February 28, 2014 Volume XL, Issue II Time Warner Inc. NYSE: TWX

Dow Jones Indus: 16,321.71 Initially Probed: Volume XXVIII, Issue VII @ $13.06 S&P 500: 1,859.45 Last Probed: Volume XXXIX, Issue XI & XII @ $65.82 Russell 2000: 1,183.03 Trigger: No Index Component: S&P 500 Type of Situation: Business Value, Consumer Franchise

Price: $ 67.13 Shares Outstanding (MM): 901.9 Fully Diluted (MM) (% Increase): 924.3 (2.5%)

Average Daily Volume (MM): 5.4 Market Cap (MM): $ 62,048 Enterprise Value (MM): $ 80,351 Percentage Closely Held: Insiders <1% 52-Week High/Low: $ 30.48/15.95

Trailing Twelve Months Price/Earnings: 17.1x Introduction Price/Stated Book Value: 2.1x Time Warner Inc. (“TWX” or the “Company”) is Long-Term Debt (MM): $ 20,099 a leading media and entertainment conglomerate. Time Implied Upside to Estimate of Warner’s stable of businesses include the leading film Intrinsic Value: 46% and TV production studio (Warner Bros.), the dominant premium pay TV network (HBO), a collection of top Dividend: $1.17 cable networks (including TNT, TBS, CNN), and the Payout 29.8% largest domestic print magazine portfolio (Time Inc.). Yield 1.7% Asset Analysis Focus last profiled Time Warner in January 2011. At the time, we highlighted Time Net Revenue Per Share: Warner’s attractive sum-of-the-parts valuation, which 2013 $ 31.61 we believed reflected a conglomerate discount as well 2012 $ 29.43 as the extreme negative investor sentiment toward 2011 $ 27.21 traditional media companies prevalent at that time.

TWX shares have rallied 140% over the Earnings Per Share: subsequent 3 years, reflecting strong double-digit 2013 $ 3.92 annual EPS growth as well as improved investor 2012 $ 3.00 sentiment. However, in our estimation TWX still trades 2011 $ 2.71 at an unwarranted discount to peers considering its

dominant franchises. The upcoming spinoff of Time Inc. Fiscal Year Ends: December 31 (“Time” or the “Spinco”), set for 2Q 2014, could provide Company Address: One Time Warner Center a catalyst for closing this discount by separating the un- New York, NY 10019 loved, declining publishing business from TWX’s more Telephone: 212-484-8000 attractive assets. Pro forma for the separation, TWX will Chairman/CEO: Jeffrey L. Bewkes generate approximately 80% of revenue from Clients of Boyar Asset Management, Inc. own 57,465 shares of Time subscription and content sources. The Company will Warner Inc. common stock at a cost of $28.01 per share. also generate close to 30% of revenue internationally. Analysts employed by Boyar’s Intrinsic Value Research LLC own In addition to international distribution of Warner Bros. shares of TWX common stock. content, TWX’s footprint includes ~84 million - 33 - Time Warner Inc. international subscribers at HBO and distribution of Turner content in over 200 countries. Management expects TWX to grow EPS by double digits again in 2014, and the Company has a tremendous platform to continue that growth going forward. In our sum-of-the-parts analysis, we apply higher multiples to the premium HBO (12.5x 2016E OIBDA) and Turner Networks (11x) business units than to the low-growth Warner Bros. filmed entertainment division (10x) to derive an estimated intrinsic value of approximately $92 per share. Notably, these multiples still represent discounts to the divisions’ respective peers. Adding in Time Inc. at a discounted 6.5x 2013 OIBDA, TWX shares have 46% upside to our estimate of intrinsic value looking out over the next 2-3 years.

While the Time Inc. spinoff may not be meaningful enough to move the needle at TWX, it is the third spinoff and just the latest in a string of shareholder-friendly corporate actions at TWX under CEO Jeff Bewkes. In February 2014, TWX also began separately reporting results at HBO and Turner Networks. At the least, this could be a catalyst for investors to begin to properly ascribe a premium multiple to HBO. More optimistically, we would not dismiss the possibility that TWX eventually considers a separation of Turner and/or HBO. We believe either business would command a premium valuation as a standalone company, and would also present an attractive acquisition target. Absent further deconsolidation, TWX should continue to create shareholder value via aggressive return of capital. TWX has repurchased ~20% of its shares over the past 3 years alone (at a 37% average discount to the current price), and the Company is boosting its target leverage ratio to a still-moderate 2.75x OIBDA (currently 2.4x leveraged) in conjunction with the Time spinoff.

Assessing the Time Inc. Spinoff When Asset Analysis Focus last devoted a full profile to Time Warner in January 2011, we discussed our hope that the Company would consider a sale or spinoff of the Publishing Business. Time Warner Chairman and CEO Jeff Bewkes had already taken several steps to streamline the Company since taking the helm in 2008. Most notably, this included the spinoffs of Time Warner Cable in March 2009 and AOL in December 2009. More than three years later, our wishes are set to come true. In March 2013, Time Warner announced another iteration of the Company’s spinoff strategy: TWX will distribute the Publishing Business to TWX shareholders during 2Q 2014, creating an independent publicly traded company to be renamed Time Inc. Each of TWX’s previous spinoffs proved rewarding for TWX shareholders and for ongoing shareholders of the newly-created companies, and we believe this iteration offers a similar opportunity.

Business Description Time Inc. publishes 23 print magazine titles in the U.S. including People, Time, Sports Illustrated, and Southern Living. Time’s U.S. operations contributed approximately 82% of the Spinco’s revenue in 2012. The Spinco generates 13% of revenue in the United Kingdom, primarily through subsidiary IPC Magazines Group and its portfolio of over 60 media brands. Time publishes over 10 titles in Mexico through subsidiary Grupo Editorial Expansion (GEX). In October 2013, Time acquired American Express Publication Corporation from American Express. Renamed the Time Inc. Affluent Media Group, the portfolio includes Travel + Leisure and Food & Wine magazines.

Time Inc. generates approximately 85% of revenue from magazine publishing, including greater than 50% from advertising sales (mostly print advertising as well as digital magazine and online advertising and advertising services provided to third parties) and ~1/3 from circulation. Approximately 60% of circulation revenue is subscription-based, with the remainder from newsstand sales. Time also licenses over 50 titles for international publication and generates other ancillary revenue such as brand licensing, TV extensions (This Old House; People TV specials, etc.), hosted conferences, outsourced publication management services, book publishing and equity income.

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Principal U.S. Magazine Titles Magazine title Rate Base(a) Frequency(b) Category Related magazine titles Related websites People 3,475,000 52 Celebrity Weekly People en Español (U.S.) People.com People StyleWatch (U.S.) PeopleenEspanol.com Time 3,250,000 48 Weekly Time for Kids (U.S.) Time.com Newsmagazines Time (Europe) Life.com Time (Asia) TimeforKids.com Time (South Pacific) Sports Illustrated 3,000,000 52 Sports: General Sports Illustrated Kids SI.com (U.S.) FanNation.com SIKids.com Southern Living 2,800,000 12 Regional SouthernLiving.com Real Simple 1,975,000 12 Womens Lifestyle RealSimple.com Cooking Light 1,775,000 11 Epicurean MyRecipes.com CookingLight.com Entertainment Weekly 1,725,000 44 Entertainment EW.com Money 1,700,000 11 Personal Finance Money.com InStyle 1,700,000 13 Womens Fashion InStyle.com All You 1,500,000 12 Womens Service AllYou.com Golf 1,400,000 12 Sports: Golf Golf.com Health 1,350,000 10 Womens Health & Health.com Fitness Sunset 1,250,000 12 Regional Sunset.com What’s On TV (U.K.) 1,083,198 51 Entertainment WhatsOnTV.co.uk Essence 1,050,000 12 African American Essence.com This Old House 950,000 10 Shelter ThisOldHouse.com Travel + Leisure 950,000 12 Travel TravelandLeisure.com Food & Wine 925,000 12 Epicurean FoodandWine.com Fortune 830,000 18 Business: Corporate Fortune (Europe) Fortune.com Fortune (Asia) (a) Circulation level guaranteed to advertisers for regular issue U.S. magazines in 2013 or ABC reported first-half 2013 circulation for U.K. magazines, as applicable. (b) Number of physical issues, including regularly published special issues, delivered to subscribers in 2013.

