January 30, 2015 Volume XLI, Issue I Discovery Communications, Inc. Nasdaq: DISCA/DISCB/DISCK

Dow Jones Indus: 17,164.95 Initially Probed: Volume XXXII, Issue III @ $7.48 S&P 500: 1,994.99 Last Probed: Volume XXXII, Issues XI & XII @ $18.28 Russell 2000: 1,165.39 Trigger: No Index Component: S&P 500 Type of Situation: Business Value

Price: $ 27.88 Shares Outstanding (MM): 449 Fully Diluted (MM) (% Increase): 682 (+52%) Average Daily Volume (MM): 2.7 Market Cap (MM): $ 19,014 Enterprise Value (MM): $ 25,786 Percentage Closely Held: John Malone: 29% voting Advance/Newhouse: 25% voting

52-Week High/Low: $ 42.05/27.88 5-Year High/Low: $ 42.05/25.33

Trailing Twelve Months Price/Earnings: 16.5x Introduction/Overview Price/Stated Book Value: 3.2x Discovery Communications, Inc. (“Discovery”, “DISCA”, or “The Company”) is the world’s #1 pay-TV Net Debt (MM): $ 6,772 programmer (based on subs), reaching 2.8 billion Upside to Estimate of cumulative subscribers in more than 220 countries. The Intrinsic Value: 62% flagship Discovery Channel is the most widely Dividend: $ N/A distributed network in the world and is in more than 447 Yield: N/A million homes while TLC is the number one most distributed Women’s cable network brand in the world Net Revenue Per Share: with nearly 400 million subscribers. For the twelve TTM: $ 8.99 months ended September 2014, DISCA generated $6.1 2013: $ 7.66 billion in revenue from its three reportable segments 2012: $ 5.90 including U.S. Networks (48%), International (50%) and 2011: $ 5.15 Education (2%).

Earnings Per Share: Discovery Communications is no stranger to TTM: $ 1.69 longtime AAF readers having been featured (as 2013: $ 1.49 Discovery Holding Company) in 2006 shortly after its 2012: $ 1.24 spin off from Liberty Media and then again in 2008 after 2011: $ 1.40 it simplified its complex ownership structure. Shares of Discovery increased 6 fold from our last profile through Fiscal Year Ends: December 31 year end 2013. However, shares have declined by Company Address: One Discovery Place ~30% over the past year, significantly underperforming Silver Spring, MD 20910 its peers. While there are many uncertainties facing Telephone: 240-662-2000 Discovery’s shares including soft cable ratings, pay-TV CEO/President: David M. Zaslav distributor consolidation, FX headwinds and geopolitical Clients of Boyar Asset Management, Inc. do not own shares of concerns, among others, we believe these issues are Discovery Communications, Inc. common stock. more than reflected in the current share price. In our Analysts employed by Boyar’s Intrinsic Value Research LLC own view, many investors are overlooking Discovery’s shares of DISCA/DISCK common stock. favorable investment merits including its attractive dual

- 31 - Discovery Communications, Inc. revenue stream business model. At current levels, Discovery trades at a discount to its media peers after commanding a premium valuation over the past 3+ years (shares currently trade at ~10x EV/adjusted OIBDA vs. peak levels of ~15x). In our view, the share price correction is an overreaction and represents an opportunity to own a first rate content company at a very favorable valuation.

While Discovery’s U.S. Networks segment operates in the mature pay-TV market, Discovery has plenty of opportunities to drive further revenue and profitability growth. Discovery has been slow to embrace the monetization of its content over non-traditional platforms, but has recently begun to offer TV Everywhere rights to pay-TV distributors, which is helping DISCA realize double-digit increases when renewing affiliate fee agreements. Discovery’s successful network rebrandings should also be a driver of future growth through the attainment of higher affiliate fees and advertising revenues. The Company has rebranded 7 networks over the past 6 years including Investigation Discovery (ID) (formerly Discovery Times) and the Oprah Winfrey Network (OWN), which was previously operated as Discovery Health. Notably, ID boasts the longest length of view of any Women’s network while the OWN has recently turned profitable and has a bright future.

With Discovery now generating more revenue from its International Networks segment than its U.S. Networks segment thanks to organic growth and recent acquisitions, adverse FX fluctuations will have a negative impact on DISCA’s results. Despite these headwinds, International Networks is well positioned to benefit from the recent acquisitions of SBS Nordic and Eurosport (meaningful synergies), increase in pay-TV penetration rates in both developed and emerging markets, and through leveraging its robust content library in international markets. While FX fluctuations present near term headwinds, it could provide Discovery an opportunity to make attractive bolt on acquisitions in Europe or Asia.

