalization and restructuring (e.g., Tribune’s 2007 restructuring is not included in the total). 2013 values include deals through Aug. 23.”; For Broadcast TV Deals: Full-Power Stations: “Values exclude recapitalization and restructuring (e.g., Tribune’s 2007 restructuring is not included in the total). 2013 values include deals through Aug. 23.” Source: Free Press (original based on SNL Kagan and Free Press research), RBC Capital Markets

Some of the largest groups have national reach that meets or exceeds that of the O&Os of the major broadcast networks. For example, Sinclair reaches 39% of TV households and Nexstar reaches 16% of TV households. For comparison, CBS’s O&O stations reach 38% of the country, while ABC only reaches 23%. That said, for the local station groups, such as Sinclair, the focus of the “big 4” station footprint is largely outside the largest markets. Reach for additional groups is presented below.

Exhibit 20: Household Coverage

39%44%

30%

14% 16%

0%

10%

20%

30%

40%

50%

60%

Sinclair Tribune Gannett Media General Nexstar

"Super Group" Reach

23%

38% 37% 36%

23%

32%

37%

27%

0%

10%

20%

30%

40%

50%

60%

ABC CBS FOX NBC

Network O&O Reach

All Stations

Primary Network Affiliates

Note: “Super Group” reach based on pro forma estimates presented in Exhibit 1, please see Exhibit 1 for details on assumptions. Network O&O reach based on the most recent annual filing for the respective company. For NBC assumed total NBC affiliated TV station reach equaled sum of individual markets and added in Nielsen household reach for DMAs where NBC owned a Telemundo station but not a NBC station. For CBS subtracted out household reach from total company coverage has provided in each DMA where CBS had a presence not through a CBS Network station. For FOXA assumed sum of percent of households reached for each market as provided in the K equaled total FOX station coverage, FOXA appears to have a FOX Network affiliated station in every market where it has an O&O presence. Source: Company reports and press releases, Nielsen/, RBC Capital Markets estimates

Beyond the three key drivers of consolidation outlined above, we believe another industry dynamic has been responsible for the urgency with which station groups have consolidated: reverse compensation. Growing retransmission consent revenues have not gone unnoticed by the broadcast network partners, and the broadcast networks have looked to capture their share of this value creation. We believe that smaller station groups are generally the most


February 4, 2014 19

weakly positioned in negotiations with both MVPDs and their broadcast network partners. This lack of leverage could result in smaller groups realizing a significantly smaller level of retransmission consent “profits,”

7 than a larger group would generate from the same station.

In late 2012, Perry Sook, chairman, president and CEO of Nexstar, described his vision for the future of the broadcast station industry in an environment where leverage is incredibly important:

I would think within two to five years, you'll see the emergence of what I call three or four super-groups, and I think you'll see a couple emerge sooner rather than later…. Those companies will continue to drive the business, while the companies that are sub-scale will look in the mirror and choose not to be a house by the side of the road as the parade passes by.

8

We have certainly seen the industry continue to move in this direction since the end of 2012, and we do not see competitive dynamics that put larger groups at a significant advantage to their smaller counterparts from going away.

Consolidation Could Be Limited by Regulatory Factors, but Workarounds May Be Available. National household coverage is limited to 39%, and many of the larger station groups are near or approaching this limit. Additionally, local ownership of multiple stations in a single DMA is restricted.

Historically, regulatory policies have made these caps “soft”. First, coverage through UHF stations currently only counts 50% towards the national ownership cap, meaning a station group holding only UHF stations could have coverage reaching 78% of TV households. Second, TV broadcasters do not need to consolidate directly. We think broadcasters could use outsourcing arrangements, such as JSAs or SSAs, to expand nationally without having the stations considered in the national or local ownership caps. JSAs and SSAs (defined in the side bar) are not “attributable” to ownership limits (on the other hand, LMAs are “attributable” if the owner of one station “programs more than 15% of another… in the same market”).

9 While these structures are less efficient than outright ownership, we think

economic leakage is minimal.

However, we think regulatory policies that allowed workarounds of ownership restrictions could, but they will not necessarily be eliminated. The FCC recently issued a Notice of Proposed Rulemaking considering an elimination of the discount for UHF stations

10 and

consideration of whether or not to make JSAs/SSAs attributable (i.e. to count them in regards to ownership limits) continues

11. Furthermore, the NPRM’s proposal regarding the UHF cap

indicates that only combinations that resulted in a group exceeding the National Ownership Cap that already existed, had approval from the FCC, or an application pending, would be grandfathered—essentially putting a temporary hold on any new deals that would cross this threshold.

7 We refer to the net between retransmission consent revenues received and reverse compensation payments made as retransmission consent “profits” 8 broadcastingcable.com 9 SBGI 2012 10K 10 FCC 13-123 11 broadcastingcable.com

Local Marketing Agreement (LMA): An arrangement where a company provides “programming services”* to the owner of a station. For example, a station group could buy a block of time on a station it does not own, program the station during that time period, and sell the ads. Joint Sales Agreements (JSAs)/Shared Service Agreements (SSAs): An arrangement to provide “non-programming related” services such as “sales, operational and administrative services.”* ______________________ Sources:* SBGI 2012 10-K, broadcastingcable.com

An outsourcing agreement may allow the operator to act as if they are the station owner in many respects including, in some cases, negotiating retransmission consent.


February 4, 2014 20

http://www.broadcastingcable.com/news/local-tv/rise-station-super-groups/43886

http://www.broadcastingcable.com/news/washington/fcc-wont-close-proceeding-joint-sales-agreements-attribution/60658

Our sense is that the UHF discount will be eliminated, but that outsourcing agreements will probably persist in some form, but not necessarily the same, allowing workarounds of national and local ownership restrictions. If the UHF discount is eliminated and the cap is effectively set at 39%, future consolidation opportunities for some of the larger groups may be limited. However, we are uncertain of the final cap. We do note that the cap could be raised given additional competition to broadcasters from new sources (e.g. Internet) and as a concession to broadcasters who would oppose the elimination of the UHF discount. Additionally, outsourcing agreements may continue to be available as a workaround. Under such a scheme, we think even relatively large groups may have an opportunity for continued growth in existing markets. On the other hand, even if regulatory restrictions were lifted, the opportunities to expand into the largest markets, at least as a “Big 4” affiliate, are probably limited because the broadcast networks typically own their stations in these markets.

Eventual Regulatory Outcome Uncertain But Under Most Scenarios, Opportunities Still Likely Exist For Even The Larger Groups. There remains uncertainty regarding where the true limits on ownership will eventually settle. While the UHF discount could be eliminated and/or JSAs/SSAs could be made attributable, the overall cap could also be raised.

Additionally, for groups that have exhausted their ability to expand national reach, there may be opportunities to expand within existing markets, which would offer unique scale advantages such as sharing a news department. FCC rules generally permit owning two stations if "at least one of the stations is not ranked among the top four stations in the DMA (based on market share), and at least eight independently owned TV stations would remain in the market after the proposed combination."

12 Further, “a party may request a waiver of

the rule to acquire a second or third station in the market if the station to be acquired is economically distressed or not yet constructed and there is no party who does not own a local television station who would purchase the station for a reasonable price.”

13

With JSAs/SSAs not currently counted toward local ownership, station groups have the ability to capture at least some of the synergies associated with having a duopoly, even if the requirements for ownership of multiple stations are not met. However, there have been cases where the use of such a structure did not appear sufficient to permit ownership or divestiture if the asset was chosen “in the interest of time”. For example, press reports indicated that the Justice Department opposed or was not yet “comfortable” with the sale of WSYT to Cunningham.

14 As a second example, the Justice Department recently forced the

divestiture of KMOV in St. Louis to a non-affiliated third party as a condition for completion of the Gannett/Belo merger. If the divestiture had not been forced, the group would have owned the top two stations in the market—we think this type of scenario is one where the Justice Department would be more likely to get involved.

15 Additionally, some press reports

have indicated the FCC is taking a closer look at such agreements, and that decisions could be delayed as this is done.

16

We do not think it is necessarily realistic to think that a station group could achieve duopolies in every market where it owns a station. The company may not want an independent, non-Big 4 station, and the holders of the current affiliate relationships may not be willing to sell at an attractive price (nor may the owners of any independents, for that matter). However, we think it is possible that, over time, station groups could swap stations

12 fcc.gov; also permitted if "the service areas – known as “Grade B signal contours” – of the stations do not overlap" 13 SBGI 2012 10-K 14 wsj.com 15 dealbook.nytimes.com 16 Two items from tvnewscheck.com: January 10, 2014 and January 23, 2014.

Existing Ownership Restriction Highlights

Local Radio/TV Cross Ownership: Ownership limits “based on a sliding scale that varies by the size of the market”. At the high end: if there are 20 or more “independently owned… full power TV stations and radio stations, major newspapers, and the cable system in the market… an entity can own up to two TV stations and six radio stations (or one TV station and seven radio stations).”

Local TV Multiple Ownership: A group can own two stations in a DMA if “1) the service areas… do not overlap; or 2) at least one of the stations is not ranked among the top four stations in the DMA (based on market share), and at least eight independently owned TV stations would remain in the market after the proposed combination. “

National TV Ownership: A group can cover up to 39% of households, “under this rule, TV stations on UHF channels (14 and above) count less than TV stations on VHF channels (13 and below).” ____________________ fcc.gov/guides/review-broadcast-ownership-rules


February 4, 2014 21

http://www.fcc.gov/guides/review-broadcast-ownership-rules

http://online.wsj.com/news/articles/SB10001424127887323623304579057251488006852?cb=logged0.7767849625088274

http://dealbook.nytimes.com/2013/12/16/justice-department-to-clear-gannetts-acquisition-of-belo-with-one-condition/

http://www.tvnewscheck.com/article/73226/wheeler-vows-to-take-closer-look-at-ssas

http://www.tvnewscheck.com/article/73494/report-wheeler-putting-brakes-on-ssas



so that each group gives up a single station to create a duopoly in another market—or affect multiple transactions to achieve a similar effect.

Local Efficiencies, Purchase Synergies, and Benefits of Scale Within a single market, a TV broadcaster may be able to expand margins through localized economies of scale. While there are local ownership restrictions that must be considered, discussed above, operating two stations versus one in a single market can offer meaningful synergies. This scale can be achieved either by owning two stations in a market outright (which is attributable), effectively through an LMA (which we assume is generally attributable), or through an outsourcing agreement SSA/JSA (which we assume is generally not attributable, though this assumes certain conditions are met).

Synergies from the creation of a duopoly come from “marketing, programming, overhead and capital expenditures.”

17 For example, one estimate of potential cost savings from the

creation of a duopoly is presented below for the Yuma-El Centro DMA.