Best-in-Class Publisher By nearly all measures, the print media business is in the midst of a long-term secular decline. Nonetheless, Time remains highly profitable and we believe Time’s portfolio is among the better-positioned in the magazine publishing industry to maintain healthy profit levels for the foreseeable future. Time Inc. has the largest magazine circulation in the U.S. across a diverse portfolio of targeted brands (documented in the preceding table) that we believe are more durable than the broader print business. Below, we detail some of Time’s attractive business characteristics and key competitive advantages.  Leading Scale: Time Inc. is the #1 domestic print magazine publisher based on readership and print advertising revenue, with approximately 100 million domestic print customers each month according to the Company. Time had 7 of the top 25 magazines in the U.S. in 2013 based on advertising revenues, including the number 1, 3, and 4 titles People, Sports Illustrated, and InStyle. Time is also the #1 magazine publisher in the U.K. based on print newsstand revenue, with IPG’s portfolio reaching almost 26 million adults including 49% of all mass market women, according to IPG. Time Inc.’s leading scale affords the Company considerable cost savings and revenue synergies across magazines and divisions.  Customer Database: A corollary of Time’s scale advantage is its leading customer database covering over 150 million U.S. adults. Time’s national reach enables the Spinco to attract increased advertising dollars via national ad campaigns as well as targeted advertising across geographic and demographic segments. This is reflected in Time’s 23.7% share of domestic print magazine advertising spending in 2013, according to the Publishers Information Bureau (PIB).The Company’s vast database also provides a marketing advantage for building and maintaining its magazine circulation as well as providing third-party marketing and advertising services.

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 Iconic and Targeted Lifestyle Brands: Time’s collection of titles includes several iconic, premium brands that we believe should prove more durable than the broader print industry. For example, People dominates the celebrity entertainment category and that one brand alone generated almost 20% of Time Inc. revenue in 2012. Like People, many of Time’s brands (the namesake notwithstanding) are directed at targeted audiences like women’s leisure, affluent homeowners, fashion, regional, etc. and skew toward audiences with higher household income. In the U.K., IPC’s portfolio of over 60 brands are organized in 3 publishing divisions based on targeted audiences: IPC Connect (women’s mass market, with titles including Now, Chat, and Woman); IPC Southbank (upmarket women with titles including MarieClaire via an unconsolidated JV, InStyle, and Ideal Home) and IPC Inspire (men’s leisure and lifestyle, e.g. Nuts, Mousebreaker, NME). The values of these brands are reflected in average subscription prices ~2x their closest competitors for magazines like People, InStyle, and Real Simple. Time’s targeted magazines should also hold up better than broader news magazine weeklies and newspapers in the face of growing free, Internet- delivered competition.  Strong Online Presence: Time also has a robust online presence of its own, including over 45 websites and an improving mobile and digital magazine presence. Time estimates its global digital/mobile footprint reaches 116 million customers. Time.com, People.com, and SI.com (linked to cnn.com) are all top-250 ranked websites in the U.S. according to Alexa Internet. IPC websites also engage over 25 million users/month in the U.K. Time generates a growing, double-digit percentage of advertising revenue from digital channels. Just in February 2014, Time announced a partnership with Google to launch a programmatic ad exchange across Time’s digital properties globally.

Historical Performance Despite its strong brands, Time Warner’s Publishing Business has failed to avoid the fate (secular decline) of the broader publishing industry. The business’s total revenues declined 2.4% in 2012 and 3.3% in 2013 and have declined at a 5.5% CAGR since 2005. On the positive side, we would note that advertising and subscription revenues have actually held up fairly well to date, averaging low-to-mid single-digit declines on an annual basis. This has been counterbalanced by newsstand revenues, which have been free-falling at double- digit rates in recent years likely due to the rapid growth of mobile-delivered content alternatives.

Time Inc. Historical Revenue by Source Revenue: 2010 2011 2012 2013 Advertising $1,935 $1,923 $1,819 $1,807 Subscription $735 $754 $748 $723 Newsstand $538 $498 $447 $389 Other $18 $19 $15 $17 Total Circulation $1,291 $1,271 $1,210 $1,129 Other $449 $483 $407 $418 Total Revenue $3,675 $3,677 $3,436 $3,354

Despite the declines, Time’s advertising performance across its principal magazine titles still has fared meaningfully better than the broader industry, as illustrated in the following table. According to PIB, U.S. print advertising dollars increased by 1.1% in 2013 across 207 tracked magazines, versus a 4.0% increase for Time across 22 of its largest titles. In 2012, Time’s core U.S. portfolio declined 1.0% versus 4.1% for the industry. Time’s ad page count also held up modestly better than the industry. Time’s advertising outperformance was led by its premiere women’s entertainment and fashion brands like People, Entertainment Weekly, and InStyle, each of which averaged mid-single to low double-digit annual print ad dollar increases over the past 2 years. Unfortunately, this has been partially offset by the more daunting secular challenges faced by Time’s magazines in categories such as news weeklies (Time magazine ad dollars down ~6% in 2012-2013), business publications (Fortune up ~2% but Money down an average of 5% in 2012-2013) and other men’s categories (Sports Illustrated down 5.5% in 2013).

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Time U.S. Magazine Ad Dollars, 2013 vs. 2012 2013 2012 2013 2012 2013 2012 2013 2012 CONSUMER MAGAZINES Ad Dollars Ad Dollars %Chg %Chg Ad Pages Ad Pages %Chg %Chg All You 36,528,466 35,662,043 2.4 -8.2 696.42 725.73 -4 -24.3 Cooking Light 129,746,024 124,121,159 4.5 -7.9 944.25 960.9 -1.7 -13.2 Country Weekly 6,331,638 7,061,686 -10.3 0.8 716.91 845.05 -15.2 -3.4 Entertainment Weekly 210,479,417 188,235,841 11.8 -4.7 1,070.41 1,011.39 5.8 -8.8 Essence 101,708,206 110,412,175 -7.9 -10.3 920.49 1,063.48 -13.4 -15.5 Food & Wine 103,228,368 98,453,091 4.9 0.6 999.2 1,006.77 -0.8 -5.5 Fortune 213,474,027 208,441,655 2.4 2.2 1,408.77 1,464.18 -3.8 -4 Golf Magazine 188,167,872 162,048,623 16.1 3.6 895.49 798.81 12.1 -4 Health 76,765,009 71,151,598 7.9 -17.9 629.33 613.15 2.6 -22.4 In Style 483,830,082 435,274,675 11.2 11.6 2,810.83 2,683.70 4.7 5.4 Money 104,127,065 116,864,546 -10.9 -0.1 462.68 514.73 -10.1 -5 People 1,065,943,779 993,275,045 7.3 -0.4 3,183.46 3,155.50 0.9 -6 People En Espanol 82,260,386 81,010,316 1.5 18.6 1,022.07 1,066.95 -4.2 12.1 People Style Watch 120,204,620 111,096,459 8.2 12.1 1,376.03 1,352.82 1.7 3.8 Real Simple 262,382,612 242,046,792 8.4 -13.1 1,307.89 1,277.79 2.4 -17.8 Southern Living 190,196,189 183,358,186 3.7 1 861.83 880.84 -2.2 -6.5 Sports Illustrated 545,175,908 576,764,608 -5.5 0.1 1,327.20 1,411.50 -6 -5.5 Sports Illustrated Kids 7,946,498 6,612,246 20.2 18.1 111.42 96.88 15 11.7 Sunset 69,225,973 65,609,149 5.5 -6.6 520.91 530.77 -1.9 -12.3 This Old House 50,093,864 51,138,914 -2 -2.4 466.87 506.77 -7.9 -7.2 Time 372,219,522 396,044,849 -6 -5.6 1,066.65 1,203.49 -11.4 -12.2 Travel+Leisure 139,951,991 121,838,752 14.9 -10.3 1,050.49 967.48 8.6 -15.5 Time Inc. – Principal Titles 4,559,987,516 4,386,522,408 4.0 -1.1 23,850 24,139 -1.0 -7.1 CONSUMER MAGAZINES TOTAL 19,738,668,006 19,519,118,181 1.1 -3 145,712.93 151,942.76 -4.1 -8.2 Source: The Association of Magazine Media and Publishers Information Bureau via www.magazine.org