Discovery generates a robust level of free cash flow as its business model commands high margins (TTM adjusted OIBDA margin: 41.8%) thanks to its attractive dual revenue stream model (affiliate fees and advertising) and minimal capital requirements (capex as % of revenue: 2.1%). Just since 2010 Discovery has repurchased $5.4 billion of shares (avg. price: $25 a share) that has resulted in over a 20% reduction in DISCA’s diluted shares outstanding. We would expect DISCA to continue to repurchase shares and would note that the Company’s recent special share dividend (August 2014) was implemented in order to enable DISCA to repurchase its shares more aggressively (created a more liquid share class).

Our estimate of Discovery’s intrinsic value is $45 a share, representing 62% upside from current levels. The recently announced distributor consolidation (CMCSK/TWC and ATT/DTV) could prompt content companies to counter this M&A activity with acquisitions of their own. We note that DISCA ($19 billion market cap) is dwarfed by a number of larger media companies that would have no problem digesting Discovery including Disney ($154 billion), Fox ($69 billion) and Time Warner ($65 billion). If DISCA finds itself a target, we believe that shares would command a premium valuation.

Review of Discovery Communications’ Recent History In July 2005, Liberty Media spun off Discovery Holding Company (DHC) to its shareholders, which consisted of Ascent Media, which was then an entertainment post production company, and a 50% interest in Discovery Communications (DCI). The spinoff was part of Liberty Media’s strategy of streamlining its vast holdings in various media companies. At the time of the DHC spinoff, DCI’s other owners included Cox Communications and Advance/Newhouse (A/N), which each owned a 25% stake in Discovery Communications. In 2007, Cox exchanged its interest in DCI for the Travel Channel and $1.3 billion of cash. The Cox transaction, which resulted in DHC’s ownership increasing to ~67% and A/N increasing to ~33%, paved the way for the streamlining of DCI’s ownership. In June 2008, DHC reached an agreement with A/N that effectively transformed Discovery Communications into a public company. As part of that agreement, A/N agreed to exchange its ~33% stake in DCI for convertible preferred stock. The agreement was approved by DHC shareholders in September 2008 at which point Discovery became a publicly company. Ascent Media was spun off to DHC shareholders immediately prior to the transaction with Advance/Newhouse.

Asset Analysis Focus last featured shares of Discovery Communications in October 2008 shortly after the Discovery ownership restructuring. At that time we believed that Discovery’s streamlined ownership structure would allow shares to command a higher multiple representative of its strong fundamentals. In addition, Discovery CEO David Zaslav (a former NBCU executive who joined the Company in 2007) was positioning DISCA for future growth by focusing the Company on its strong brands. Upon his arrival, CEO - 32 - Discovery Communications, Inc.

Zaslav also instituted a company-wide restructuring which reduced headcount, including the dismissal of several high level managers, closed the Company’s capital-intensive retail stores, and pared investments in its education business. Under CEO Zaslav, Discovery has delivered strong growth with revenues and adjusted OIBDA increasing at a 12% and 17% CAGR, respectively between 2008 and 2013. Profitability has also expanded nicely with adjusted OIBDA margins expanding by over 800 basis points between 2008 and 2012 before declining about 300 basis points in 2013 following the acquisition of a lower margin business during the year.

Revenues (millions) Adjusted OIBDA (millions)

Note: Numbers are as reported. Source: Company presentation, November 2014

Shares of Discovery have been a strong performer increasing more than six-fold between 2008 and year end 2013. However, shares have declined about 30% over the past year reflecting a number of uncertainties including ratings weakness, distributor consolidation, foreign exchange headwinds and geopolitical concerns. While we discuss these issues in greater detail (see p. 44), we would note that shares of Discovery now trade at just 10x TTM adjusted OIBDA and at a discount to its media peers reversing a meaningful premium. In our view this valuation is inconsistent with the Company’s attractive dual stream revenue model that generates a significant amount of free cash flow. While share repurchases have been robust over the past 4 years, we would not be surprised if share repurchases were accelerated in the wake of the recent sell off.