Exhibit 21: Example of Estimated Cost Savings from Creation of a Duopoly

Potential Cost Savings From Creation Of A Duopoly In Yuma-El Centro DMA

$1,000,000

$75,000

$618,000

$55,000

$247,000

$0

$250,000

$500,000

$750,000

$1,000,000

Combining CAPEX Combine Facilities(rent/utilities)

Share TechnicalOperations

Employees (e.g.engineering, newsproduction staff)

Share Joint SalesStaff

ShareAdministration

Personnel

Total Annual

Source: FCC Filings, RBC Capital Markets

An acquisition of another group may result in cost savings/purchase synergies above the station level through the elimination of redundant functions such as corporate overhead. We can look at larger acquisition to get a sense of achievable cost synergies. For example, when announcing the acquisition of CCA and White Knight Broadcasting, Nexstar management cited synergies of $12.5 million on an incremental revenue base of approximately $100 million, and further noted that the “majority” of synergies are from cost savings.

18 This

transaction resulted in the creation of two new duopolies (19 stations acquired in total).

Retransmission Consent: Capturing Underlying Content Value and Leveraging “As Acquired” Clauses Some station groups negotiated “as acquired” clauses in their existing retransmission consent agreements. The qualifications to be covered under “as acquired” clauses vary by

17 SBGI 2012 10-K 18 Company reports, conference call


February 4, 2014 22

contract, and in some cases may include stations operated under LMAs or other outsourcing arrangements, such as SSAs and JSAs, while in other cases they may not be included.

These agreements state that the acquiring station group is able to “step-up” the retrans rate of any station it has acquired to its existing rate with the distributor (MSO, satellite or telco). As a result, there is effectively a gap between the forward-looking revenues of the company the seller is divesting and the company the buyer is acquiring. This offers synergies beyond the more typical sources: scale and back office savings. Even if the opportunities for national coverage expansion have been largely exhausted by a station group, there may still exist some opportunity for acquisitions to be used to realize “as acquired” step-ups in markets where the group already owns one station—although regulatory decisions could potentially either increase or decrease possible acquisition opportunities. Exhibit 23 demonstrates the possible step-up seen in a sample acquisition. We would generally expect the gap in per-sub rates to be smaller when the acquired group is closer in size to the acquirer, since the negotiating power of the two separate entities would likely be more similar than in cases where the scale of the acquiree and acquirer differ greatly.

Exhibit 22: Hypothetical Example of “As Acquired” Clause Effect

Independent Under Larger Group

Acquired Subs 5.1 mm Acquired Subs 5.1 mm

Retrans Rate $0.70 Retrans Rate $0.87

Annual Retrans $43mm Annual Retrans $53mm

Retrans ∆ $10mm

Apply a new rate of: $0.87

Source: SNL Kagan, RBC Capital Markets estimates

Off of a nominal base, retransmission consent revenues have grown considerably over the past several years, and we expect this growth to continue at a double-digit pace as rates catch-up to fair value (justified by highly rated primetime programming, important local news, and sports content that provides the consumer “rabidity factor” for the channel).

Exhibit 23: Estimated Industry Retransmission Consent Revenues Have Grown Considerably

$0.5 bn$0.8 bn

$1.2 bn$1.8 bn

$2.4 bn

$3.3 bn

$4.3 bn

$5.1 bn

$5.9 bn

$6.6 bn

$7.1 bn

$0.0 bn

$1.0 bn

$2.0 bn

$3.0 bn

$4.0 bn

$5.0 bn

$6.0 bn

$7.0 bn

$8.0 bn

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Ind

ust

ry R

etr

ansm

issi

on

Re

ven

ue

Source: SNL Kagan estimates, RBC Capital Markets

Timing of retransmission consent renewals can be important. In cases where a single MSO makes up a large percent of the subscriber base, a meaningful step-up could drive materially accelerating growth in a particular period.

When discussing the opportunity for growth from retransmission consent revenue, we would be remiss to not mention the corresponding payment back to the broadcast network for

Retransmission Consent: Retransmission consent payments are fees paid from MVPDs (e.g. Comcast), for the right to show a local broadcast station’s feed on its system. For example, in Seattle, DirecTV has to pay SBGI for the right to include the local ABC feed (KOMO) in its package.

Reverse Compensation: Reverse compensation payments are fees paid by a local station group to a broadcast network as part of the affiliate agreement. For example, SBGI has to pay ABC for the right to show the ABC Network’s national programming feed on its local station (includes the right to sports, and premium primetime content).


February 4, 2014 23

programming. These payments may be, but we believe generally are not, directly tied to retransmission consent payments received. We expect these payments, known as reverse compensation, to grow significantly over the longer term. However, many large industry players should benefit near term from a long duration for many of its outstanding affiliate agreements.

Spectrum: Opportunity, Asset, and a Floor Before we proceed with a valuation of a station’s spectrum, we think it is important to stress that we do not expect all station groups to participate as sellers in the upcoming spectrum auction and reverse auction. However, we still think it makes sense to use the last 700MHz spectrum auction as the starting point for estimating the value of spectrum because it provides granular pricing by region, not available since. Additionally, we recognize that parties that do not sell into an auction may be doing so because they believe the auction undervalues their spectrum. While this may certainly be true, maximizing self-monetization beyond the traditional broadcast business may rely ‘ancillary services’/broadcast overlay. Given uncertainty around and importance of a new standard for fully realizing the benefits of ‘ancillary services’ as well as the relative nascent stage of broadcast overlay, for our purposes we focus on the more defined but potentially more conservative valuation provided from prior transactions.

It is possible to broadcast the signal of a single TV channel over less than 6 MHz, which would allow a broadcaster to partially monetize spectrum space through other services. However, it is important to note that while a broadcaster could still provide a signal with only a portion of its spectrum, it would either have to send a lower quality picture or fewer channels (assuming no technological improvements are implemented). We do not believe that a station would currently be able to broadcast a high definition (HD) signal for a wide range of content with less than 50% of its spectrum—and high action events, such as sports, may require 75% plus—under the current standard. The exhibit below shows how a broadcast signal can be split between channels. In each case, the primary channel is being delivered as an HD signal. Also, note that WRC of Washington DC is also sending a mobile TV signal.

In Exhibit 24 below, we demonstrate how a single stick of spectrum can be used to broadcast multiple channels. Under the current standard, 6MHz of “space” in the spectrum allows the transmission of roughly 18Mbps worth of data. A change in the standard could allow the same MHz of “space” in the spectrum to transmit more data.


February 4, 2014 24

Exhibit 24: Usage of One Band of Spectrum to Deliver Multiple Channels

6MHz = 18Mbps

6MHz = 18Mbps

Primary Stream Of Non-Sports Content (PBS show "This Emotional Life") in 720p HD

Primary Stream Of Non-Sports Content (PBS show "This Emotional Life") in

Secondary Chan. (SD)

Tertiary Channel (SD)

Quarternary Channel (SD)

Secondary Channel (SD)


Primary Stream Of Sports Content (NFL football game) in 720p HD

Primary Stream Of Sports Content (NFL football game) in 1080i HD



Mobile DTVNo Additional Channels

Source: FCC, RBC Capital Markets

Additionally, there are a couple of recent cases where local stations/groups appear to be actively looking at channel sharing as a possible tool to facilitate spectrum monetization in a potential auction. In LA, a PBS station and a multilingual station are testing spectrum sharing in an experiment sponsored by CTIA-The Wireless Association—success could make it easier for local channels to partially monetize their spectrum in a broadcast spectrum auction.

19

Additionally, recently LIN Media has indicated it would consider selling a portion of its spectrum and participating in spectrum channel-sharing arrangements.

20

While station groups may be able to partially monetize their spectrum even if a change in standard does not occur – to maximize monetization we think that a change in technical standards is the key. The next major overhaul in the broadcasting standard is known as ATSC 3.0. While conversion is many years away, and not a guarantee, it would provide some interesting opportunities. However, we would remind investors that many hurdles remain. These hurdles include:

(1) determining the actual standard to be implemented (e.g. details of ATSC 3.0 are not yet determined; target for a proposed standard is December 2015),

(2) gaining regulatory support from the FCC (which, given the expectation that such an overhaul would require consumers to obtain new receivers/converters, may take time), and

(3) actually switching over consumers (since ATSC 3.0 is not expected to be backward compatible).

19 nytimes.com 20 broadcastingcable.com

While broadcasters can send a mobile signal under the current standard, it requires a second feed—as the technical aspects of the primary feed make mobile reception impractical (e.g. fading is a major issue when trying to receive the current stationary “TV” broadcast with a moving device). However, with limited space in the spectrum and little consumer adoption, there is little incentive for broadcasters to offer such a stream. In turn, with only a few mobile DTV feeds, there is little incentive for manufacturers to offer equipment able to receive these feeds and little incentive for consumers to push for the technology. Further, we think a mobile DTV stream under the current standard would still have more broadcasting issues than one under a revised standard.


February 4, 2014 25

http://www.nytimes.com/2014/01/29/business/media/tv-stations-in-los-angeles-to-participate-in-channel-sharing-trial.html?src=recg

http://www.broadcastingcable.com/news/washington/lin-media-considers-sharing-spectrum/128721

Remember, there was more than a decade between the FCC accepting a new standard and finally fully adopting it for full power transmissions in the digital to analogue transition. Although, we would note that digital streams were available earlier than the cutoff date since broadcasters were temporarily given a second piece of spectrum on which to air the new digital channel before the analogue channel went off the air.

A major change in standard would allow larger data throughput on a 6MHz band of spectrum, in addition to utilizing compression technology that could send the same quality picture using less data. With the proposal process still ongoing, the capabilities of ATSC 3.0 are undetermined. But, we think it would be possible to see as much as a doubling in data throughput per 6MHz band (an increase of 30% is the minimum indicated in the ATSC call for proposals) while the data required to send an HD quality signal could be reduced by more than 50%. If such a standard were implemented, a single 6MHz stick could be divided to transmit:

1. broadband data through roughly 25% of the spectrum space. This space could be sold to mobile phone companies on a per MBit basis.

2. multiple HD channels, possibly seven, which could be received by in-home TVs and mobile devices on the remaining spectrum. For mobile devices to receive broadcast channels, the current standard requires a second stream be sent; however, we would anticipate that channels under a new standard could be viewed on fixed and mobile devices.

Exhibit 25: One Example of How Spectrum Could Be Monetized Beyond Current Use

Wholesale Broadband 7 HD Channels

0.0MHz

0.0MHz 1.5MHz 6.0MHz

Ca

n S

ell

Ba

nd

wid

th t

o C

ell

Co

s. B

y B

it

Ca

n T

ele

cast

Mu

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Vs

An

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ob

ile

De

vic

es

Ov

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Re

ma

inin

g S

pe

ctru

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pa

ce

Source: Company Reports, RBC Capital Markets

Such a scenario would provide more channels for the station owner to program and an opportunity to provide consumers a superior TV product (one receivable by mobile devices). Simply having more pipes would provide a substantial opportunity. While MSOs are generally opposed to adding any new networks, this would offer the capability to launch networks straight to the consumer. While success of any new channel would depend largely on programming, ownership of the pipe sets the stage. It is important to note, however, that


February 4, 2014 26

mobile devices will need to have the appropriate receivers installed; but we think that the availability of all stations nationwide could help drive adoption. Once the new standard is in place, all broadcast channels across the country would be available for the device to receive, while in the case of prior mobile TV products, only channels that specifically offered the side-stream were available and there was no guarantee that they would be available in the future.