Management expects the recent revenue trends to continue as the industry headwinds persist. We are cautiously optimistic Time’s print magazine advertising revenue will continue to outperform the industry by a couple percentage points per annum given its composition. The growing adoption of tablets should also continue to buoy advertising revenue going forward. According to the Publishers Information Bureau (PIB), ad units increased by a whopping 16% across 69 iPad magazine titles in 2013. In terms of circulation revenue, the drag from newsstand sales should become progressively less material to Time, as newsstand sales already account for less than 12% of total revenue. From a profitability standpoint, in recent years, the Company has been moderately successful in containing production and editorial costs. Total costs of revenue were 38.4% in 2013, up just over 2 percentage points from 2010 levels. However, this does not reflect restructuring charges, which have been an ongoing cost of business at Time for several years. Time took $63 million in restructuring costs in 2013 primarily related to headcount reductions. Total SG&A expenses have also remained stubbornly high at 42%-44% of revenue over the past several years. As a result, the combination of modest margin declines and revenue losses has led adjusted OIBDA to decline from $675 million in 2010 to $531 million in 2013. Although also declining somewhat, Time continues to throw off a large amount of cash flow. Free cash flow totaled $427 million in 2012 vs. $472 million in 2010, and was close to $400 million in 2013.

Financial Outlook: New Management Set to Attack Costs Going forward, better cost discipline will be essential if Time is to maintain profitability over the long term. Importantly, we believe Time has two major catalysts in a new management team and the pending spinoff. During summer 2013, Time replaced both the CEO and CFO. New CEO Joseph Ripp is a seasoned executive who formerly worked at Time Warner including progressive stints as CFO of Time Inc., Time Warner, and finally AOL between 1993-2002. In the months following Mr. Ripp's hiring, Time made a rash of additional management changes including a new Chief Content Officer, Chief Technology Officer, EVP of Advertising Sales, EVP of Consumer Marketing, General Counsel, and Editor of People. The managerial shakeup reached the editorial operations, which were decentralized and the Time Inc. Editor-in-Chief position was eliminated. Norman Pearlstein (Time Inc. Editor-in-Chief from 1995-2004 and most recently Bloomberg L.P. Chief Content Officer) will have editorial oversight in the newly created role of Chief Content Officer.

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Regarding cost cutting, we believe there is plenty of low hanging fruit for the new management team. Editorial costs are roughly flat in recent years despite the revenue declines and restructuring initiatives. Furthermore, Time’s SG&A expenses were a bloated 43.9% of revenue in 2013. Despite laying off 500 employees in the 1Q 2013 restructuring initiative, Time still has roughly 5,000 U.S. employees and another 2,800 in international operations. We believe the new management team, combined with the separation from Time Warner, will provide a catalyst for more aggressive financial management. To put it lightly, the new executives will be highly incentivized via stock and options/RSUs in the newly-created independent entity. CEO Ripp received restricted stock and options covering approximately 267,000 TWX shares, which will be converted into Time Inc. equity following the spinoff. New CFO Jeff Bairstow also received approximately 36,000 TWX restricted shares and options to be converted into Time Inc equity. Other employees’ outstanding stock options and RSUs will also be converted following the spinoff. Going forward, cash bonuses will also be linked directly to adjusted income and free cash flow.

In fact, the new team already appears to be acting quickly. A complete strategic and financial review was initiated upon their arrival in late 2013 and is still ongoing. As part of the review, in February 2014 Time began a new restructuring program that includes “streamlining its organizational structure to enhance operational flexibility, speed decision-making, and spur the development of new cross-brand products and services.” Time expects to take ~$150 million of restructuring charges in 1H 2014 primarily tied to cost initiatives and real estate consolidation (lease exit costs) as well as the American Express Publishing integration, including ~$100 million in 1Q 2014 (prior to separation from TWX). Part of Mr. Pearlstein’s stated role will also be bridging the gap between the business and content sides of the Spinco, which we interpret as introducing cost discipline and financial accountability to the editorial side.

On the revenue side, the strategic review is also aimed at re-evaluating investment priorities with an aim to returning to growth. The new management team has emphasized a focus on digital and cross-device initiatives. Enhancing the Spinco’s digital platforms and strategy could lead to new revenue sources as well as improving the cost structure by reducing physical production costs (print, paper, distribution).

Real Estate: Hidden Assets Real estate offers another prime opportunity for cost savings and one source of potentially hidden value is Time’s real estate portfolio, listed below. Time’s vast utilized office space includes a majority of the 2 million square foot Time & Life Building in New York as well as substantial space in London, Alabama, Florida and New Jersey. Time’s current net rental expense is approximately $90 million per year, and the Spinco also utilizes close to 1 million additional square feet of owned real estate. The dissolution of Time’s operating clusters (announced as part of the new restructuring plans) will likely include meaningful rationalization of this real estate footprint. Time’s leased real estate at the Time & Life Building alone likely accounts for an estimated ~$70 million per year. Reducing this occupancy by even ½ could result in meaningful value creation for Time equity holders given the Spinco’s size.

Additionally, we would note that Time owns a large portion of its office space including the Blue Fin Building in London (completed next to the Tate Modern in Southwark in 2007), which has been rumored to be under consideration for sale.1 Of course, with ~40% of the building sub-let and the remainder currently utilized by Time, a sale would represent financial engineering as much as value creation. But based on the capital value per square foot implied by the sale of two adjacent buildings (part of the same project) in September 2013, the Blue Fin building would command £343 million or $571 million (€687 million/sq. foot or 5.25% net initial yield)—a material source of low-cost capital for the Spinco (16.5% of estimated Spinco enterprise value).

1 http://www.costar.co.uk/en/assets/news/2013/September/MG-swoops-to-buy-312m-RBS-campus/ - 38 - Time Warner Inc.

Principal Real Estate Properties Approximate Leased or Expiration Date, Description / Location Principal Use Square Footage Owned if Leased Time & Life Building Rockefeller Center Executive, business, 2,000,000(a) Leased 2017 1271 Avenue of the Americas administrative and editorial offices New York, New York Blue Fin Building Executive, business, 110 Southwark Street 499,000(b) Owned — administrative and editorial offices London, United Kingdom 2100 Lakeshore Drive Executive, business, 398,000 Owned — Birmingham, Alabama administrative and editorial offices 135 West 50th Street Business and editorial offices 240,000(c) Leased 2017 New York, New York 3102 Queen Palm Drive Warehouse and distribution facility 230,000 Leased 2020 Tampa, Florida Hippodrome Building 1120 Avenue of the Americas Business and editorial offices 143,000 Leased 2015 New York, New York(d) 3000 University Center Drive Business offices, call center 10419 N 30th Street 133,000 Leased 2020 and distribution facility Tampa, Florida 260 Cherry Hill Road Business offices 132,000(e) Owned — Parsippany, New Jersey One North Dale Mabry Highway Business offices 70,000 Leased 2020 Tampa, Florida (a) The current tenant is Historic TW Inc., a subsidiary of Time Warner. Time Warner expects to transfer the lease to Time Inc. as part of the Internal Reorganization. Approximately 548,000 square feet are subleased to unaffiliated third-party tenants. (b) Approximately 210,000 square feet are leased to unaffiliated third-party tenants. (c) Approximately 4,000 square feet are subleased to unaffiliated third-party tenants. (d) Lease acquired on October 1, 2013 in connection with our acquisition of American Express Publishing Corporation (e) Approximately 24,000 square feet are leased to Time Warner.

Outlook and Valuation Time Inc. is unlikely to be a significant determinant of value for long-term TWX shareholders given the former’s modest enterprise size in relation to the parent. On the other hand, for this same reason there could be intense selling pressure on Time Inc. shares initially, as is so often observed with spinoffs. This could lead to a mis-pricing scenario worthy of opportunistic investors’ attention. In assessing Time’s estimated intrinsic value, we are not positive on the business regaining top-line growth anytime soon. On the other hand, Time Inc. should be somewhat insulated from the worst of the broader industry’s long-term challenges given Time’s scale, premier/niche brands, and online footprint. At the same time, the new management team is highly incentivized to cut costs and explore all strategic alternatives. This could entail folding Time’s less productive product lines as part of the de-clustering initiative; we suspect there is a vast disparity in cash flow production between parts of Time’s strongest and weakest divisions.