Business Description and Overview Discovery Communications is the world’s #1 non-fiction media company reaching 2.8 billion cumulative subscribers in over 220 countries. Discovery is dedicated to satisfying curiosity, engaging and entertaining viewers with high-quality content on worldwide television networks, led by Discovery Channel, TLC, Animal Planet, Investigation Discovery and Science, as well as U.S. joint venture network OWN: Oprah Winfrey Network. The Company’s content spans genres including science, exploration, survival, natural history, technology, docu-series, anthropology, heroes, paleontology, history, space, archeology, health and wellness, engineering, adventure, lifestyles, crime and investigation, civilizations, current events and kids. A key component of the Company’s business model is the universal appeal of the vast majority of the Company’s content. Since the Company’s content resonates well across cultures and geographies, DISCA is able to leverage it’s valuable intellectual property over many international markets with minimal incremental costs. This is in marked contrast to many cable network companies that tend to produce content with only local/regional appeal (Reality, Music, Food, Home/Lifestyle). In addition, with DISCA owning virtually all of its content it is also able to monetize it across multiple distribution platforms (VOD, SVOD, OTT, etc.).

Discovery also controls Eurosport International, a premier sports entertainment group, including six pay- TV network brands across Europe and Asia. Discovery also is a leading provider of educational products and services to schools, including an award-winning series of K-12 digital textbooks, through Discovery Education, and a digital leader with a diversified online portfolio, including Discovery Digital Networks.

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Discovery reports its results in three reportable segments including U.S. Networks, International Networks and Education. The following provides a breakdown of DISCA’s results by revenue and profitability:

Discovery Revenue and Profitability – 9 Mos. 2014 ($MM) Revenues Adjusted OIBDA*

Education Education $90 $15 2% 1% U.S. Networks U.S. $2,209 Int'l Networks Int'l 48% Networks $1,274 Networks $796 61% $2,291 38% 50%

Total Revenue: $4,590 Total Adjusted OIBDA: $2,085

*Adjusted OIBDA presented before $232 million of corporate espenses and eliminations

U.S. Networks (48% of 9 Mos. 2014 Revenues) Discovery owns and operates nine national television networks including fully distributed networks such as Discovery Channel, TLC and Animal Planet. The Company’s three largest networks generated 70% of U.S. Network’s total revenue during 2013. In addition, this segment has a 70% ownership in Discovery Family (formerly known as the Hub) and holds an equity method investment in the Oprah Winfrey Network (OWN). The following provides a summary of U.S. Networks.

U.S. Networks - Summary Results ($MM) 2011 2012 2013 9 Mos 2013 9 Mos 2014 Distribution $1,180 $1,222 $1,294 $985 $956 Advertising $1,337 $1,456 $1,576 $1,165 $1,207 Other $102 $70 $82 $62 $46 Total Revenues $2,619 $2,748 $2,952 $2,212 $2,209

Adjusted OIBDA $1,495 $1,622 $1,708 $1,274 $1,274 Adjusted OIBDA Margin 57.1% 59.0% 57.9% 57.6% 57.7%

The U.S. Networks segment generates revenue from affiliate fees received from distributors for airing its networks and from the sale of advertising on the Company’s networks. Discovery’s affiliate fees are secured pursuant to multi-year agreements that average 4-6 years in the U.S. and typically contain annual escalators. Approximately 90% of U.S. Networks Distribution revenue is derived from the top ten pay-TV operators. Discovery sells advertising in the upfront and scatter market with ~55% of inventory sold in the upfront. Advertising sold in the scatter market (closer to air) usually commands a premium to upfront pricing.

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International Networks (50%) International Networks - Summary Results ($MM) 2011 2012 2013 9 Mos 2013 9 Mos 2014 Distribution $890 $984 $1,242 $911 $1,141 Advertising $514 $580 $1,162 $756 $1,050 Other $51 $73 $70 $49 $100 Total Revenues $1,455 $1,637 $2,474 $1,716 $2,291

Adjusted OIBDA $645 $721 $976 $659 $796 Adjusted OIBDA Margin 44.3% 44.0% 39.5% 38.4% 34.7%

Discovery’s International Networks segment owns and operates a mix of Global Networks (Discovery, Channel, TLC and Discovery, etc.) that are extensions of its U.S. networks (dubbed and subtitled in local languages) and regional networks with local content. Over 50% of content utilized on the Company’s various International Networks are sourced from its U.S. Networks.