A change in standard may offer significant benefits to station groups, even in a scenario where the company does not have nationwide coverage. With the existing channels becoming mobile and potentially more plentiful, utility to consumers should increase. High utility would likely increase viewership and thus ad revenues. Further, a change in standard could greatly increase the potential for generating side-revenue from the wholesale of data for mobile broadband. Additionally, two or more groups, in combination (through a strategic partnership and not a “transaction”), could potentially reach as much as 70%-plus of the country, fundamentally changing the utility of this spectrum. Such a partnership would set the stage for the companies to have a national network of their own. Potentially, this would both allow the launch of nearly national channels (allowing the group to compete more directly with cable channels that have national reach) and allow the companies to offer the wholesale of mobile broadband space nationwide.

Spectrum Value Derivation Using the 2008 700Mhz Auction (Auction 73) as our basis for valuing spectrum, and assuming no price inflation since that point (which we recognize may be a conservative assumption,) it is possible to come up with an estimate of spectrum value by market. Details of the analysis are presented below.

We believe the FCC Spectrum Auction 73 also known as the 700 MHz Band Auction (held in March 2008) provides a reasonable historical precedent for the value of TV broadcast spectrum on the open market. Spectrum sold in the auction averaged $1.28 per MHz-Pop, although results varied significantly by geography.

21 For example, while spectrum in Chicago

garnered $3.76 per MHz-Pop, spectrum in Paducah, Kentucky and the surrounding area sold for a mere $0.03 per MHz-Pop. Spectrum sold as part of an incentive auction would most likely be located in the 600 MHz Band, and thus, we would expect it to be worth roughly the same as the spectrum sold in the 700 MHz Band Auction (Auction 73) because the characteristics of the spectrum should be similar.

Pricing also varied meaningfully by “block”; this determined how the spectrum was sold, what spectrum was sold, and how it could be used. Each of these blocks, however, was part of the UHF TV spectrum. In some ways, the cleanest block of spectrum was the C-block, which was sold nationally or in large regions, depending on the nature of the bid. The C-block offered a mobile provider a clean way to aggregate a single band across the country, which is beneficial because equipment costs have historically been higher when a cell phone has to receive more ranges of spectrum. However, we think it is possible that pricing could have been depressed after a certain price was reached due to “open access” requirements—although, up to this point, open access has not become widespread. Additionally, concerns of interference for the A-block may have depressed pricing,

22 while requirements on the D-

block deterred purchasers. Finally, the E block was allocated as unpaired spectrum, 1-way

21 Remember MHz-Pop is range of spectrum times the number of people that you can reach with your spectrum. If you own 6 MHz of spectrum in an area where 1,000 people live, you have 6,000 MHz-Pop of spectrum. It tells you how much ―stuff‖ (information) you can send how many people in one metric. 22 nytimes.com


February 4, 2014 27

http://www.nytimes.com/2008/03/21/technology/21auction.html

spectrum, which is generally considered less valuable.23

This leaves the B-block as the cleanest basis for a valuation of spectrum that is unencumbered by technical or regulatory restrictions.

Exhibit 26: Value of Spectrum in the 2008 Auction Varied by Block

Average Price For All Spectrum Sold By Block

All A-Block Spectrum Sold All C-Block Spectrum Sold

Purchase Price

For All Blocks

Total MHz-Pop

Purchased $/Mhz/Pop

Purchase Price

For All Blocks

Total MHz-Pop

Purchased $/Mhz/Pop

$3,990mm 3,424mm $1.17 $4,747mm 5,704mm $0.83

All B-Block Spectrum Sold All E-Block Spectrum Sold

Purchase Price

For All Blocks

Total MHz-Pop

Purchased $/Mhz/Pop

Purchase Price

For All Blocks

Total MHz-Pop

Purchased $/Mhz/Pop

$9,105mm 3,453mm $2.64 $1,276mm 1,701mm $0.75

Price For Spectrum Sold That Can Be Identified To Roughly Match A DMA

A, B, E-Block Blend For Identified DMAs B-Block For Identified DMAs

Purchase Price

For All Blocks

Total MHz-Pop

Purchased $/Mhz/Pop

Purchase Price

For All Blocks

Total MHz-Pop

Purchased $/Mhz/Pop

$13,150mm 7,196mm $1.83 $7,939mm 2,273mm $3.49

Not a 1-to-1 comparison: The valuation above includes 6 Not a 1-to-1 comparison: The valuation above includes 6

Source: RBC Capital Markets

Our valuation of spectrum is based on the price of spectrum in the 2008 spectrum auction, but a number of questions must be answered to determine if any adjustments need to be made.

Should we include an inflation factor to capture an increase in value since the 2008 auction?

We would have anticipated that pricing would have increased since 2008. However, recent transactions do not necessarily support this assertion—as we describe below. As a result, we simply assume there was no general increase in broadcast TV spectrum pricing since the 2008 auction. Considering only a few major transactions since the 2008 auction, it is difficult to make this estimate with much certainty.

While the price per MHz-pop for Qualcomm’s spectrum was higher when sold to AT&T than when purchased, it is possible this is due to, or at least partially due to, the fact that Qualcomm intended to use the spectrum as one-way spectrum. On the other hand, AT&T announced it would pair the spectrum with another band—which we believe could increase the value of the spectrum. Additionally, it is worth noting that these blocks are not completely comparable because the D-block spectrum sold was not purchased in the 2008 auction, thus, we recommend some degree of conservatism in extrapolating from these results.

Second, the sale of spectrum from Verizon Wireless to AT&T indicates roughly flat pricing before factoring in the value of the inclusion of AWS licenses in five markets. Note that, news reports indicate that not all of the B-Block spectrum purchased as part of the 2008 auction was included in the sale, thus we do our best to estimate what regions were included.

Third, the Verizon/T-Mobile transaction is similar to the first transaction discussed. While headline pricing suggests an increase in the value of spectrum, technical complications—in this case progress in dealing with interference issues—makes the headline numbers more difficult to interpret. In aggregate, we think it makes sense to not apply any inflation factor to

23 wirelessbroadbandcoalition.org


February 4, 2014 28

http://wirelessbroadbandcoalition.org/wp-content/themes/wbc/download.php?resourceid=298

2008 auction results, although it wouldn’t particularly surprise us if there was some upside to this assumption. We err on the side of conservatism given the limited availability and opaque nature of comparable transaction data.

Exhibit 27: Major Transactions of 700MHz Spectrum since the 2008 Auction

Price Difference Between Auction And Recent Transactions

Auction Results Recent M&A

Date 12/20/10

Price ($mm) 838 Price ($mm) 1,925

Total MHz-Pop (mm) 2,122 Total MHz-Pop (mm) 2,220

Price ($/MHz-Pop) $0.39 Price ($/MHz-Pop) $0.87

Purchased By Qualcomm Sold To AT&T

Sold By Qualcomm

Details: Details:


Date 1/25/13

Price ($mm) 1,871 Price ($mm) 1,900

Total MHz-Pop (mm) 492 Total MHz-Pop (mm) 504


Purchased By Verizon Wireless Sold To AT&T

Sold By Verizon Wireless

Details: Details:


Date 1/6/14

Price ($mm) 2,417 Price ($mm) 3,315

Total MHz-Pop (mm) 1,651 Total MHz-Pop (mm) 1,792


Purchased By Verizon Wireless Sold To T-Mobile

Sold By Verizon Wireless

Details: Details:

Not a 1-to-1 comparison: The valuation above includes 6 MHz E-Block from 722MHz-728MHz (this spectrum was purchased by Qualcomm in the 2008 auction), and a 6MHz D-Block spectrum in location 716MHz-722MHz (this spectrum was purchased for $38mm in 2003 and was nationwide).

Not a 1-to-1 comparison: The valuation above includes 6 MHz E-Block from 722MHz-728MHz (this band was sold to AT&T), and 60% (weighted for the 6MHz sold) of the 10MHz Nationwide in the D-Block in location 758MHz-763MHz and 788MHz-793MHz purchased as part of the auction.

Price does not include "a contribution of Advanced Wireless Services (AWS) spectrum licenses in five markets."

Above we only include our estimate of the lots of B-block spectrum were sold to AT&T . Some of the Verizon B-block licenses purchased were not sold to AT&T.

Appears to suggest an increase in pricing but we note it's possible FCC and technical changes that could help address interference issues may have made the spectrum more valuable. Pricing is still well below where B-block sold. Purchase price combination of cash ($2.365B) and spectrum swap ($0.95B; T-Mobile est).

Above we include identified A-Block Verizon purchases in the 2008 spectrum auction excluding the Chicago block it sold.

Source: Company reports and conference calls, fcc.gov, dailywireless.org, yahoo.com, RBC Capital Markets

What restrictions are placed on the spectrum and its sale?

The government’s support would be required for its full monetization, largely because the FCC would need to implement a change in the broadcast standard. For broadcasters who wish to sell spectrum through an auction, the money received may be impacted by any restrictions on what bidders are allowed to participate or limits on how much spectrum a player can acquire. While we think outright restrictions are unlikely, we think limits are possible on how much sub-1 GHz spectrum Verizon and AT&T will be allowed to own.

Should B-licenses be used as the basis for spectrum value? Or should a blended valuation be used for multiple blocks sold in a single DMA?

We believe a spectrum owner determined to sell their spectrum in the near-term should at least consider the blended value of all blocks of spectrum when estimating potential realized value, even though the B-block rate may still be the most comparable depending on the


February 4, 2014 29

circumstances. Given the uncertainty around regulatory restrictions and auction rules, it may not be a fair assumption that spectrum sold in an upcoming auction would necessarily match the rates of the most expensive block sold in the 2008 auction. However, for those in a position to hold spectrum longer term to try to capture a larger portion of the spectrum value, and not the value with potentially restrictive requirements on use, we think the B-block serves as the best valuation template. Additionally, we note again that a direct sale of the spectrum is not the only path to monetization—and players willing to pursue self-monetization do not need to sell into an auction to realize the value of their spectrum.