Alternatively, larger strategic moves could be in the works. As noted, management is conducting a full strategic and financial review, and we believe this could entail much more than just layoffs, real estate footprint rationalization, and other traditional cost cutting measures. Time Warner reportedly discussed a sale of U.K. subsidiary IPC in 2010-11. IPC Magazine Group was acquired from private equity firm Cinven for £1.15 billion in 2001. While its value is likely much lower today, we suspect a sale of IPC and the Blue Fin Building in London could net upwards of $1 billion for Time. It was also widely reported that Time Warner and Meredith Corporation explored a merger of some or all of Time’s assets into Meredith in 2012-early 2013 before talks broke down, triggering TWX to initiate the spinoff. Nonetheless, following the decision in March 2013, Meredith CEO Steve Lacy reiterated his company remained “open to continuing a dialogue on how our companies might work together on future opportunities.” A combination of Meredith’s 18 magazine portfolio with Time could offer attractive revenue synergies, and the transition of Time’s editorial and administrative footprint from New York City into Meredith’s Des Moines, Iowa headquarters (sounds like an easy way to implement voluntary redundancies) could translate to huge cost savings.

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Barring a break-up or outright sale of the Spinco, Time still throws off a valuable cash stream. Time Warner currently intends to spin Time Inc. with approximately $1.3 billion in debt, or just under 2.5x 2013 adjusted OIBDA. Pro forma for incremental leverage, we estimate Time still produced ~$300 million in free cash flow in 2013. Assuming some success with restructuring initiatives while core earnings continue to decline at low single-digit rates, and adding in estimated excess real estate value, we estimate the Time Inc. Spinco’s intrinsic value is approximately $2.28 per TWX share assuming a discounted 6.5x 2013 adjusted OIBDA trading multiple. This translates to a conservative single-digit free cash flow multiple. By comparison, based on recent industry transactions, we estimate Time could command upwards of 8-10x OIBDA in a transaction, implying a private market value of $3-$4 billion or ~$3-$4 per TWX share. For example, in 2011 Hearst acquired 102 magazine titles including Elle from Lagardère for €651 million or a reported 13x EBIT.

Time Inc. Estimate of Intrinsic Value ($ millions) Time @ 6.5x 2013 OIBDA $3,452 Less Assumed Net Debt at Spinoff ($1,300) Equity Value $2,152 Estimated Intrinsic Value per TWX Share $2.28

As an independent company, the spinoff will also allow Time more flexibility to deploy its cash to improve its competitive position (whether via investments or strategic acquisitions) and/or return cash to shareholders. Discussing the proposed $1.3 billion initial leverage, Time Warner CFO Howard Averill noted during the Company’s 4Q 2013 conference call, “We think that level will allow sufficient flexibility to both invest in the business and provide direct returns to stockholders, while also optimizing its cost of capital and delivering attractive levered equity returns to investors.” Similarly, Time CEO Ripp noted last July, “Their [Time’s] subscription unit generates a lot of cash. In the past, they were restricted with how to use that, and cash flows flowed to Time Warner. Now we have opportunities to reinvest in making the Web better and the iPad app better and into different industries as well.” 2

Content is King. Long Live Time Warner. In the eyes of many investors, the U.S. video programming industry is fully mature at best, and at worst, facing a long-term secular decline from cord cutting. Contrarily, we have detailed the favorable characteristics of the programming business in many Asset Analysis Reports in recent years, and the continued outsized growth across Time Warner’s business units also suggests the pessimistic narrative is less than fully accurate. In particular, we believe growing competition for viewership across platforms is only increasing the value of high quality content. In our view, Time Warner is arguably the best-positioned company of scale in the world to take advantage of this trend. Time Warner generated a startling $22.6 billion or 76% of revenue from content and subscription sources in 2013, and features the leading production studios, the dominant premium TV network, and the highest-rated cable networks. Pro forma for the Time separation, TWX generates ~80% of revenue from content and subscription. Below, we provide a brief update on Time Warner’s dominant assets and recent performance/outlook.

Time Warner Inc. Components of Revenue ($ millions) 2011 2012 2013 Subscription $9,523 $9,997 $10,379 Advertising $6,116 $6,121 $6,326 Content $12,635 $11,832 $12,240 Other $700 $779 $850 Total Revenues $28,974 $28,729 $29,795

2 http://www.nytimes.com/2013/07/23/business/media/joseph-ripp-named-new-head-of-time-inc.html?_r=0 - 40 - Time Warner Inc.

Warner Bros. Time Warner’s Warner Bros. business unit (formerly titled Theatrical Entertainment) includes the Company’s feature film and television production and distribution businesses as well as related home video, videogame, and ancillary licensing operations. Warner Bros. generates ~50% of revenue from feature film production under the Warner Bros. and New Line titles. While the film production business is volatile and requires heavy investment, Warner’s leading scale and franchises provide a unique advantage. Warner Bros. released 18 movies in the U.S. in 2013 following 17 titles in 2012, protecting the Company from exposure to the results of any one particular feature. Warner’s portfolio of world-recognized franchises also insulates its studios against excessive volatility. Enhanced by the DC Entertainment comic book division, Warner’s leading stable of owned or licensed franchises/characters include Batman, Superman, Green Lantern, Wonder Woman, Lord of the Rings/The Hobbit, and Harry Potter. TWX typically uses co-financing arrangements to further reduce financial exposure; only 3 films were wholly-financed in 2013. Warner Bros. again produced industry-leading results in 2013, setting a record with over $5 billion in global box office revenues. Looking forward, Warner Bros. is set to release another 18 films in 2014 including The LEGO Movie ($330 million global box office revenue YTD vs. $60 million production budget), Batman vs. Superman, and the third installment of The Hobbit. The Company also recently reached an agreement with Harry Potter author J.K. Rawlings to develop a new film series and TV mini-series. Warner Bros. also includes the industry’s largest television production studios. Warner produced 32 shows for broadcast television in 2013, including the #1 rated comedy (The Big Bang Theory) and #1 rated non-scripted series (The Voice). Warner is also producing another ~30 shows for cable networks this season.

Overall, Warner Bros. produced decent growth in revenue (2%) and operating income (8% to $1.3 billion) in 2013. Going forward, Warner is ideally placed to benefit from the rapidly-escalating investment in original programming that is taking hold throughout the television industry. Warner Bros. results should also benefit from stabilization at the Home Entertainment segment. Long thought to be in a perpetual decline due to DVD obsolescence, industry-wide home video and electronic delivery revenue actually increased 1% in 2013— the first annual increase in 9 years. Warner’s results declined 3%, attributed to difficult comparisons against Batman: The Dark Night Rises in 2012. Revenue is benefiting from Internet video adoption, including subscription video services like Netflix as well as higher video on demand (VOD) and electronic sell through (EST) revenue. Warner is exploiting new licensing models including accelerated licensing windows, whether via off-network video (e.g. subscription streaming deals with Netflix prior to/during regular syndication windows) or EST of feature films shortly after theatrical release. Warner also maintains rights to an increasingly valuable, high quality library of over 6,000 films from Warner and third-party studios. Warner’s EST revenue increased nearly 40% in 2013, aided by further adoption of the UltraViolet cloud-based electronic copy standard. Overall electronic-delivered revenue increased double digits to greater than $1 billion.

Turner Networks At Turner Networks, TWX is well placed with a portfolio of 6 leading cable networks with broad distribution. This includes the #1 cable network (TBS) in prime time and among adults 18-49 in 2013. TNT is also consistently a top-5 rated cable network, and CNN regained the #2 cable news network position in 2013 based on total day part viewership. At Cartoon Network, Adult Swim ranked #1 in total day part among adults 18-34 for the 9th consecutive year, with record ratings in 2013.