International Networks – Subscriber Summary International International Subscribers Subscribers Global Networks (mm) Regional Networks (mm) Discovery Channel 271 Discovery Kids 76 Animal Planet 200 SBS Nordic(a) 28 TLC, Real Time and Travel & Living 162 DMAX(b) 16 Discovery Science 81 Discovery History 14 Investigation Discovery 74 Shed 12 Discovery Home & Health 64 Discovery en Espanol (U.S.) 5 Turbo 52 Discovery Familia (U.S.) 4 Discovery World 23 GXT 4 (a) Number of subscribers corresponds to the collective sum of the total number of subscribers to each of the SBS Nordic broadcast networks in Sweden, Norway, and Denmark subject to retransmission agreements with pay television providers. (b) Number of subscribers corresponds to DMAX pay television networks in the U.K., Austria, Switzerland and Ireland. Source: Company 10-K, 2013

The International Networks segment also owns and operates free-to-air (FTA) television networks that reached 285 million cumulative viewers in Europe and the Middle East as of December 31, 2013. DISCA’s FTA networks include DMAX (81mm subs), Fatafeat (55mm) Quest (26mm), and Real Time (25mm), among others. Similar to the U.S. Networks segment, the primary sources of revenue are derived from affiliate fees and advertising though the average affiliate fee contract is a little shorter outside the U.S. at ~2-3 years. Distributor concentration is less a concern outside of the U.S. with just 50% of affiliate fees derived from the top 10 distributors.

Over the past two years, Discovery has significantly expanded its international presence primarily through the acquisition of SBS Nordic and Eurosport. Discovery has deployed approximately $2 billion for these businesses. While we discuss the opportunities these operations will provide Discovery in a later section, the following summarizes the two businesses.  SBS Nordic – In April 2013, Discovery acquired ProSiebenSat.1 Group’s SBS Nordic operations for $1.7 billion valuing SBS at approximately 10x its recurring EBITDA. The SBS Nordic business includes 12 television networks in Norway, Sweden, Denmark and Finland and 19 radio stations across the region. The SBS Nordic transaction added a number of new genres to the portfolio

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including general entertainment, scripted and sports programming. The following provides key market share stats of the SBS portfolio: . In Norway, SBS boasts the #2 television portfolio with four networks and a 34% market share. . SBS holds a ~22% market share in Sweden with its two television networks while SBS owns the #1 radio portfolio in the country. . SBS’ portfolio in Denmark includes four television networks with a market share of 19%  Eurosport – In May 2014, DISCA acquired a controlling interest in Eurosport, which is a leading pan-European sports media platform. As part of the transaction, DISCA paid $349 million to increase its Eurosport stake to 51% from 20% after purchasing its initial stake in the network in 2012 for ~$222 million. Based on our estimates, Discovery acquired its controlling stake in Eurosport for ~11-12x EBITDA. Due to regulatory restrictions, the Company retains a 20% stake in Eurosport France, but has the option to purchase an additional 31% in 2015 for $48 million subject to approvals. The flagship Eurosport network reaches 123 million subs in Europe and focuses on regionally popular sports, such as tennis, skiing, cycling and motor sports. In addition, the Eurosport platform also includes Eurosport 2 (68 million subs), Eurosport Asia-Pacific (10 million subs) and Eurosport News (8 million). While we discuss the Eurosport transaction in greater detail below, DISCA should be able to leverage its international infrastructure (localized sales force) to drive growth and margin expansion.

Education (2%) Education - Summary Results ($MM) 2011 2012 2013 9 Mos 2013 9 Mos 2014 Total Revenues $95 $105 $114 $73 $90

Adjusted OIBDA $25 $27 $27 $13 $15 Adjusted OIBDA Margin 26.3% 25.7% 23.7% 17.8% 16.7%

The Education segment generates revenue from subscription-based services for schools including curriculum-based VOD tools, professional development services, digital textbooks and, to a lesser extent, student assessments and publication of hardcopy curriculum-based content. Services are provided to 3.5 million teachers and 35 million students at more than half of U.S. K-12 schools and more than half of UK primary schools.

U.S. Networks Operate In Mature Pay-TV Market, but Discovery Has Multiple Growth Avenues Discovery has been a strong performer in the media industry with revenues and OIBDA increasing at a 7% and 9% CAGR, respectively between 2008 and 2013 with margins increasing by over 400 basis points to 58%. While this growth has been impressive, we see further gains ahead despite operating in the relatively mature U.S. Pay-TV market. Discovery should experience higher affiliate fees and advertising revenues due to its increased market share and successful and ongoing repositioning of underperforming networks. In addition, the monetization of content over new platforms could also bolster the Company’s distribution revenues.