We think using the B-block as the basis makes the most sense for parties not in a rush to monetize spectrum, as: 1) the government likely cannot force a sale, meaning broadcasters shouldn’t take a “bad” deal, and 2) a more flexible standard would offer the best of both worlds and result in spectrum going to the most valuable use. Spectrum allocated to the most valuable use could both increase value captured by the broadcasters and give the government an outcome that results in spectrum allocated to its most efficient use. Further, if taxed ratably, as a percentage of revenues generated, the most efficient allocation should also maximize revenues generated for the government. However, we consider spectrum values based on both the B-block and a cross-block blend below as we lay out the price of spectrum by DMA to determine how price varies by market.


February 4, 2014 30

Exhibit 28: Model Based on Results of the 2008 700MHz Band Auction (Auction 73)

Price Based On B-Block

Price Based On Blended Blocks

Price Difference Between Clean C-Block And Other Blocks

y = -0.634ln(x) + 3.723R² = 0.4733

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

0 50 100 150 200 250

$/(

MH

z-P

op

)

Rank Of P2+ Of Closest DMA

y = -1.333ln(x) + 7.5821R² = 0.5556

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

0 50 100 150 200 250

$/(

MH

z-P

op

)

Rank Of P2+ Of Closest DMA

Source: FCC, RBC Capital Markets estimates

Because, as discussed above, we do not assume an inflation factor since the 2008 auction in the baseline assumption, Exhibit 28 also serves as the template for the value of spectrum held today.

Should stations operated under outsourcing agreements be included in spectrum valuation?

If the outsourcing agreements include rights to buy the licenses, and the ability to put these rights to another party, then we think the operating group should be able to capture the value of the spectrum of stations under outsourcing agreements. However, given the lack of completely transparent information, we think both scenarios should be considered.

How much value is captured by the government?

While we do not believe the government could “take” the spectrum from any broadcasters—it may take a share of proceeds from its sale (such as those generated by an auction) or tax proceeds from “supplementary” services on broadcast spectrum (such as transmission of mobile broadband data) as is currently done at a rate of 5%.

24 While this tax gives us some

context for estimating the government’s share of revenues from ‘supplementary’ services, we recognize there is much uncertainty around the possible split of revenues in an auction.

24 transition.fcc.gov


February 4, 2014 31

http://transition.fcc.gov/Forms/Form317/317.pdf

Key Investor Concerns

Aereo – Loopholes, Litigation and Legislation Could Impact the Retransmission Consent Paradigm A key part of the broadcast television investment thesis is contingent upon the ability to drive monetization higher over time, primarily through the retransmission consent framework. There are, however, legal and legislative initiatives that could threaten the existing framework for retransmission consent.

As further detailed in our pieces titled Media Investors Should Get Ready for More Newsflow on Aereo Litigation (May 23, 2012), Our Call with a Legal Expert on Aereo (July 19, 2012), and Aereo Implications Reach into the Cloud; Outcome Likely Favors Broadcasters (January 13, 2014), one of the biggest potential investor issues surrounding the future of retransmission consent revenues is the potential viability of start-up Aereo TV. The subscription service was launched in March 2012 and provides consumers with the ability to watch broadcast TV online for a subscription fee of $8/month. Aereo appears to be well funded and is backed by Barry Diller, the chairman of IAC/InterActiveCorp, which likely adds some weight to its efforts. IAC/InterActiveCorp reportedly led two rounds of investments in the company (for $20.5 million and $38 million). Aereo has argued that it is not an MVPD in the traditional sense, and not engaging in a public performance of the content it streams, but rather it is an antenna rental service, and thus, is not required to pay retransmission consent fees.

The service works as follows:

1) Each subscriber is provided his or her own thumbnail size antenna at an off-site location that picks up an individual broadcast signal just for that user;

2) The antenna and related services are controlled remotely by the end user; 3) The desired/selected signal is encoded and uploaded to the Internet; and 4) The end user can stream a live signal online from his or her computer, mobile device, or

tablet. Additionally, the service includes DVR functions to record content and play it back later.

Broadcasters brought litigation against the company, and another similar company called FilmOn, claiming copyright infringement (and in some cases unfair competition, a claim which has since been dismissed). In the lower federal District “trial courts” of Boston and New York, Aereo has been victorious in early litigation, with the broadcasters being denied a pre-trial injunction against Aereo that would have forced cessation of its service “in-market”. However, in the LA and Washington DC trial courts, FilmOn lost that same battle. Given that the courts appear to be treating Aereo and FilmOn as a single legal “issue”, our assessment is that Aereo (and the class of antenna rental companies) is essentially two for four in the lower courts.

That said, in April 2013, Aereo won a 2nd US Circuit Court of Appeals—the appellate level of the New York trial court—ruling that denied broadcasters a preliminary injunction against the service. This appellate level “win” for Aereo is probably the most significant legal ruling in the proceeding since it is the highest court ruling. That said, we believe the 2nd Circuit ruling could be something of an outlier in that the Court was bound by the 2nd Circuit's ruling on the 2008 Cablevision remote DVR case (no other jurisdiction is). In the remote DVR case, Cablevision successfully defended itself against Viacom for establishing a remote-based DVR service in which the cable subscriber’s DVR “box” was essentially a cloud based “virtual” box that did not sit at the customer premise, and was only accessible by the individual customer. If the service is only available to a single paying subscriber for an individual performance,

Why We Are Comfortable with the Aereo Risk

Each battle has a varying likelihood of success, but in aggregate, losing the war would take a lot. In order for Aereo to impact the business case, we think the following would have to happen:

Aereo Would Have to Win the Supreme Court Copyright Case: The case is not clear cut, some of our best industry contacts indicating 60/40 for the Broadcasters.

Even a 4-4 Tie Likely Would Not Be Sufficient to Impact the Business Case: Would result in each District Court ruling holding in each respective district. We believe a national solution is necessary to provide an “end-run” around retrans for most MSOs. Conflicting rulings at the District level could be an “effective” win for broadcasters.

Aereo Would then Have to Find a Way to Avoid Classification as an MVPD and Associated Retrans Requirements: Again not a clear-cut issue. In our opinion, the definition of an MVPD would warrant considering Aereo one, but thus far it is our sense that the FCC has been reluctant to regulate online video (with questions also relating to whether or not an MVPD must be facilities-based.

For Aereo to Offer an “End-Run” Around Retrans for Existing MVPDs, It Would then Have to Find a Way to Adopt the Technology While Avoiding the Requirement of Retrans Payments: While a work-around may certainly be possible, it is unclear what would be required for an MVPD to be able to offer the service as part of its package without retransmission consent requirements then applying.


February 4, 2014 32

then its location at the customer premise on a physical, or remote, basis was deemed irrelevant. This applies to the DVR element of Aereo’s service as much as the off premise antenna.

In October, broadcasters filed a Supreme Court petition for writ of certiorari to review the Second Circuit Court's ruling. In this petition, the broadcasters argue, technical detail (surrounding the Cablevision case) trumps common sense and that Aereo’s system should not preclude considering the transmission of the broadcasters signal a public performance.

On January 10, 2014, the Supreme Court announced it would hear the Aereo case. We anticipate that arguments will be heard by March and that we should hear something from the court by mid-June. However, this would not necessarily mean a resolution by mid-June. For example, the question of whether or not Aereo is an MVPD, and thus subject to retransmission consent/must-carry rules, is not part of the Supreme Court case (nor is the same question for an MVPD attempting to offer such a service itself).

Additionally, if a court ruling(s) in Aereo’s favor were to offer MVPDs a way to bypass retransmission consent, it is possible that Congress could look to pass legislation eliminating such an end-run around retrans. We think support of localism from some regulators and policy markers gives these parties a vested interest in the viability of the broadcast model, since the existence of local TV stations is important to disseminate everything from typical, everyday news to evacuation information in case of emergencies. As a result, we suspect government intervention would occur under circumstances where a technological innovation might dislocate the subscription revenue stream for local broadcast TV, although though this is far from a certainty. As a result, we would not expect a near-term resolution of the issue that goes against the broadcasters.

While we think a ruling in favor of the broadcasters could be more definitive, further complicating matters is recent legislation introduced by Senator Jay Rockefeller of West Virginia, Chairman of the Senate Commerce Committee (the committee with regulatory review jurisdiction over Cable TV), entitled the Consumer Choice In Online Video Act. The bill stipulates that antenna-rental services like Aereo, if found to be copyright legal, would not be subject to the same retransmission consent fees broadcast networks have been extracting from Pay TV operators. We would note two factors related to this legislation that make it less concerning from the broadcaster perspective:

1) Our own channel checks tell us there is little real “traction” to get such legislation passed, as evidenced by the lack of a co-sponsor, and

2) It is unclear if Rockefeller’s committee has the jurisdiction to make Aereo “legal” since it will likely require intervention from the Judiciary Committee given the importance of copyright law in the legal framework.

We believe the real risk is less about Aereo than the technology itself, and its potential to be acquired or copied by the traditional MVPD ecosystem. In particular, if Aereo wins it is possible that cable providers could start their own ‘Aereos,’ so that they can bypass retransmission fees, which could cut off an important source of revenue for the broadcasters. Again, this would depend on the ability of MVPDs to find a way to avoid retransmission consent/must-carry rules—not just whether or not Aereo violates Copyright law.

Further, even if the Aereo model were to offer a retransmission consent “end-run”, it would likely take years to implement as it would likely require new set-top box technology and customer service support for MSOs to run parallel cable/Aereo-style solutions as well as the

Why We Are Comfortable with the Aereo Risk (cont’d…)

The Government and Regulatory Bodies Would Have to Sit on the Sideline: If the Supreme Court rules in favor of Aereo, the fact that such a ruling appears to go against the spirit of the law,may help induce legislators to make such a copyright working-around illegal. Additionally, political support from some of localism could result in legislation protecting the local broadcasters it looks like the network might be forced to switch to cable.

MVPDs Would Have to Determine Adoption Is Worth the Investment: Implementation would likely be more complicated than just flipping a switch, as new set-top box technology and additional customer service support would probably be required. Would such investment be necessary, if it may just result in the broadcast networks moving to cable? In the end, the MVPDs would still have to pay fees for the content.

Broadcast Networks Would Have to Decide to Convert to Cable, and Not Take Local Stations with Them: If all of the above goes wrong, as long as the local stations are part of a switch to cable, as part of a national network of local cable channels, the ecosystem may still hold together. While the question of how much value the local groups would have to give up is unknown, they do provide valuable content of their own.

Even if everything above went wrong for the broadcasters, technical and contractual requirements would likely mean an “end-run” around retransmission consent would be years away, and spectrum should provide valuation support.


February 4, 2014 33

expiration of existing retransmission consent agreements with MSOs, that wouldn’t be abrogated by a ruling favorable for Aereo.

There is a natural remedy to the antenna rental “loophole,” which Aereo, and the cable companies might ultimately use in a bid to end-run around retransmission consent. That is, for the broadcasters to simply remove their signals from the broadcast landscape and convert into cable networks. This would not be an easy or “overnight” process as legal complications would arise for everything from affiliate agreements to programming rights, while more practical complications would arise from addressable audience size and commercial CPM rates. However, conversion is possible. In April of 2013, Fox President and COO Chase Carey implied that the Fox Network would do just that in the event of an Aereo legal victory. Broadcasters such as Sinclair would have a similar option in a local market.