Turner has been a beneficiary of the long-term viewership transition from broadcast to cable networks, which should continue to be a theme going forward. Turner continues to boost investment in original programming and sports rights across its networks in order to maintain their dominant position. Original programming investment will increase ~20% in 2014, and Turner has secured long-term sports agreements including NBA basketball, NCAA men’s college basketball tournament, and MLB baseball. TWX recently began reporting Turner Networks as a separate business unit, providing direct evidence of its progress. Turner Networks’ compelling content and ratings is evident in subscription (affiliate fee) growth. Subscription revenue has been growing at mid-to-high single digit rates annually, reaching $4.9 billion in 2013. Combined with slightly lower advertising growth, this has enabled Turner to expand margins all while boosting original and sports programming expense, as illustrated in the following table. Turner recently signed extensions with 2 of the top 5 MVPDs, providing good revenue visibility going forward; the Company expects to average double-digit annual affiliate fee growth over the next 3 years.

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Turner Networks: Revenue and Margin Growth Continues ($ millions) 2011 2012 2013 Subscription $ 4,398 $ 4,660 $ 4,896 Advertising $ 4,196 $ 4,315 $ 4,534 Content $ 417 $ 369 $ 363 Other $ 155 $ 183 $ 190 Total Revenue $ 9,166 $ 9,527 $ 9,983

Programming costs: Originals and sports $ 2,392 $ 2,498 $ 2,647 Acquired films and syndicated series $ 906 $ 890 $ 946

Adj. OIBDA $ 3,306 $ 3,597 $ 3,788 Margin 36.1% 37.8%37.9%

International Growth: TWX Ideally Placed as Leading Content Provider, Premium Network Putting domestic growth prospects aside, we would highlight the tremendous long-term opportunity afforded to content producers by international markets. As illustrated in the following table, international pay TV uptake remains far below full penetration or even U.S. levels. In large developing countries, pay TV penetration ranges from as low as 28% in Brazil to 83% in India. Digital pay TV penetration is much lower, ranging from ~25%-40%. Even large developed countries like Japan, Italy, Australia, and the U.K. have pay TV penetration rates of only ~30%-50% as many households are still content with free-to-air programming. As cultural barriers break down and the increasingly high quality video content being produced today makes its way around the globe, we expect pay TV penetration to steadily advance. Furthermore, and perhaps counter-intuitively, the long-term growth in high speed Internet could also facilitate pay TV/premium video adoption by building consumer awareness/demand for global video content and facilitating the marketing of bundled video and data services.

Pay TV Monthly Video ARPU, 1995-2009

Source: Screen Digest (January 2013), MPA, Discovery Communications estimates (Japan). Via Discovery Communications. Russia excludes Tricolor FreeSat.

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Time Warner is ideally positioned to capture these long-term trends across each of its business units. Pro forma to exclude Time Inc., TWX already generated approximately $8.4 billion or 32.5% of consolidated revenue outside the U.S. in 2013. Including unconsolidated JVs at HBO, this figure is greater than $10 billion. TWX also holds various other minority equity positions and unconsolidated JVs internationally through Turner and Warner Bros. as well as at the Company level. Warner Bros. is TWX’s biggest international presence, generating close to half of revenue internationally. Warner recorded over $3 billion in gross box office revenue internationally in 2013, while international TV revenue was close to $1.5 billion in 2013. As the world’s leading movie and TV studio, Warner is ideally positioned to benefit from the secular growth story of global adoption of Western entertainment viewing habits and pay TV.

Turner Networks is also well positioned. Turner already reaches over 200 countries across 130 brands in 27 languages, and the division has been aggressively pursuing new expansion opportunities both organically and via acquisition/JV. Turner Networks grew international subscription revenue by double-digits in 2013 excluding foreign exchange fluctuations and a similar growth rate could be sustainable for the foreseeable future. Turner is particularly well positioned in Latin America with several regional network brands of scale, including a strong presence in Brazil as well as Chile’s leading free-to-air station, Chilevision (purchased in 2010 for ~$150 million). As of 2009 (more recent figures not disclosed), Turner generated 33% of international revenue in Latin America with a favorable margin profile (est. 20%-plus). TWX recently singled out Turner’s strong Latin America performance in 2013, noting double-digit revenue growth and profit growth above 25% for the year. Turner also has a strong presence in the Asia Pacific region including India and Japan. The region contributed 23% of Turner’s international revenue as of the last report in 2009. CNN has a particularly strong international presence. CNN International is the largest English language news brand in the world with distribution in over 200 countries and Turner has also launched several local language CNN stations.

TWX also holds a strategic stake in Central European Media Enterprises (CME). TWX invested $246 million to acquire a 31% equity position in 2009, and subsequently invested another $504 million in equity and convertible debt between 2011-2013, raising its voting interest in class A shares to 49.9%. CME has an attractive broadcast footprint in 6 Central and Eastern European countries, but has come under balance sheet pressure recently as the weak macro economy deeply cut into its advertising revenue—particularly in the Czech Republic. With additional capital needed to get through 2014, in February 2014 CME announced a $397 million refinancing and capital raise, with TWX participating in the rights offering as well as a private placement that could ultimately increase TWX’s equity stake to as high as 78.5%. TWX also agreed to provide CME with a $115 million credit facility and a $35 million term loan or bridge financing in lieu of the rights offering. TWX’s investments in CME are not without risk, but we believe CME could have significant long-tem upside if CME’s new co-CEOs (including Michael Del Nin, previously Time Warner Senior Vice President, International and Corporate Strategy) can right the ship and capitalize on the company’s dominant market position. CME anticipates returning to positive cash flow in 2015.

Last but certainly not least, we believe HBO’s international platform has long been overlooked. HBO has been building its international distribution since the 1970s, providing a huge leg up on the competition. Today, HBO/Cinemax video networks are distributed in over 60 countries, with content distributed in over 150 countries. Historically, HBO’s international networks were operated as JVs built around movie services. As a result, the networks were often under-managed. The JV equity holdings were not consolidated on TWX’s financial statements either, which made it easy for investors to discount the value of HBO internationally. In recent years, the Company has been steadily consolidating these JVs and transitioning to more active management with a greater focus on local original content. For example, HBO now airs ~90 hours of local original content annually in Brazil. The following table lists HBO’s recent international transactions. Notably, the large HBO Latin America Group (LAG) is still accounted for as an equity investment. HBO also launched a premium pay TV network in the Netherlands in 1Q 2012 and in India in 2013.

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HBO International JV Consolidating Transactions ($ millions) JV Acquisition Date Price JV Share/Notes HBO Asia 2007- 2008 $275 20%-30% incremental, to 75% (south Asia) -80% HBO Latin America Group (LAG) Dec-08 combined 20%-30% incremental, to 60% HBO Latin America 1Q 2010 $217 increased to 80% LBO LAG 1Q 2011 NA Increased to 88% HBO Central Europe Jan-10 $155 Increased from 33% to 100% HBO Asia 2013 $37 Increased to 100%

HBO’s existing distribution network and the business’ top-quality content also position HBO as a primary beneficiary of pay TV growth internationally. Historically, HBO original content was often released on an extended delay (e.g. 1 year) internationally, if at all, and sometimes through free-to-air partnerships. Today, HBO is increasingly providing immediate access to new content while monetizing it through its controlled premium channels. The results of this strategy and ongoing global pay TV adoption are already evident. Remarkably, HBO international subscribers grew over 15% in 2013 after climbing at 25%-plus per annum in 2011-2012. Inclusive of unconsolidated JVs, HBO has over 84 million international subscribers, contributing ~25% of segment revenue. HBO is also positioned to benefit from high speed Internet adoption internationally via its highly-regarded HBO GO authenticated Internet SVOD platform. The platform is available in 23 countries and counting and HBO already reported over 2 million international SVOD/mobile subscribers as of 2013. This includes the December 2012 launch of HBO Nordic as a combination premium TV/SVOD offering. Launched as a JV with a regional cable provider, HBO acquired 100% of the venture in June 2013.