Market Share Growth Should Drive Further Affiliate Fee and Advertising Growth Over the past 5 years, Discovery has increased its investment in content to ~$1.5 billion on an annual basis from ~$800 million to bolster its brands and capture market share. The investment has paid off in terms of market share gains with 2013 marking the fifth consecutive year of audience growth for Discovery’s U.S. networks. Discovery now commands an ~12% market share up from 5% over the past ~7 years. Despite the market share gains, DISCA still only generates 5% of industry subscriber fees, providing ample room for future growth. Thanks in part to the Company’s content investment, DISCA recently stated it is garnering low double-digit increases during its recent affiliate fee renewals, which is expected to translate to high single-digit distribution growth, up from 4% growth in 2012 (note growth in 2013 was 5% on adjusted basis). Through the

- 36 - Discovery Communications, Inc. first 9 months of 2014, DISCA’s distribution revenue was up by 6% and management expects further increases as affiliate fee agreements are renegotiated (~20% of distributors are up for renewal each year).

In addition to providing a nice boost to affiliate fees, DISCA’s market share growth is also delivering good advertising growth. During 2013, a number of Discovery’s top networks had their most watched years ever in key demos including the flagship Discovery channel, Animal Planet and ID. Although there has been some advertising softness across the cable TV landscape (discussed in further detail below), pricing has remained strong. Discovery’s future advertising should also be a beneficiary of the disconnect between pricing on broadcast and cable TV networks with the current ~30% CPM gap between broadcast and cable likely to continue to narrow.

While the Company’s content investment has been elevated, future investment is likely to be more moderate, which should have a favorable impact on DISCA’s U.S. Networks margins. Going forward, Discovery expects future content costs to increase at a mid-to-high single-digit rate compared with the mid-teens growth rate experienced in recent years. According to Discovery management, the lower required content spend is a function of the fact that it has developed a base of established series.

Network Rebrandings Should Also Deliver Affiliate Fee and Advertising Boost Discovery has successfully rebranded a few of its underperforming networks in recent years that have driven subscriber gains and boosted advertising revenues. Over the past 6 years, the following 7 Discovery networks have undergone a transformation as part of an initiative to improve their operating performance.

“Beachfront Real Estate Provides Additional Growth Opportunities” Seven New Brands Off Discovery’s Existing Distribution in the Past Six Years

Source: Company presentation, November 2014

The most successful recent rebranding has been the conversion of the Discovery Times network (note: Discovery acquired the NY Times’ stake in the network in 2006) in 2008 to Investigation Discovery, which is now a leading mystery and suspense network. Under the leadership of veteran cable network executive Henry Schleiff, who joined Discovery in 2009, the network has registered a significant improvement in performance. Since its launch, ID has improved from a top 55 Women’s network to the #2 ranked network for Women in the U.S. (trailing only USA) in the 25 to 54 demo. Notably, ID boasts the longest length of view (cable or broadcast) of any network in the U.S. for Women ages 25-54 and also recently received the distinction as the #1 network for viewer satisfaction in the Beta Research Digital Subscriber Study. ID’s audience has increased at a double-

- 37 - Discovery Communications, Inc. digit annual rate since its launch in 2008. ID also boasts being the #2 Women’s channel in America during daytime and the number 4 overall Women’s network.

Investigation Discovery (ID) - Subscribers (MM)

100 94

90 84 85 79 80 80 74 70 70 63

60 53 55 50

40

Subscribers - Millions Subscribers - 30 23 20 14 10 10

0 2008 2009 2010 2011 2012 2013 September 2014 U.S. Subs International Subs

Despite ID’s strong viewership results and subscriber growth, the network is still underpenetrated in the U.S. with just 85 million subs as of September 2014, well below the ~95-100 million subs of fully distributed cable networks. There is also an opportunity to generate increased affiliate fees from higher pricing with ID’s monthly subscriber fee believed to be roughly $0.10 below comparable networks. In addition, advertising rates for the network are not reflective of the network’s attractive audience and viewership gains, but the Company expects the cost per thousand (CPM) differential with peers to close in the coming years. During Discovery’s 1Q 2014 earnings call CEO Zaslav stated, “Even though ID is the number four network in America for Women we still don’t get the pricing that we think we deserve on that. … You’re going to see sustainable growth in our pricing on ID for the next two years at least before we get to where it should be.” Given the universal appeal of the network’s “crime” content, the rebranding is also having a favorable impact on the Company’s International Networks segment. ID is currently in ~160 countries and management expects that the network will be in over 200 countries within the next two years.