However, it is unclear what the future of the local affiliate would be in the event of a broadcast network conversion to a cable network. The local station is not crucial to the distribution of the network in a cable network model. However, the existing broadcast networks program only a portion of the day and have no local content to replicate the current broadcast channel offering (such as local news). It is conceivable that any attempt to convert a broadcast network into a cable network might involve co-opting the local affiliates to create a series of “local” cable networks, allowing for a transfer of the existing ecosystem onto cable.

It is also plausible, and likely more probable, that if an Aereo legal ruling provides MVPDs with a method to bypass retransmission consent payments, the local affiliates could be dislocated in a transfer of distribution from broadcast to cable. The broadcast networks could simply displace the local station content by running inexpensive syndicated programming during day parts not traditionally programmed by the network. In such a case, local broadcasters such as Sinclair could be “left out” in the cold, which could present significant downside risk to the core business. However, restrictions in affiliate agreements mean this would likely not happen overnight and we believe spectrum provides a floor to valuation.

Our best industry legal and regulatory sources believe that, ultimately, the existing ecosystem will survive these legal and regulatory challenges. While it appears that technology may have gotten ahead of the “letter of the law” (in the context of the Cablevision case), they tell us it is likely common sense and the “spirit” of the law will ultimately prevail. That said, there will likely be noisy headlines and potential compromises along the way. To us, this is where the biggest risk to the local broadcast thesis lies – essentially in the unknowable, until the issue is ultimately resolved.

Other Risks The ability to renew FCC licenses and continue to operate stations under outsourcing agreements without violating FCC ownership limitations. Licenses are provided to TV stations by the FCC, at a maximum duration of eight years.

25 Renewals are granted if the FCC

finds that that station has “served the public interest,” and the licensee has not seriously violated the Communications Act or violated rules in a way that “would constitute a pattern of misconduct.”

26

25 SBGI 2012 10-K 26 SBGI 2012 10-K


February 4, 2014 34

In our opinion, generally, renewal of an FCC license is a fairly perfunctory exercise. A bigger risk is whether local station groups will be able to continue to operate stations under outsourcing arrangements such as JSAs and SSAs without violating FCC ownership rules. Notably, the attribution of JSAs and SSAs is under review as part of the FCC’s Quadrennial Regulatory Review, while earlier this year Senator Jay Rockerfeller issued a letter requesting that the Government Accountability Office take a “closer look” at the TV broadcasters’ use of JSAs and SSAs.

27

These arrangements allow local station groups to operate duopolies in many markets and realize the associated efficiencies of local scale. We believe that the structure of these deals will typically allow an unwinding of these deals without a substantial loss of value directly. For example, we believe SBGI may hold rights to purchase the FCC license and to sell these rights to another party if necessary. However, even with a clean unwind, local groups could lose the economic value created by the local efficiencies of a duopoly (e.g. sharing of local news operations). We think additional FCC limitations on the creation of duopolies would not be in the public interest, as duopolies likely allow for a higher quality local product that would not be possible without scale. Additionally, we think such a change would be unnecessary from a concentration of media ownership perspective, as new sources of competition, such as the Internet, effectively eliminate the threat of a monopolistic scenario in this context (which ownership rules were generally put in place to stop). However, the risk of greater restrictions on duopolies does exist.

An alternative to simply eliminating the UHF discount—which the NAB has referred to as “arbitrary and capricious” if not done in context of overall ownership—would be to eliminate the discount while simultaneously raising the overall cap.

28

The ability to maintain reasonable reverse compensation obligations. Broadcast networks’ content remains a key part of a local station’s programming equation. If reverse compensation payments are greatly increased, it could impact the profitability of the local station. For larger station groups, we think the negotiating position is strong, suggesting manageable increases in reverse comp that would not impact the investment thesis. Also, note that because affiliate agreements with the Big 4 are likely somewhat staggered, a shift would likely take place over time as agreements roll over.

The ability to receive approval for acquisitions, and to successfully integrate these businesses. Scale provides for more efficient operations and increases negotiating leverage with MVPDs and broadcast networks. Both FCC and antitrust approval may be needed for future acquisition activity. An inability to complete these pending and potential future deals could impact the ability to grow earnings in the future. This risk applies to outright ownership and the ability to operate stations under outsourcing agreements such as JSAs and SSAs; we address some of the risks regarding FCC treatment of these structures in the section titled Consolidation Has Been Rampant.

The ability to renegotiate retransmission consent deals in the station groups favor. Retransmission consent revenues provide a meaningful share of local station group revenue. We believe that the biggest threat to retransmission consent revenues is an end-run around for MSOs from an Aereo-like product. We address this risk in detail above.

The ability to renew affiliate agreements with broadcast networks. While we believe local stations create significant value on top of the broadcast network’s content, this content still

27 broadcastingcable.com 28 broadcastingcable.com


February 4, 2014 35

http://www.broadcastingcable.com/news/washington/rockefeller-calls-gao-study-tv-station-shared-service-agreements/61397

http://www.broadcastingcable.com/news/washington/nab-stand-alone-uhf-discount-decision-would-be-illegal/128002

remains a key part of the value equation. Loss of a major network affiliate agreement could significantly impact the earnings potential of a local station.

The ability to attract and maintain local and national advertising. The local and national spot advertising markets are a major contributor to local station group revenue. We believe TV advertising provides marketers an effective way to reach customers—limiting our concerns of an industry-wide shift in ad spend to other mediums, such as online—but, ad revenue does face near-term exposure to movement in the macro economy.

Further, ad revenue is dependent on the ability to achieve sufficient viewership ratings (indirectly, ratings also likely impact retransmission consent revenue). Typically, a local station group’s success hinges on the popularity of two types of content: 1) the content it purchases from a broadcast network (which could be impacted either by a decline in viewership of content provided under existing agreements, or from the loss of an affiliate), and 2) the non-network content it airs, such as local news. The success of a local station group has a large dependence on the company’s ability to deliver desirable content to viewers.


February 4, 2014 36

Industry Notes Industry Structure Local stations are programmed through a combination of network content (content provided in bulk through agreements with national networks such as ABC), third party content (content purchased from a third party, such as rerun episodes of Two and a Half Men or first run episodes of Divorce Court), and self-produced content (such as local news). Revenues are generated through the sale of advertising either on a station-by-station basis or across multiple stations, and through the sale of rights to MVPDs to include the channel as part of their “cable” or “satellite” offering.

Exhibit 29: Industry Structure

Local Station

Network Content

3rd Party Content

Self-Produced Content

MSOs

Advertisers

Viewer

Network: Provides content during a certain windowLocal Station: Typically pays fee for content feed, and shares advertising spots

3rd Party Content Provider: Sells content to be shown on station, typically in time slots not filled by network programmingLocal Station: Pays for content through a fee or sharing ad revenue (or both)

Local Station: Pays for content production (e.g. cost of talent). Typically, locally focused content such as news.

Advertiser: Pays for ad space on the networkLocal Station: Provides ad space

MSOs: Typically pays for rights to retransmit the local station (may not be the case for smaller stations).Local Station: Provides a feed of the local


Not all advertising shown on the channel is monetized by the local station, as some is given to the network as part of the affiliate agreement, while other advertising space is traded for third party programming in a process known as barter. Additionally, some non-programming time is dedicated to other uses, such as promos for other content on the network or station identification.


February 4, 2014 37

Exhibit 30: Hypothetic Sharing of Advertising Minutes

DOES THE AMOUNT GOING TO THE AFFILIATE

INCLUDE THE IMPACT OF BARTER??

THINK AT LEAST 7 here means more than 7, up to 12… see quote

Prime Time Hour Daytime Hour Weekend Hour

Programming

50 minutes

10 minutes

44 minutes

16 minutes

44 minutes

16 minutes

Non-Programming Non-Programming Non-Programming

Network

7.5 minutes

2.5 minutes

4-12 minutes

4-12 minutes

<= 9 minutes

>= 7 minutes

Affiliate Affiliate Affiliate

Non-Advertising

0.5 minutes

2.0 minutes

0.5 minutes

3.5-11.5 minutes

0.5 minutes

>= 6.5 minutes

Station Advertising Station Advertising Station Advertising

Source: Vogel, RBC Capital Markets

Spectrum Summary What Is Spectrum? Spectrum is the air space through which wireless communication signals can be sent. It is the medium that radio, broadcast TV, satellite TV, and mobile device signals (to name a few) are sent through. These signals are differentiated by how many times a crest of a wave passes a given point per second (i.e., frequency); and, the rate at which the wave cycles is measured in Hertz (within the TV spectrum range megahertz, MHz, are typically used—1MHz equals 1 million Hertz). The space in the spectrum can be segmented into ranges of frequencies referred to as bands.

For More Information… Please see our deep dive on the topic, titled Deep Dive on Incentive Auctions & Other Hot Topics in Media and Advertising published January 17, 2012.


February 4, 2014 38

Exhibit 31: Illustration of Spectrum as a Road and Key Definitions

Lower

Frequency

Higher Frequency

500 MHz 515 MHz506 MHz

A wider band/lane (i.e. a bigger range of

frequencies) means you can send more stuff!

wavelength

6 MHz Band 9 MHz Band

Wavelength—The distance from peak

to peak of a wave.

Frequency—How quickly a cycle

repeats itself. A longer wavelength

means a lower frequency.

MHz—A measure of frequency. 1 MHz

means that 1mm cycles happen every

second.

MHz-Pop—The range of spectrum

times the number of people that you

can reach with your spectrum. If you

own 6 MHz of spectrum in an area

where 1,000 people live, you have

6,000 MHz-Pop of spectrum. It tells

you how much “stuff” (information) you

can send how many people in one

metric.

Note: Illustration is not drawn to scale Source: RBC Capital Markets

In the broadcast TV portion of the spectrum, these frequency ranges are what we know as TV channels. Each TV channel has a 6 MHz band over which the broadcaster is permitted to send its signal.

29 The frequency range between 602 MHz and 608 MHz, for example,

corresponds to channel 36. The TV station on channel 36 in your local market is permitted to send out signals that range in frequency from 602 MHz to 608 MHz.

30 There is no real

relationship between a channel‘s analogue frequency and its name other than the higher the channel number the higher the frequency.

29 Historically, a single channel was sent over a 6 MHz band. Today, it’s possible to send multiple channels as we have discussed previously and discuss later in this section. 30 We ignore the requirement to have some dead-space between channels to avoid interference for simplicity.