HBO: Crown Jewel Unveiled Albeit only a modest profit contributor from the perspective of the parent, the separation of the publishing business may serve as a catalyst for closing TWX’s conglomerate discount to the sum-of-the-parts intrinsic value of its best-in-class operating businesses. Time Warner also recently took another major step in enabling the Company’s underlying value to come to light: Concurrent with the release of 4Q 2013 financial results in February 2014, TWX disaggregated HBO from its Networks segment into a separate reporting segment. We have long viewed HBO as Time Warner’s crown jewel, but believed its opaque financials (none released since basic figures in 2009) prevented investors from properly valuing the subsidiary—a problem no longer. Asset Analysis Focus has discussed our favorable opinion of the U.S. premium pay TV industry several times, and we would reference last month’s Starz report for our detailed thoughts. In short, we are attracted by the premium pay TV model’s economies of scale/high barriers to entry; superior brand value; premium, high quality original content; unbundled pricing model which aligns incentives with MVPDs while also more easily enabling Internet-delivered distribution; and household under-penetration leaving room for subscriber growth even in mature markets. As a highly profitable yet distant #3 player in the field, we view Starz as an undervalued asset with attractive long-term upside. However, HBO is the industry paragon whose lead we can only hope Starz imitates. We would cite Netflix CEO Reed Hastings’ recent commentary to emphasize HBO’s attractive position:

“We believe that once a subscription video service has achieved profitability and scale in a market (20% to 30% of households), it is very likely to be able to sustain that profit stream for many decades. At that percentage of households, our advantages in content acquisition and member acquisition are considerable.” – Reed Hastings, April 2013 letter to shareholders

With 43 million domestic and ~127 million global subscribers (including unconsolidated international JVs), suffice to say HBO is comfortably beyond Mr. Hasting’s threshold for economies of scale. Just looking domestically, HBO dominates the premium pay TV/SVOD segment with the second-most subscribers (just behind Netflix, comparing across flagship multiplexes), highest ARPU, largest original programming budget and original programming hours, highest ratings, most Primetime Emmy Awards of any network for 12 years running (108 nominations in 2013), and top-quality first window film content (~60% of top 20 box office movies historically).

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Premium Subscription Video Category Comparison- 2013 HBO NFLX Showtime Starz Domestic (Dom. Streaming) (CBS Cable Network) Networks Subscribers (domestic, flagship channels) ~29 33.4 ~23 22.0 Subscribers (domestic, total multiplex) ~43 NA 76.6 57.0 Est. Revenue per Sub (core network) ~$12 $7 ~$6-$6.50 $4.98 Est. Revenue per Sub (total subscribers) ~$8 $7 ~$2 $1.93 Peak Same Day Views—T op Rated Show 5.5 MM NA 2.9 MM 2.6 MM Original Scripted Content Hours (2013E) 83 53 80 36 Source: AAF estimates based on public company filings, management public commentary, Nielsen TV Ratings.

Netflix Comparison Revisited When AAF last featured a full profile of TWX in January 2011, we advocated pairing our long TWX thesis with shorting Netflix. The pair trade was based on the discrepancy between Netflix and HBO valuations (implied by a TWX sum-of-the-parts), combined with Netflix’s daunting task of transitioning from a DVD-by-mail to Internet subscription video on demand (SVOD) service. The Netflix short thesis played out well in the short term, with NFLX shares declining 70% to their trough in November 2011. However this did not hold long, with NFLX shares sharply climbing since 2012 and now 111% higher than at our initial report date (although still underperforming TWX shares’ 140% climb). In the interim, Netflix has executed virtually flawlessly on all the areas of potential upside we originally highlighted as risks to the thesis: Rapidly gaining the scale (paying subscribers) necessary to fund premium streaming content acquisition; a successful move into original programming (14 Emmy nominations in 2013); and aggressively entering international markets to vastly expand Netflix’s addressable market. Although shares may be priced to perfection, we know better than to test our luck on the short side again. However, we believe it is worthwhile to revisit the Netflix/HBO comparison to shed light on HBO’s potential standalone value, now that the disclosure of HBO’s financials makes the comparison possible with precision.

HBO Subscriber Growth Unimpeded by Netflix’s Ascent

140 140 HBO NETFLIX 120 120

100 100

80 80

60 60

40 40 Year-end Subscribers (millions) Year-end Subscribers (millions) Subscribers Year-end 20 20

0 0 2011 2012 2013 2011 2012 2013

Domestic HBO Domestic Cinemax International HBO Domestic NFLX Streaming Domestic NFLX DVD NFLX International

Note: HBO subscriber counts are estimates based on management commentary. Source: Company filings.

To begin, it is clear that the rapid emergence of Netflix as the largest SVOD player has not disrupted HBO by any means. While TWX does not consistently report HBO subscribership levels, management stated HBO added 1.9 million domestic subs (HBO/Cinemax) in 2012—a record—and another record ~2 million in 2013. With only ~29% of U.S. pay TV households subscribing to HBO (plus ~12 million Cinemax subscribers;

- 45 - Time Warner Inc. likely largely overlapping), there should be plenty of room for similar growth rates going forward. As detailed later, international subscribership has also boomed thanks to renewed management focus and consolidation of JVs. In fact, we believe both companies are benefiting, and should continue to benefit, from an ongoing surge in consumer appetite for highest-quality original programming. As Netflix CEO Reed Hastings described in his April 2013 letter to shareholders,

“While we are passing HBO in domestic members in 2013, it will be several years before we are peers with them in terms of original programming, Emmy awards, and international members. It wouldn’t be surprising to us if HBO does their best work and achieves their highest growth over the next decade, spurred on by the Netflix competition and the Internet TV opportunity.” – Reed Hastings, April 2013 letter to shareholders

From a financial perspective, HBO’s growth has been even more impressive. Revenue has compounded at a 5.7% annual rate over the past 5 years despite the macroeconomic drag, while OIBDA margins expanded nearly 400 bps to 36.4%. We would also note HBO’s capital expenditure requirements are de minimis ($45 million in 2013). Returning to the Netflix comparison, Netflix has compounded revenue at an astounding 26.2% annual rate over this time frame—albeit from a lower base, especially excluding the legacy DVD-by-mail business. However, OIBDA margins remained at a scanty 6.3% in 2013. Netflix has been paying through the nose to get its hands on higher quality first run content, with the expectations of recovering the cost over the long term via subscriber growth. Netflix is also in the early, investment stage internationally which is depressing margins ($274 million international contribution loss in 2013). Netflix management likes to cite the “contribution margins” of the domestic streaming business, which expanded 574 bps to 22.63% in 2013 ($623 million contribution profit). However, we would emphasize that NFLX’s reported contribution profit excludes all technology and development and general and administrative costs. In 2013, these totaled $559 million or 71% of contribution profit! In our view, technology and development costs are a core component of Netflix’s streaming service. Furthermore, we would note that HBO’s OIBDA margins do include segment level G&A expenses. Adding HBO’s pro-rata share of TWX corporate expenses ($403 million in 2013) would reduce reported operating margins by only ~100-200bps. Last but not least, Netflix’s consolidated financial results continue to benefit from the highly-profitable ($439 million contribution profit; 48.2% margin) but rapidly declining domestic DVD business.

HBO Unveils Impressive Historical Financials ($ millions) 2008 2009* 2010E** 2011 2012 2013 Subscription Revenue $ 3,768 $ 4,010 $ 4,231 Content Revenue $ 730 $ 676 $ 658 Revenue (total) $ 3,703 $ 3,900 $ 4,188 $ 4,498 $ 4,686 $ 4,890 OIBDA $ 1,208 $ 1,300 $ 1,389 $ 1,485 $ 1,639 $ 1,778 OIBDA margin 32.6% 33.3% 33.2% 33.0% 35.0% 36.4% *2009 approximations based on management revenue commentary and stated $1,228 operating income. **2010 figures not reported; estimates represent interpolation of 2009-2011 financials.

Looking forward, we believe both companies have plenty of room to run. Similar growth rates to the past 5 years look easily achievable over the next 5 year span for HBO. Netflix is likely to grow its subscriber base faster than HBO for several more years, at least domestically. The company has reached a critical subscriber base, features a top-of-class interface and Internet delivery system, and continues to improve its content offerings. Reed Hastings recently estimated full penetration for Netflix domestically could be 60-90 million subscribers. 90 million may be overly ambitious for an unbundled subscription service considering this represents ~90% of pay TV households, but 60 million may be possible.