In our view, the successful repositioning of ID by Mr. Schleiff has not been a fluke as he orchestrated a similar turnaround of CourtTV before Time Warner took control of the brand in 2006 at an implied valuation of $1.5 billion. We believe there is significant opportunity for further improvement in a number of other underperforming brands. The following provides an overview of other recent/upcoming rebrandings at Discovery, a number of which are under the auspices of Mr. Schleiff:

 Velocity – During 2011, Discovery’s HD Theater Network was rebranded as Velocity, a men’s channel featuring fishing, boats, gambling, etc. However, the Company narrowed its niche focusing on cars. Velocity is currently in 60 million homes, but management stated in May 2014 that it should be in 70 million homes within 9 months. While Velocity doesn’t have a deep audience base, it has a very attractive and loyal following as the network targets males with annual incomes over $150k. Notably, 82% of the networks’ advertisers only advertise on Velocity. The car-based content on Velocity is universal and as a result the Company expects to be in 150 to 200 countries over the next 2-3 years, up from 51 countries. Velocity also is the #1 network in delivery among Men ages 25-54 for networks in fewer than 65 million households.  American Heroes – In March 2014, the Military Channel changed its name to the American Heroes channel in order to broaden is programming from primarily military oriented documentaries to highlighting heroes from all walks of life. Early results of the repositioning are encouraging with American Heroes averaging 236k viewers a night up from 194k prior to the conversion.

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 Destination America – Formerly operating as Planet Green, Destination America launched in May 2012 and seeks to attract a “middle America” audience with programming around travel, food, adventure, home, and natural history. Destination America was in 57 million homes as of November 2014, and management expects the network will be in over 80 million homes over the next 2-3 years. The network has enjoyed strong recent ratings growth ranking among cable’s top-five fastest growing networks in Total Day and Primetime in its key demos during the first half of 2014. Notably, Destination America has recently registered 11 consecutive quarters of year-over-year audience gains in prime time among persons 25-54.  Discovery Family – Previously known as the Hub, which itself was rebranded from Discovery Kids in 2010 in conjunction with the formation of a JV with Hasbro, the network changed its name to Discovery Family channel in October 2014 after Discovery increased its stake in the Network to 60% (from 50%) in September 2014. As part of the increased stake in the network, Discovery has taken over operational control of the network, which is now being overseen by Mr. Schleiff. While the channel will continue to feature Hasbro Content in the daytime, the primetime programming will seek to capitalize on the favorable “co-viewing” trends experienced at the Hub during primetime and leverage Discovery’s library of programming. Early results of the rebrand are encouraging with Discovery noting that in the first few weeks under the new banner, ratings were up double-digits with Discovery receiving strong interest for co-viewing in a quality brand environment. At 70 million subs, the network’s subscriber base is significantly below the 99 million viewers of peers Disney and Nickelodeon.

We would be remiss if we did not mention the ongoing improvement of the OWN network, which was formerly known as Discovery Health Chanel, before its transition in 2011. While DISCA does not consolidate OWN’s results (OWN is a 50-50 JV with Harpo Productions and Harpo has operating control), the network has recorded significant improvement after getting off to a slow start following its 2011 launch. OWN has experienced strong viewership growth in recent years and is now a #1 network for African American Women three nights a week and is often the #1 or #2 network for all Women in America. OWN is now a meaningful cash contributor for Discovery as the network generated its first quarter of positive equity contributions for Discovery during the fourth quarter of 2013. During Discovery’s 4Q 2013 earnings call, CFO Andy Warren noted that “we anticipate that for 2014 OWN’s cash contributions will increase significantly given its ratings and advertising momentum.” OWN is currently in ~81 million homes and management expects the network to be in ~90 million homes over the next year and a half.

Ancillary Rights Monetization – TV Everywhere and OTT Discovery has been slow to embrace monetization of its ancillary content rights, but has recently begun to offer these rights during affiliate fee negotiations. Discovery’s affiliate fee renewal with Time Warner Cable in 2013 was the first to include TV Everywhere access to Discovery content. In our view, the additional rights have also been a strong contributor to the Company’s ability to secure double-digit rate increases. DISCA’s agreement with Comcast expires in June 2015 and we would note that Comcast subscribers do not currently have access to content outside of the linear channels. Given Comcast’s motto of giving its consumers the ability to access content wherever and whenever they want it, we suspect that Comcast will look to secure these expanded rights during the upcoming renewal. It is also interesting to note that Discovery’s agreement with Comcast expires in June 2015, which is just prior to the current expected merger approval date (August 2015). We believe this could work in Discovery’s favor as Comcast is unlikely to become embroiled in a contentious renewal shortly before its merger with Time Warner Cable is approved.