February 4, 2014 39

Exhibit 32: Channels on an Analogue TV Correspond to Different Spectrum Frequency Ranges

36 XX 38 39 40 41 42 43 44 45 46 47 48 49

602

MH

z

608

MH

z

614

MH

z

620

MH

z

626

MH

z

632

MH

z

638

MH

z

644

MH

z

650

MH

z

656

MH

z

662

MH

z

668

MH

z

674

MH

z

680

MH

z

686

MH

z

… …Fre

qu

en

cy

Ch

an

ne

l

Note That:

The frequency range

between 602 MHz and 608

MHz, for example,

corresponds to channel 36.

There is no real relationship

between a channels

analogue frequency and its

channel number other than

that a higher analogue

channel number typically

means a higher frequency.

TV broadcast spectrum is

spread out in a number of

different blocks of spectrum

between the 54 MHz and

698 MHz frequency.

Broadcasting Spectrum Frequencies

From To Analogue Channels

54 MHz 72 MHz Ch. 2 - Ch. 4

76 MHz 88 MHz Ch. 5 - Ch. 6

174 MHz 216 MHz Ch. 7 - Ch. 13

470 MHz 608 MHz Ch. 14 - Ch. 36

614 MHz 698 MHz Ch. 38 - Ch. 51

Note: Channel 37 is excluded because the frequency range from 608 MHz to 614 MHz is not used for TV broadcasting. As we discuss later, digital broadcasting now allows a station to be broadcast on one spectral (analogue) channel but appear on your TV on another channel. Source: RBC Capital Markets

‘Space’ in the spectrum can be separated by either geography or frequency. For example, the 602-608 MHz (channel 36) band in New York City is distinct from the 602-608 MHz (channel 36) band in San Francisco. Thus, the channel 36s in New York City and San Francisco can have different owners and uses—one could broadcast one feed on channel 36 in New York and something else on channel 36 in San Francisco. On the other hand, bands in the same geographic region but at different frequency ranges are distinct. Thus, the 602-608 MHz band (channel 36) in NYC can have a different owner and use than the 662-668 MHz band (channel 46) in NYC.

There is, in some sense, a finite amount of ‘space‘ (and it becomes constrained more quickly in high-density areas, like New York City). However, historically, we have seen technological advancement provide growth in the availability of spectrum. This has occurred as technological advancement has allowed devices to operate on a wider range of frequencies, and as spectrum has been used more efficiently (for example, digital broadcast television is significantly more efficient than analogue.) That said, many believe that mobile broadband networks are quickly becoming overwhelmed with traffic and that expansion of mobile broadband spectrum is a matter of national importance.

How Could the Monetization of Spectrum Actually Occur? Monetization of spectrum for TV broadcasters is currently limited, as TV licenses only permit certain uses and limit others. However, as the government looks to expand broadband spectrum, it will provide opportunities to convert or transfer these types of licenses to another party that will use them for purposes beyond TV broadcasting.

Many different possible mechanisms could enable the transfer of spectrum to mobile services providers. Two possibilities that have gained some support from the primary interested parties are an incentive auction and, what we will call, a free-market scenario. An auction is the most likely near-term mechanism, although certain events could make a free-market scenario possible at some point in the future (not all broadcasters are expected to participate in the upcoming TV spectrum auction).


February 4, 2014 40

The first method of reallocation is an incentive auction, which we also call a commission scenario because the FCC helps broadcasters re-sell their spectrum and takes a, potentially rather large, commission. This plan has been backed by much of the wireless industry, has built up strong momentum and was a component of the FCC‘s National Broadband Plan, which targeted converting 120 MHz of spectrum (leaving around 174MHz of TV broadcast spectrum)—our industry sources have told us that the remaining TV stations would likely be moved down in the spectrum. Such an auction would have three parts:

1. Some outstanding TV spectrum, or “portions” of spectrum allocated by those licenses, would be recovered from broadcasters holding TV broadcast licenses by allowing broadcasters to bid to sell their spectrum rights. In such a case, the broadcasters willing to give up their spectrum for the least amount of money would win. In return for relinquishing their spectrum, the broadcaster would receive a payment, possibly in addition to potentially alleviating concessions, such as the right to share spectrum with another broadcaster or to move to a less desirable location on the spectrum. The larger the alleviating concessions, the lower cash payment broadcasters should require.

2. The remaining stations would then be repacked, and likely moved lower in the spectrum, by the FCC in order to create a solid block of open spectrum across the US (or as much of the US as possible).

3. The newly packed spectrum would then be sold to the highest bidder. This new spectrum would be sold with more lenient restrictions, as is typical of mobile broadband licenses, and could raise significantly more proceeds than the payments made to the previous owner to recover the spectrum.

One major drawback to the incentive auction is that it could take at least until the middle of 2015 for the auction to occur (FCC Chairman Wheeler recently provided this target

31).

Physically repacking the spectrum and making the new spectrum available to the winners could take longer (with build-out of this newly won spectrum adding even more time until it was made available for broadband use). Even this relatively long timeframe assumes the regulatory/legislative process moves relatively smoothly. The process is laid out below, although it is possible that both the forward and reverse auctions would happen at the same time.

Exhibit 33: Summary of the Incentive Auction Process

Step 1 Step 2 Step 3

Reverse Auction–TV

broadcasters offer to sell some or

all their spectrum for a certain

price.

Repacking–The FCC reorganizes

the spectral location of licenses to

produce a solid, open band across

the U.S.

Forward Auction–The newly

created open band of spectrum is

auctioned off to broadband

providers.


31 fcc.gov


February 4, 2014 41

http://www.fcc.gov/blog/path-successful-incentive-auction-0

Exhibit 34: A Hypothetical Visualization of Repacking

TV

602 MHz

608 MHz

614 MHz

620 MHz

626 MHz

632 MHz

638 MHz

644 MHz

650 MHz

656 MHz

662 MHz

668 MHz

674 MHz

680 MHz

686 MHz

…

Frequency License Type

Mobile

TV

Mobile

TV

Mobile

TV

Mobile

Mobile

Mobile

TV

Mobile

TV

TV

…

Mobile

602 MHz

608 MHz

614 MHz

620 MHz

626 MHz

632 MHz

638 MHz

644 MHz

650 MHz

656 MHz

662 MHz

668 MHz

674 MHz

680 MHz

686 MHz

…

Frequency License Type

Mobile

Mobile

Mobile

Mobile

TV

TV

TV

TV

TV

TV

TV

Mobile

Mobile

…

Note: We believe

repacking may occur

over a much wider

range of spectrum.

And that if 120 MHz

are sold, the split

between TV and

mobile would likely

occur in the 500

MHz range.


Spectrum could also be freed through what we would refer to as a free-market scenario. A free-market scenario would reduce the restrictions on broadcast licenses so that broadcast spectrum can be better utilized (in cases where the current use is not already optimal) and it could allow direct transfer of broadcast spectrum to potential mobile broadband providers.

One benefit of de-regulation would be that it could make it easier for broadcasters to take advantage of ‘ancillary services‘ (which already occurs in limited capacity, but some claim that deregulation could ease the transition or expand the availability). ‘Ancillary services,‘ when used as we envision here also called ‘broadcast overlay’, is a system where mobile services can be ‘laid on top of‘ the existing services in the spectrum (this additional spectrum may be used by the broadcaster or sold to a third party) – this service could, for example, be a second live TV stream for mobile devices. (A second stream is currently required because the digital signal sent for at-home tuners is subject to interference when being sent to a ‘mobile‘ receiver.)

‘Ancillary services’ are possible because there is additional room for data in most bands being used by TV broadcasters. Let‘s return one more time to the road illustration (Exhibit 31). Imagine the broadcast TV signal is a motorcycle traveling down a normal width lane. In such a situation, a large portion of the road is being wasted. In this analogy, we would be adding a second motorcycle side by side with the first. Depending on the implementation, such a system could offer TV-like live streaming to cell phones, or more traditional mobile Internet access. Some broadcasters argue that utilizing ‘ancillary services‘ makes more sense because 1) the ‘one-to-many‘ nature of the signal reduces bandwidth requirements for certain uses and 2) the plan will raise more money for taxpayers.

The Coalition for Free TV and Broadband argues that video will become an increasing proportion of wireless broadband demand, and simply providing more bandwidth to mobile providers is not the best way to keep up with this increasing demand. They argue that


February 4, 2014 42

because some of this viewership could be scheduled (e.g., many people are watching the same live sports match at the same time), a broadcast style distribution method could meaningfully reduce spectrum demand. Further, they imply that TV broadcast stations would be a better fit to deploy this ‘broadcast’ technology than mobile service providers would be. A ‘broadcast’ or ‘one-to-many’ system for video streaming could potentially help conserve a significant amount of spectrum because only one signal has to be sent for many users. This contrasts significantly with typical mobile broadband usage, where each user is accessing distinct pieces of information on the Internet. Simply put, it takes less spectrum to send one signal to 1,000 people (because you only need one sliver of spectrum that everyone can ‘tune-in’ to) than to send 1,000 different signals to 1,000 people (where each person needs their own ‘conceptual’ sliver of spectrum).

As for value provided to the Treasury, the assumptions and analysis done by the Coalition for Free TV and Broadband projects ancillary service fees could provide a present value of cash flows of $60 billion over 15 years and that these cash flows could continue into perpetuity. These ancillary service fees are already imposed on broadcasters, but given the limitations placed on the licenses, the revenue generated is minimal. The Coalition for Free TV and Broadband argues that if the FCC were to relax restrictions on the broadcast TV licenses, ancillary revenues for the broadcasters would grow, and thus, so would ancillary service fees (currently, broadcasters pay fees of 5% of ancillary revenues).

32 Not surprisingly, given that

the plan would allow broadcasters to maintain control of their current spectrum, it has received the support of some TV broadcasters; however, given its lack of major traction, we limit our discussion of it to this section and don’t include it as part of our spectrum valuation elsewhere in this report.

There is, however, a major drawback to the free-market scenario, which is that it would be difficult to combine different frequencies across varied geographies to create a unified, national service (although it is our sense that the problems faced from having multiple bands across the country are becoming smaller). Still, today it appears to be impractical for cell phones to be designed to operate on a large variety of different bands in the way that you can tune your radio to different stations (though phones do operate on a limited number of bands today). This means national mobile service providers need to have bands of spectrum in the same spectral location across the country – making it impractical for them to rent 6 MHz from channel 17 in New York, 6 MHz from channel 20 in Boston, 6 MHz from channel 36 in Atlanta, etc. If broadband service is not available on the bands a phone is designed for across the country, then the phone would not have service (even roaming service) where the band of spectrum was occupied by something other than a mobile service. Although it is possible to see how a very aggressive acquirer of stations could buy solid blocks of spectrum across most of the country, this problem does create a hurdle to the free-market system (although FCC-led repacking might help). Furthermore, this presents a particularly difficult challenge for ancillary services because of the inconsistency created by the piecemeal reallocation that the system would seem to imply.