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Netflix Historical Financials: Misleading Margins ($ millions) 2008 2009 2010 2011 2012 2013 Domestic SVOD Revenue $ 2,185 $ 2,751 contribution profit margin 16.9% 22.6% Dom DVD Revenue $ 1,137 $ 911 contribution profit margin 47.3% 48.2% Intl. SVOD Revenue $ 83 $ 288 $ 712 contribution profit margin -124.5% -135.3% -38.5% Total Revenue $ 1,365 $ 1,670 $ 2,163 $ 3,205 $ 3,609 $ 4,375 Total contribution margin 0.0% 0.0% 0.0% 8.3% 14.4% 18.0% OIBDA $ 155 $ 232 $ 322 $ 429 $ 95 $ 277 OIBDA margin 11.3% 13.9% 14.9% 13.4% 2.6% 6.3%

In the Netflix bull case, Netflix’s margins should migrate toward HBO levels over time. However, we are skeptical the company can ever reach HBO-type margins. Netflix does remain under-priced, especially compared to HBO’s full sticker price (~$14-$18), and recent management commentary suggests a price increase may be in the works in 2014-2015. However, Netflix still has a lot of work to do to match the quality of HBO’s film content and the breadth (and quality) of its original programming—which may be necessary if Netflix is ever to raise prices near HBO levels without facing mass subscriber losses. Netflix’s content acquisition costs continue to grow and this will only accelerate when the Disney agreement (estimated $300-$400 million per year) begins in 2016. Additionally, HBO’s margins benefit from the MVPD distribution model, with promotional rates and MVPDs’ consignment fees accounted for above the line as contra-revenue. This boosts margins, but we also suspect it is a more efficient consumer acquisition model; HBO’s advertising and marketing expenses per subscriber ($705 million total SG&A on 77 million average subs in 2013) are well below Netflix ($504 million marketing spend on 46.4 million average subs). While neither company breaks out churn (Netflix last reported monthly churn of 5.3% in 4Q 2011 before discontinuing disclosure), we also suspect HBO has lower churn considering a customer can un-subscribe from Netflix with one mouse click; Netflix may not match HBO’s demographic skew toward higher-income households; and the churn roughly implied by HBO’s reported revenue vs. customer’s sticker price (i.e. relatively low sub count in promotional pricing periods), especially compared to its premium pay TV peers as illustrated in the table on page 45.

Netflix Valuation Summary HBO @ NFLX NFLX Enterprise Value Share Price $445.63 Market Cap $27,319 Enterprise Value $26,618 $26,618 EV/OIBDA (TTM) 96.2x 15.0x Price/FCF (TTM) 625.3x 24.8x EV/Revenue (TTM) 6.1x 3.1x EV/Sub (TTM) $519 $210

Netflix currently trades at lofty valuations including 96x 2013 EV/OIBDA, 625x 2013 FCF, and $519 EV per sub. By comparison, placing Netflix’s enterprise value on HBO (assuming no debt) implies much more modest multiples: 15x 2013 EV/OIBDA, 25x unlevered 2013 FCF (assuming 38% tax rate), and $210 per sub. Essentially, Netflix is being valued to grow into HBO, and then some. In our view, the valuation discrepancy is undeserved given HBO’s market position and business model. HBO is currently producing outsized free cash flow for TWX, while Netflix has yet to produce meaningful free cash flow. While Netflix may grow into its valuation over an extended time frame, we expect domestic subscriber growth rates to converge within the next few years. Internationally, HBO is still far more developed and continues to add subscribers at a faster rate. Longer-term, while we like the dynamics of HBO’s MVPD distribution model, HBO is also ideally positioned to go over-the-top a la Netflix when/where it is economical. Alternatively, HBO could continue to develop a hybrid

- 47 - Time Warner Inc. authenticated model with its highly-regarded HBO GO Internet streaming platform. HBO and Time Warner Cable recently began experimenting with a “skinny stack” bundle of high speed Internet plus HBO GO (no cable subscription). While unlikely to gain broad adoption in the near term, this bundle creates the opportunity for HBO to reach a younger demographic that is not subscribing to video and protects HBO against a broader cord cutting threat longer term. Nonetheless assuming recent revenue growth rates continue while margin growth slows (cumulative 100 bps expansion from 2013-2016 ), we estimate HBO’s intrinsic value could approach $26 billion looking out 2-3 years based on a 12.5x 2016E OIBDA multiple. We are comforted that this is still slightly below Netflix’s current enterprise value.

HBO Valuation Summary ($ millions) Revenue – 2016E $5,550 Assumed OIBDA margin 37.4% OIBDA – 2016E $2,076 EV/OIBDA multiple 12.5x Implied Enterprise Value $25,948 per TWX share $28.07

Balance Sheet/Capital Deployment Time Warner continues to be a free cash machine as well as a tremendous steward of capital under Chairman/CEO Jeff Bewkes. Free cash flow increased 20% to $3.5 billion in 2013 (excluding external M&A- related costs and adding tax benefits from equity investments) or $3.73 per share. Excluding Time Inc., free cash flow was approximately $3.1 billion. In addition to strong top-line growth, TWX is growing free cash flow via careful expense controls. Operating margins expanded ~600 basis points over the past 5 years, and expenses increased only 3% in 2013. Notably, TWX has been returning cash to shareholders in excess of free cash flow recently. Over the trailing 12 months through January 2014, TWX spent $3.9 billion to repurchase 64 million shares or nearly 7% of initial shares outstanding at an average price of ~$60 per share. Over the past 3 years alone, TWX has repurchased 276 million shares or approximately 25% of initial shares outstanding at an average price of ~$42/share or nearly 37% below the current share price.

TWX Free Cash Flow ($ millions) 2012 2013 Adjusted Operating Income $6,126 $6,599 Depreciation and Amortization 892 886 Working Capital/Other (940) (1,044) Cash Interest, Net (1,220) (1,158) Cash Taxes (1,274) (1,165) Capital Expenditures (643) (602) Free Cash Flow $2,941 $3,516 Free Cash Flow per Share (avg. DSO) $3.01 $3.73

Accelerated return of capital to shareholders should continue to be the default going forward. Net debt stood at $18.3 billion or a reasonable 2.4x TTM adjusted OIBDA at December 31, 2014, providing the Company with financial flexibility. As noted, TWX expects to spin out Time Inc. with approximately $1.3 billion in debt. This will have minimal impact on TWX’s consolidated leverage ratio, but the removal of a more cyclical/declining business gives TWX management more comfort to run a leveraged balance sheet. In fact, in February 2014 management boosted its targeted long-term leverage ratio from 2.5x to 2.75x. The board authorized a new $5 billion share repurchase program in January 2014 and also increased the quarterly dividend 10% to $0.3175 per share (1.7% yield) in February 2014. While TWX will also continue to pursue M&A, this is likely to be smaller bolt-on transactions like the recent CETV capital injection. Mr. Bewkes and TWX management have repeatedly voiced their disinclination toward executing transformative M&A given the Company already has scale and repurchasing its own shares represents a high hurdle rate. In fact, TWX continues to move in the opposite direction toward deconsolidation, as most recently illustrated with the pending Time Inc. spinoff.

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Valuation and Conclusion Time Warner shares have rallied 26% over the past 12 months, slightly outperforming the S&P 500’s 23% return. The outperformance has been much more remarkable over the ~3 years since AAF last featured Time Warner in January 2011; TWX shares are up 140% versus 43% for the S&P (both returns price only). Time Warner’s outperformance has been driven by a combination of ongoing operational growth and improving investor sentiment. Three years ago, TWX shares traded at only 7.8x EV/OIBDA, a ~25% discount to its closest peers. In our estimation, TWX’s depressed valuation reflected extreme investor concern toward over-the-top (OTT) competition from the likes of Netflix. HBO, and to a lesser extent TWX’s cable networks, were viewed as particularly vulnerable given their premium market positions. Warner Bros.’ television production and DVD businesses were also exposed to the Internet-delivered content threat. However, over the subsequent years these fears have proved unfounded as both HBO and Turner Networks have recorded some of their strongest growth rates. Warner Bros. has also posted more consistent results than its major studio competition, bolstered by its serialized franchises, persistent broadcast/cable TV production demand, and international markets.