In addition to TV Everywhere rights with existing distributors, DISCA should be able to more fully monetize its content via over-the top platforms. In our view, as the Company is able to leverage its content over new platforms, this will allow DISCA to add a more meaningful third revenue stream, in the form of content licensing, to its dual revenue stream model. In November, Discovery announced an agreement with Sony for distribution of the Company’s U.S. Networks on Playstation Vue, Sony’s new cloud-based TV service, which is expected to launch in the first quarter of 2015. Meanwhile, in December 2014, Discovery announced an agreement with Hulu that will allow its subscribers to stream a variety of programs across Discovery’s portfolio of networks including exclusive subscription video on demand (SVOD) rights to Discovery’s hit series Deadliest Catch. Discovery’s programming will be made available to Hulu subscribers 12 months after airing on Discovery’s linear network, which is much shorter than the 18 month window of prior SVOD agreements with

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Netflix (expired December 2014) and Amazon (expired March 2012). Importantly, DISCA notes that its prior SVOD agreements did not adversely impact the audience on its linear networks. In December 2014, Discovery CEO David Zaslav said that he is hopeful that it will be able to reach a new agreement with Netflix and stated, “They want to do a deal with us. We want to do a deal with them. It's really just a question of value. And so we continue to talk about the value of our content.”

International Networks – Multiple Opportunities to Drive Future Growth and Margin Expansion The second quarter of 2014 marked the first quarter in DISCA’s history that it generated more revenue from outside of the U.S. reflecting organic growth and the contribution from the aforementioned recent acquisitions. DISCA’s organic growth has been achieved due to strong distribution and advertising growth in the Company’s International Networks segment.

Int’l Networks Growth Rates/Profitability Excluding FX Fluctuations and Newly Acquired Businesses 9 mos 9 mos Revenues 2008 2009 2010 2011 2012 2013 2013 2014 Distribution – 9.0% 6.0%* 11.0% 16.0% 15.0% – 9.0% Advertising – 12.0% 22.7%* 18.0% 19.0% 23.0% – 16.0%

OIBDA – 24.0% 20.0% 18.3%* 18.0% 16.0% – 16.0%

Adjusted OIBDA Margin** 33.4% 39.3% 43.6% 44.3% 44.0% 39.5% 38.4% 34.7% * No significant differences with reported results ** Adjusted OIBDA Margins as reported

The recent acquisitions of SBS and Eurosport, which command margins lower than International Networks, have driven down International Networks’ adjusted OIBDA margins to ~35% or ~900 basis points below the 44% margins the International Networks segment commanded before the acquisition and well below the 58% OIBDA margins generated by the U.S. Networks segment. While the acquisitions were margin dilutive, management has noted they were accretive immediately from a financial perspective. Given the scale of the U.S. Networks business, we do not believe that the international business will ever be on par with the U.S. operations from a profitability standpoint. However, we believe there are a number of factors that should drive future growth and margin expansion within the International Networks segments. These factors include realizing synergies/benefits from the SBS Nordic and Eurosport transactions, continued pay-TV growth in international markets that should favorably impact future advertising and distribution revenue, and further leverage of DISCA’s content in international markets.

Realization of Benefits from Recent Acquisitions Including SBS and Eurosport Discovery has achieved its strong international growth over the years primarily through organic means. Over the past two years the company has completed two acquisitions as a way to continue to drive further growth in its international operations. While DISCA does not believe that it will be able improve the margins of SBS and Eurosport to segment averages, it does believe that it can grow margins from the new base and the overall segment could approach 40% adjusted OIBDA margins over the next 5 years. The following provides a discussion of the opportunities as DISCA brings SBS Nordic and Eurosport into the fold.

 SBS Nordic – While SBS Nordic operates in a relatively mature pay-TV market and its operations in the region have been well run, DISCA believes that it should be able to capitalize on its newfound scale in the region. The region also is characterized by stability with growing economies. Discovery currently has eight channels in each of the regions (Denmark, Sweden, Findland, Norway), which should allow it to command higher distribution and advertising revenues for both the SBS networks as well as DISCA’s Networks. SBS currently generates approximately 30% of its revenues from subscriber fees, which is below the ~50/50 (distribution/advertising) mix of DISCA’s International Networks. While DISCA should also be able to command higher affiliate fee pricing of its Networks in the region, advertising revenues should also benefit from cross selling the Discovery networks to SBS advertisers. During Discovery’s 4Q 2013 earnings call in February 2014, management noted

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that it had garnered 75 new advertising clients on the Discovery Channel and TLC in Sweden and 102 in Denmark since establishing a joint sales team after closing of the merger.  Eurosport – Discovery believes that it should be able to leverage its international infrastructure to further expand Eurosport’s reach and drive higher advertising revenues. While Eurosport has done a good job expanding distribution (its 133 million European subs are higher than the ~100 million subs that ESPN has in the U.S.) and improving operating performance, there are a number of opportunities for Discovery to expand distribution and capture higher advertising dollars.