Key Items Below we summarize a couple key items for investors. However, we have addressed the topic in more detail in our piece titled Deep Dive on Incentive Auctions & Other Hot Topics in Media and Advertising published January 17, 2012.

32 Business Analytix, Inc. Prepared for Sinclair Broadcasting Group. The Economic Value Of Broadcast Innovation – Impact On The US Treasury, November 2011.

Exhibit 35: Summary of Spectrum Ranges

Frequency Name Range

Medium frequencies 300 KHz - 3 MHz

High frequencies 3 MHz - 30 MHz

Very high frequencies (VHF) 30 MHz - 300 MHz

Ultra-high frequencies (UHF) 300 MHz - 3 GHz

Super high frequencies (SHF) 3 GHz - 30 GHz

Extremely high frequencies (EHF) 30 GHz - 300 GHz

Source: "Optimal Abolition of FCC Spectrum Allocation" Thomas W. Hazlett, RBC Capital Markets


February 4, 2014 43

Not All Spectrum Is Equal o The so-called sweet spot for radio spectrum includes parts of the VHF and UHF

range because good propagation characteristics make it useful for a wide variety of wireless applications while power and antenna size requirements are reasonable.

33

However, even within this range, different frequency bands are better for different purposes. For example, “it is generally accepted that lower UHF channels provide better coverage for TV broadcasting.”

34

o Much of the spectrum allocated to television broadcasting, is also the spectrum deemed most valuable for broadband use (225 MHz to 1 GHz) due to “excellent propagation characteristics in that frequency range”.

35 This means that signals at

these frequencies can cover larger regions and penetrate obstacles more effectively than signals at higher frequencies (where most broadband spectrum is located). At lower frequencies (e.g. VHF – and yes, VHF does stand for very high frequencies but relative to the range of spectrum in use, the VHF band is not actually all that high), cell phones would require larger antennas and be more prone to dropped calls.

36

While broadcast TV in the VHF spectrum may also experience problems (fading, noise, weak signals), the FCC seems to believe that these problems are ones that can be fixed. In their view, these issues should not necessarily keep the FCC from moving TV broadcast licenses currently for UHF bands into the VHF frequency range so long as sufficient effort is made to solve these problems prior to relocation.

37

Currently, within the optimal band (225 MHz to 1 GHz), almost 30% of the spectrum is granted to TV, making broadcast TV an obvious place for the government to look for additional broadband spectrum.

Partial Spectrum Monetization Is Not Out of the Question o It may be possible for a broadcaster to transmit its signal using less than 6 MHz,

allowing it to partially monetize the signal. However, it is important to note that while a broadcaster could still provide a signal with only a portion of its spectrum being used for TV broadcasting, it would either have to send a lower quality picture or fewer channels (assuming no technological improvements). We do not believe that a station would currently be able to broadcast an ‘HD’ signal for a wide range of content with less than 50% of its spectrum (and high action events, such as sports, may require 75% plus). That said, over time, development of more advanced compression technology/a new broadcast standard could reduce the amount of spectrum “space” required to send an HD quality signal. Exhibit 36 below prepared by the FCC shows how a broadcast signal can be split between channels. In each case, the primary channel is being delivered as an HD signal. Also, notice that WRC of Washington DC is also sending a mobile broadcast signal.

33 Laflin, Nigel and Dajka, Bela. A Simple Guide to Radio Spectrum. BBC 34 The Brattle Group, Inc. 35 FCC. Spectrum Analysis: Options For Broadcast Spectrum OBI Technical Paper No. 3. June 2010 36 FCC. Spectrum Analysis: Options For Broadcast Spectrum OBI Technical Paper No. 3. June 2010 37 FCC. Spectrum Analysis: Options For Broadcast Spectrum OBI Technical Paper No. 3. June 2010


February 4, 2014 44

http://www.ebu.ch/fr/technical/trev/trev_309-spectrum.pdf

Exhibit 36: Usage of One Band of Spectrum to Deliver Multiple Channels

6MHz = 18Mbps

6MHz = 18Mbps

Primary Stream Of Non-Sports Content (PBS show "This Emotional Life") in 720p HD

Primary Stream Of Non-Sports Content (PBS show "This Emotional Life") in



Quarternary Channel (SD)

Secondary Channel (SD)


Primary Stream Of Sports Content (NFL football game) in 720p HD

Primary Stream Of Sports Content (NFL football game) in 1080i HD



Mobile DTVNo Additional Channels

Source: FCC, RBC Capital Markets

o To affect partial monetization, a station group could, perhaps, sell spectrum for one of its stations and then broadcast that station either on spectrum held by another station it owns, if it has a duopoly in a market, or rent spectrum space from a station in the market owned by another party.

o Additionally, there are a couple of recent cases where local stations/groups appear to be actively looking at channel sharing as a possible tool to facilitate spectrum monetization in a potential auction. In LA, a PBS station and a multilingual station are testing spectrum sharing in an experiment sponsored by CTIA-The Wireless Association—success could make it easier for local channels to partially monetize their spectrum in a broadcast spectrum auction.

38 Additionally, recently LIN Media

has indicated it would consider selling a portion of its spectrum and participating in spectrum channel-sharing arrangements.

39

Even though broadcaster’s do not technically “own” the spectrum, it is unlikely the government would be able to reclaim the spectrum without broadcaster endorsement. o Our industry sources support the supposition that “licensees possess certain rights

and expectations that can make it difficult, in practice, for the FCC to reclaim and re-license that spectrum for another purpose.”

40 Furthermore, the broadcasters are a

powerful lobby (through, primarily, the National Association of Broadcasters, NAB)

38 nytimes.com 39 broadcastingcable.com 40 Federal Communications Commission. Spectrum Analysis: Options For Broadcast Spectrum OBI Technical Paper No. 3. June 2010

While broadcasters can send a mobile signal under the current standard, it requires a second feed—as the technical aspects of the primary feed make mobile reception impractical (e.g. fading is a major issue when trying to receive the current stationary “TV” broadcast with a moving device). However, with limited space in the spectrum and little consumer adoption, there is little incentive for broadcasters to offer such a stream. In turn, with only a few mobile DTV feeds, there is little incentive for manufacturers to offer equipment able to receive these feeds and little incentive for consumers to push for the technology. Further, we think a mobile DTV stream under the current standard would still have more broadcasting issues than one under a revised standard.


February 4, 2014 45

http://www.nytimes.com/2014/01/29/business/media/tv-stations-in-los-angeles-to-participate-in-channel-sharing-trial.html?src=recg

http://www.broadcastingcable.com/news/washington/lin-media-considers-sharing-spectrum/128721

which makes us believe non-voluntary and incentiveless reclamation of spectrum is very unlikely.

41

Broadcasters can offer some ancillary services on their spectrum o Broadcasters may provide ancillary services on the portion of their spectrum that is

not used for the TV broadcast signal, but they are required to pay a fee of 5% of gross revenues derived from these services.

Broadcasters will likely have to share value created through monetization of spectrum o With the federal government looking to reduce the deficit, we expect it to raise

revenues in connection with any broadcaster spectrum monetization (we think this is justified, up to a point, considering that broadcasters were granted use of a public good for free). However, we note that given the need to amend licenses to allow alternative uses and an existing tax on ancillary services, even in a “free-market” scenario, as described above—the government would likely capture some revenue.

Advantages to not converting spectrum to “traditional” wireless broadband spectrum o A ‘broadcast‘ or ‘one-to-many‘ system for video streaming could potentially help

conserve a significant amount of spectrum because only one signal has to be sent for many users. This contrasts significantly with typical mobile broadband usage, where each user is accessing distinct pieces of information on the Internet. Simply put, it takes less spectrum to send one signal to 1,000 people, because you only need one sliver of spectrum that everyone can ‘tune-in’ to, than to send 1,000 different signals to 1,000 people, where each person needs their own sliver of spectrum.

41 Yes, the mobile industry also has a powerful influence in Washington. However, take note of the fact that while mobile providers may compete with TV for the spectrum, they have absolutely no reason to oppose an incentive driven reclamation because whether or not the government has to pay for the spectrum, it will likely be auctioned off in the same way and thus the cost to mobile providers shouldn’t change. In fact, we think that, under these circumstances, mobile providers should be in favor of incentive payments because it could accelerate the reclamation of spectrum.


February 4, 2014 46

Ticker SBGI NXST LIN GTN MEG* GCI

Company

Sinclair

Broadcast

Group Inc.

Nexstar

Broadcasting

Group, Inc.

LIN Media LLCGray Television,

Inc.

Media

General, Inc.

Gannett Co.,

Inc.

Price as of:

2/3/2014 $30.09 $46.77 $23.62 $10.87 $17.24 $26.51

50 Day Average Volume 1,249,006 550,647 356,813 894,931 364,027 2,631,934

ENT. VALUE CALCULATION

Diluted Shares Out. (000s) 101,996 31,867 54,375 58,360 89,100 233,745

Diluted Equity Market Cap 3,069,051 1,490,443 1,284,328 634,370 1,536,084 6,196,573