TWX shares are currently valued at 10.7x TTM EV/OIBDA or approximately 10x 2014E OIBDA. Backing out Time Inc., TWX currently trades at a reasonable ~16x forward P/E based on management’s 2014 guidance. Despite the multiple expansion in recent years, TWX still trades roughly in line with its historical pre-recession average multiple and at a meaningful discount both versus major studio/network peers and our estimate of intrinsic value. Closest peers Viacom, Disney, and Fox currently trade at 11.4x, 12.3x, and 13.9x EV/OIBDA (TTM), respectively. In our view, TWX shares still reflect a meaningful holding company discount and the discount to peers is unwarranted considering the Company’s high-quality assets. Pro forma for the Time Inc. spinoff, TWX will generate ~80% of revenue from subscription and content sources. By contrast, peer Viacom generates ~40% of revenue from more volatile advertising sources, and Disney generates only ~35% of revenue directly from subscription and content. As detailed below, a sum-of-the-parts method helps uncover the extent of the discount at TWX.

In estimating Warner Bros.’ intrinsic value, we conservatively project revenue and operating income remain roughly flat going forward. Applying a 10x EV/OIBDA multiple, we estimate the studio’s intrinsic value is approximately $17.5 billion. This is roughly in line or a modest discount to Warner’s major studio peers. Given its leading scale, consistent financial performance, and valuable franchises, Warner Bros. arguably deserves a premium multiple. Viacom’s Paramount studio has faced challenges in recent years and recorded AOI margins only ~1/2 Warner Bros.’ levels in 2013, at 5.5% vs 10.8%. Disney suffered its own bumps along the road in recent years, and Disney responded with several studio acquisitions including $4.1 billion for Lucasfilm in December 2012, $4 billion for Marvel in 2009, and $7.4 billion (16.5x forward EBITDA) for Pixar in 2006. These were transacted at much higher multiples, and primarily reflected brand/franchise values. For example, the Marvel transaction represented approximately 15x forward EBITDA; we would note TWX subsidiary DC Comics has an arguably superior franchise portfolio to Marvel’s. Our multiple also represents a large discount to smaller publicly traded studios such as Lions Gate (18x EV/OIBDA) and Dreamworks (34x).

At Turner Networks, the key networks have continued to hold audience share despite increased competition, aided by strong sports rights and originals investment. While not quite the powerhouse of an ESPN, Turner Networks’ affiliate agreements remain somewhat underpriced. This should drive double-digit average annual subscription revenue growth over the next several years. International revenue should also grow at a similar pace as Turner gains scale and pay TV gains penetration. As AAF has frequently detailed, cable networks have historically commanded outsized, mid-teens average EV/EBITDA multiples in transactions. This reflects their strong network effects/barriers to entry, relatively predictable dual revenue stream, and attractive cash flow profiles. Nonetheless valuing Turner Networks at a discounted 11x OIBDA given its relative maturity, we estimate Turner’s intrinsic value could reach $52 billion in 2-3 years. In terms of pure-play cable publicly traded comps, Discovery currently trades at 15x EBITDA, Scripps is valued at 11.4x EBITDA, and AMC at 13.7x.

As detailed, we believe HBO is TWX’s crown jewel network with a premium brand and pricing model, unrivaled content, highly-regarded online platform, and 127 million global subscriber base. Under conservative growth assumptions, we estimate HBO’s intrinsic value will approach $26 billion at 12.5x 2016E OIBDA. We are comforted that this is still less than Netflix’s current enterprise value. Adding up the parts and subtracting corporate expenses at 8x, our sum-of-the-parts intrinsic value for TWX is approximately $92 per share. Adding

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Time Inc. at an estimated standalone enterprise value of $3.5 billion or $2.28 equity value per TWX share, this implies approximately 46% upside from current levels over the next 2-3 years.

TWX Valuation ($MM) Warner Bros. @ 10x 2016E OIBDA $17,453 HBO Networks @ 12.5x 2016E OIBDA $25,948 Turner Networks @ 11x 2016E OIBDA $52,088 Less 8x 2016E Corporate Expenses ($2,760) Total: $92,729 Net Debt 2016E ($23,394) Equity Value $69,335 Shares Outstanding (MM) 2016E 750 Standalone TWX Estimated Intrinsic Value per Share $92.45

Time @ 6.5x 2013 OIBDA $3,452 Less Assumed Net Debt at Spinoff ($1,300) Equity Value $2,152 Time Inc. Estimated Intrinsic Value per TWX Share $2.28

TWX Estimated Sum-of-the-parts Intrinsic Value $94.73 Implied upside 45.7%

The spinoff of Time Inc. during 2Q 2013 could serve as a catalyst for closing TWX’s discount to intrinsic value. Although not a huge contributor to TWX’s bottom line, the business’ secular challenges have likely weighed on the multiple ascribed to Time Warner. TWX could attract a new investor base as a pure-play content producer and TV network. At the same time, the separation of Time will transfer $1.3 billion in debt and allow TWX greater flexibility to utilize its stable free cash flow to return capital to shareholders, including via modestly increasing leverage. With the share count down by ~20% over the past 3 years, we are confident TWX management will continue to be aggressive as warranted. Finally, we would not discount the possibility that Time Warner continues the process of deconsolidation. We have long advocated for Time Warner to separate its businesses, and the Company has done a commendable job of this to date under Mr. Bewkes’ leadership— with tremendous results for shareholders. The Time separation is another step, but a separation of Turner Networks and/or HBO would be much more impactful. While some investors (and management) may be averse to severing HBO’s link to a major studio, much of this concern could be resolved via long-term extensions of the existing film output agreements. We believe Turner and HBO would each command a premium multiple as a standalone entity or in a transaction. Management has shied away from any such possibility historically, but the decision to begin separately reporting HBO and Turner Networks in 4Q 2013 does raise the question whether this could portend a change somewhere down the line.

Risks Risks that Time Warner may not achieve our estimate of the Company’s intrinsic value include, but are not limited to, general economic weakness impacting the Company’s businesses; lost distribution or failure to reach distribution agreements on favorable terms; increased competition for network programming; failure to achieve success in studio content production and original programming; loss of third party content at HBO; and loss of key management personnel.

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

- 50 - Time Warner Inc.

TIME WARNER INC. CONSOLIDATED BALANCE SHEET (in millions)

ASSETS Dec. 31, 2013 Dec. 31, 2012 Current assets Cash and equivalents $ 1,862 $ 2,841 Receivables, less allowances 7,868 7,385 Inventories 2,028 2,036 Deferred income taxes 447 474 Prepaid expenses and other current assets 639 528 Total current assets 12,844 13,264 Noncurrent inventories and theatrical film and television production costs 6,699 6,675 Investments, including available-for-sale securities 2,024 1,966 Property, plant and equipment, net 3,825 3,942 Intangible assets subject to amortization, net 1,920 2,108 Intangible assets not subject to amortization 7,629 7,642 Goodwill 30,563 30,446 Other assets 2,490 2,046 TOTAL ASSETS $ 67,994 $ 68,089

LIABILITIES AND EQUITY Current liabilities Accounts payable and accrued liabilities $ 7,322 $ 8,039 Deferred revenue 995 1,011 Debt due within one year 66 749 Total current liabilities 8,383 9,799 Long-term debt 20,099 19,122 Deferred income taxes 2,642 2,127 Deferred revenue 482 523 Other noncurrent liabilities 6,484 6,721 Commitments and Contingencies Equity Common stock, $0.01 par value 17 17 Paid-in-capital 153,410 154,577 Treasury stock, at cost (37,630) (35,077) Accumulated other comprehensive loss, net (852) (989) Accumulated deficit (85,041) (88,732) Total Time Warner Inc. Shareholders’ Equity 29,904 29,796 Noncontrolling interests — 1 TOTAL EQUITY 29,904 29,797 TOTAL LIABILITIES AND EQUITY $ 67,994 $ 68,089

- 51 - Cisco Systems, Inc.

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Asset Analysis Focus is not an investment advisory bulletin, recommending the purchase or sale of any security. Rather it should be used as a guide in aiding the investment community to better understand the intrinsic worth of a corporation. The service is not intended to replace fundamental research, but should be used in conjunction with it. Additional information is available on request. The statistical and other information contained in this document has been obtained from official reports, current manuals and other sources which we believe reliable. While we cannot guarantee its entire accuracy or completeness, we believe it may be accepted as substantially correct. Boyar's Intrinsic Value Research LLC, its officers, directors and employees may at times have a position in any security mentioned herein. Boyar's Intrinsic Value Research LLC Copyright 2014.

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