Total EV 6,269,365 2,477,323 2,223,313 1,424,123 2,420,669 9,600,597

KEY FINANCIAL METRICS

Net Revenues

2011A 765,288 306,491 400,003 307,131 616,207 5,239,980

2012A 1,061,679 378,632 553,462 404,831 359,722 5,353,190

2013E 1,346,498 502,040 648,674 342,077 522,800 5,170,386

2014E 2,096,144 747,055 783,616 482,927 632,000 5,988,080 Average

2015E 2,181,630 766,256 784,867 503,500 - 5,756,720

2012-14E CAGR 41% 40% 19% 9% 33% 6% 23%

2013-15E CAGR 27% 24% 10% 21% n/a 6% 18%

EBITDA

2011A 269,498 96,100 121,905 96,280 82,000 1,144,000

2012A 412,248 148,940 236,400 176,214 145,700 1,154,400

2013E 467,311 166,749 179,671 106,950 152,600 1,043,905

2014E 796,338 308,198 276,937 205,956 228,000 1,440,712 Average

2015E 776,234 273,055 241,767 166,800 - 1,269,587

2012-14E CAGR 39% 44% 8% 8% 25% 12% 20%

2013-15E CAGR 29% 28% 16% 25% n/a 10% 23%

EPS

2011A $0.97 ($0.42) $0.27 $0.03 ($3.31) $2.13

2012A $1.78 $5.77 $1.29 $0.42 ($1.68) $2.33

2013E $1.18 $0.73 $0.53 $0.33 N/A $2.02

2014E $2.28 $3.48 $1.75 $1.18 N/A $2.71 Average

2015E $2.04 $2.76 $1.21 $0.65 - $2.53

2012-14E CAGR 13% -22% 17% 67% n/a 8% 21%

2013-15E CAGR 32% 94% 52% 40% n/a 12% 62%

FCF/Share

2011A $1.67 n/a $0.66 -$0.06 N/A $2.61

2012A $2.50 n/a n/a $0.89 N/A $2.42

2013E $2.54 $3.81 $1.32 $0.52 N/A $2.16

2014E $4.74 $7.47 $2.84 $2.10 N/A $2.89 Average

2015E $4.22 $6.96 $2.60 $1.20 - $2.82

2012-14E CAGR 38% n/a n/a 54% n/a 9% 54%

2013-15E CAGR 29% 35% 40% 52% n/a 14% 42%

Current Leverage Ratio 4.0x 4.9x 4.1x 5.5x 4.3x 2.5x

TRADING/VALUATION MULTIPLES Average

EV/2012A EBITDA 15.2x 16.6x 9.4x 8.1x 16.6x 8.3x 11.4x

EV/2013E EBITDA 13.4x 14.9x 12.4x 13.3x 15.9x 9.2x 13.5x

EV/2014E EBITDA 7.9x 8.0x 8.0x 6.9x 10.6x 6.7x 7.7x

EV/2015E EBITDA 8.1x 9.1x 9.2x 8.5x N/A 7.6x 8.9x

EV/Average 2014-15E EBITDA 8.0x 8.5x 8.6x 7.6x N/A 7.1x 8.2x

2014-15 EV/EBITDA To 13-15E CAGR 0.28 0.30 0.54 0.31 NA 0.69

Price/2012A EPS 16.9x 8.1x 18.3x 25.9x N/A 11.4x 17.4x

Price/2013E EPS 25.5x 64.1x 45.0x 32.9x N/A 13.1x 47.3x



Price/Average 2014-15E EPS 13.9x 15.0x 15.9x 11.9x N/A 10.1x 14.3x

2014-15 P/E To 13-15E CAGR 0.44 0.16 0.31 0.30 n/a 0.86

Price/2012A FCF 12.0x N/A N/A 12.2x N/A 11.0x 12.2x

Price/2013E FCF 11.9x 12.3x 17.9x 20.9x N/A 12.3x 17.0x



Price/Average 2014-15E FCF 6.7x 6.5x 8.7x 6.6x N/A 9.3x 7.3x

2014-15 P/FCF To 13-15E CAGR 0.23 n/a n/a 0.10 n/a 0.97

Ex-SBGI, GCI &

MEG ('15)*

Source: Company reports, FactSet, RBC Capital Markets estimates

USD in 000s; SBGI financials based on RBC estimates; All other companies (NXST, LIN, GTN, MEG, and GCI) are not covered by RBC Capital Markets and thus FactSet

consensus financials are used. Note: Adjusted estimates used where available, USD in 000s; *MEG estimates for 2015 do not appear to have been revised for the

closing of the Young merger and are thus excluded from averages


February 4, 2014 47

Companies mentionedCBS Corp. (NYSE: CBS; $56.31; Top Pick)Comcast Corporation (NASDAQ: CMCSA; $52.77; Outperform)Sinclair Broadcast Group, Inc. (NASDAQ: SBGI; $30.09; Outperform)The Walt Disney Company (NYSE: DIS; $69.99; Outperform)Twenty-First Century Fox Inc. (NASDAQ: FOXA; $30.88; Outperform)

Required disclosuresConflicts disclosuresThe analyst(s) responsible for preparing this research report received compensation that is based upon various factors, includingtotal revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generatedby investment banking activities of the member companies of RBC Capital Markets and its affiliates.

Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in,this report. To access current conflicts disclosures, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza,29th Floor, South Tower, Toronto, Ontario M5J 2W7.

RBC Capital Markets, LLC makes a market in the securities of CBS Corp..

A member company of RBC Capital Markets or one of its affiliates managed or co-managed a public offering of securities forComcast Corporation in the past 12 months.

A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services fromComcast Corporation in the past 12 months.

RBC Capital Markets, LLC makes a market in the securities of Comcast Corporation.

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other thaninvestment banking services from Comcast Corporation during the past 12 months. During this time, a member company of RBCCapital Markets or one of its affiliates provided non-securities services to Comcast Corporation.

RBC Capital Markets is currently providing Comcast Corporation with non-securities services.

RBC Capital Markets has provided Comcast Corporation with investment banking services in the past 12 months.

RBC Capital Markets has provided Comcast Corporation with non-securities services in the past 12 months.

A member company of RBC Capital Markets or one of its affiliates managed or co-managed a public offering of securities for TheWalt Disney Company in the past 12 months.

A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services fromThe Walt Disney Company in the past 12 months.

RBC Capital Markets, LLC makes a market in the securities of The Walt Disney Company.

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other thaninvestment banking services from The Walt Disney Company during the past 12 months. During this time, a member company ofRBC Capital Markets or one of its affiliates provided non-securities services to The Walt Disney Company.

RBC Capital Markets is currently providing The Walt Disney Company with non-securities services.

RBC Capital Markets has provided The Walt Disney Company with investment banking services in the past 12 months.

RBC Capital Markets has provided The Walt Disney Company with non-securities services in the past 12 months.


February 4, 2014 48

https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1

https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1

RBC Capital Markets, LLC makes a market in the securities of Twenty-First Century Fox Inc..

A member company of RBC Capital Markets or one of its affiliates managed or co-managed a public offering of securities for SinclairBroadcast Group, Inc. in the past 12 months.

A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services fromSinclair Broadcast Group, Inc. in the past 12 months.

RBC Capital Markets, LLC makes a market in the securities of Sinclair Broadcast Group, Inc..

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other thaninvestment banking services from Sinclair Broadcast Group, Inc. during the past 12 months. During this time, a member companyof RBC Capital Markets or one of its affiliates provided non-securities services to Sinclair Broadcast Group, Inc..

RBC Capital Markets is currently providing Sinclair Broadcast Group, Inc. with non-securities services.

RBC Capital Markets has provided Sinclair Broadcast Group, Inc. with investment banking services in the past 12 months.

RBC Capital Markets has provided Sinclair Broadcast Group, Inc. with non-securities services in the past 12 months.

The author is employed by RBC Capital Markets, LLC, a securities broker-dealer with principal offices located in New York, USA.

Explanation of RBC Capital Markets Equity rating systemAn analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assignedto a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative tothe analyst's sector average. Although RBC Capital Markets' ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP), andUnderperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same becauseour ratings are determined on a relative basis.RatingsTop Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 monthswith a favorable risk-reward ratio.Outperform (O): Expected to materially outperform sector average over 12 months.Sector Perform (SP): Returns expected to be in line with sector average over 12 months.Underperform (U): Returns expected to be materially below sector average over 12 months.Risk RatingAs of March 31, 2013, RBC Capital Markets suspends its Average and Above Average risk ratings. The Speculative risk rating reflectsa security's lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limitedoperating history that result in a higher expectation of financial and/or stock price volatility.

Distribution of ratingsFor the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,the meanings are not the same because our ratings are determined on a relative basis (as described below).

Distribution of ratings

RBC Capital Markets, Equity Research

As of 31-Dec-2013

Investment Banking

Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [Top Pick & Outperform] 791 51.13 274 34.64

HOLD [Sector Perform] 666 43.05 179 26.88

SELL [Underperform] 90 5.82 14 15.56


February 4, 2014 49


February 4, 2014 50


February 4, 2014 51

References to a Recommended List in the recommendation history chart may include one or more recommended lists or modelportfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists includea former list called the Prime Opportunity List (RL 3), the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Large Cap(RL 7), the Guided Portfolio: Dividend Growth (RL 8), the Guided Portfolio: Midcap 111 (RL 9), the Guided Portfolio: ADR (RL 10),and the Guided Portfolio: Global Equity (U.S.) (RL 11). RBC Capital Markets recommended lists include the Strategy Focus Listand the Fundamental Equity Weightings (FEW) portfolios. The abbreviation 'RL On' means the date a security was placed on aRecommended List. The abbreviation 'RL Off' means the date a security was removed from a Recommended List.

Equity valuation and risksFor valuation methods used to determine, and risks that may impede achievement of, price targets for covered companies, pleasesee the most recent company-specific research report at https://www.rbcinsight.com or send a request to RBC Capital MarketsResearch Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.

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February 4, 2014 52

https://www.rbcinsight.com

https://www.rbcinsight.com

of a subject company that is considered a long-term 'Sector Perform' or even an 'Underperform' might be a short-term buyingopportunity as a result of temporary selling pressure in the market; conversely, the security of a subject company that is rateda long-term 'Outperform' could be considered susceptible to a short-term downward price correction. Short-Term Trade Ideasare not ratings, nor are they part of any ratings system, and RBC Capital Markets generally does not intend, nor undertakes anyobligation, to maintain or update Short-Term Trade Ideas. Short-Term Trade Ideas discussed in SPARC may not be suitable for allinvestors and have not been tailored to individual investor circumstances and objectives, and investors should make their ownindependent decisions regarding any Short-Term Trade Ideas discussed therein.

Analyst certificationAll of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all ofthe subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly orindirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s Financial ServicesLLC (“S&P”) and is licensed for use by RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or impliedwarranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warrantiesof originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing,in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special,punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

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February 4, 2014 53

or possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that productand consider that document before making any decision about whether to acquire the product. This research report is not for retail investors as defined in section761G of the Corporations Act.To Hong Kong Residents:This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, RBC Investment Management (Asia) Limited and RBC Capital Markets (HongKong) Limited, licensed corporations under the Securities and Futures Ordinance or, by the Royal Bank of Canada, Hong Kong Branch, a registered institution underthe Securities and Futures Ordinance. This material has been prepared for general circulation and does not take into account the objectives, financial situation,or needs of any recipient. Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact RBCInvestment Services (Asia) Limited, RBC Investment Management (Asia) Limited, RBC Capital Markets (Hong Kong) Limited or Royal Bank of Canada, Hong KongBranch at 17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone number is 2848-1388).To Singapore Residents:This publication is distributed in Singapore by the Royal Bank of Canada, Singapore Branch and Royal Bank of Canada (Asia) Limited, registered entities grantedoffshore bank and merchant bank status by the Monetary Authority of Singapore, respectively. This material has been prepared for general circulation and doesnot take into account the objectives, financial situation, or needs of any recipient. You are advised to seek independent advice from a financial adviser beforepurchasing any product. If you do not obtain independent advice, you should consider whether the product is suitable for you. Past performance is not indicativeof future performance. If you have any questions related to this publication, please contact the Royal Bank of Canada, Singapore Branch or Royal Bank of Canada(Asia) Limited.To Japanese Residents:Unless otherwise exempted by Japanese law, this publication is distributed in Japan by or through RBC Capital Markets (Japan) Ltd., a registered type one financialinstruments firm and/or Royal Bank of Canada, Tokyo Branch, a licensed foreign bank.

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February 4, 2014 54

Broadcasting Industry Overview

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