Eurosport: A Model of Value Creation

Source: TF1-Le Groupe Investor presentation, Nov-Dec 2014

During a September 2014 investment conference, CFO Warren stated, “I couldn’t be more bullish on that asset and that acquisition. I think it’s going to be a crown jewel for us and I think the benefit and the leverage we’re going to get out of that is going to be significant.” Discovery has a presence in each of the 50+ countries that Eurosport has current distribution. Prior to Discovery taking over Eurosport, advertising was sold on a Pan European basis versus utilizing a local sales force. During Discovery’s 3Q 2014 earnings conference call, CEO Zaslav discussed the local sales opportunity with Eurosport noting, “In addition, Eurosport previously relied almost exclusively on Pan European ad sales. The benefit of Discovery’s local teams means we can increase our inventory to sell local in addition to Pan-European, and local ad markets are significantly bigger than Pan-European.” Eurosport currently derives just 20% of its revenues from advertising, which is underpenetrated relative to mature cable networks. Additional opportunities that Discovery intends to pursue for Eurosport include expansion into India (where Discovery currently has 11 networks in 5 languages across the country) and the creation of the equivalent of regional sports networks across the region utilizing the Eurosport 2 platform.

Pay-TV is Underpenetrated Discovery is well positioned in a number of promising international markets where pay-TV penetration is low, but is experiencing good growth. For example, in Brazil DISCA has 5 of the top 20 channels including Discovery Kids, which is the top rated network (among all networks, not just kids) in the country. Discovery’s market share in the country is impressive given the much smaller universe of channels (~60) in the country. While pay-TV in Brazil has experienced strong growth over the past 2-3 years with penetration increasing to ~30% vs. ~20%, DISCA believes that there is room for further growth. While penetration is unlikely to approach U.S. levels, management believes 50%-60% penetration rates are not unrealistic over the mid-long term.

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Low Pay-TV Penetration Around the World

Source: IHS year end 2014 projections via Company presentation, November 2014

In Discovery’s international markets, Discovery’s distribution revenue growth has been largely a function of subscriber growth. However, as audiences expand, DISCA should be able to command price increases from its distributors. Over the past 7 years, viewership across Discovery’s portfolio of networks is up over 200%.

Selection of Discovery's International Networks - Subscribers (MM) 2009 2010 2011 2012 2013 November 2014 Discovery Channel 187 206 213 246 271 350 Animal Planet 141 154 166 183 200 308 Discovery Science 41 59 66 75 81 80 Discovery Home & Health 36 41 48 57 64 65 Discovery Kids 28 33 37 61 76 81 ID: Investigation Discovery 10 14 23 63 74 94

Free To Air – Leveraging Discovery’s Content Library One of the ways that Discovery has been leveraging its content in international markets is through the purchase of free to air stations. While over 90% of the Company is derived from its dual revenue stream model Discovery believes that its free to air strategy can be a growth driver for the Company, especially in markets where pay-TV penetration is low. The Company has FTA channels in ~6 markets including Germany where there are roughly 3.5 million pay TV subs, but ~35 million TV households. The FTA model allows Discovery to leverage an established local advertising infrastructure.

Discovery Generates Robust Free Cash Flow that is Poised to Accelerate Despite investments in content and infrastructure (local ad sales, etc.) Discovery has generated strong cash flows. Over the past three years, Discovery has generated an annual average of $1.1 billion of free cash

- 42 - Discovery Communications, Inc. flow (~6% FCF yield). In our view, Discovery’s free cash flow is poised to accelerate as its content spending begins to moderate. As we noted above, DISCA expects its investment in content to moderate to a mid to high single-digit growth rate from the mid-teens growth rate experienced in recent years, which we estimate to be an ~$200 million annual reduction in content investment. In addition, the double-digit renewals within the U.S. Networks segment should help bolster segment profitability and would note that this is a high margin revenue stream with a large portion of the incremental revenues dropping straight to the bottom line. The Company’s multiple opportunities to drive growth and profitability in its international operations should also help accelerate free cash flow generation.

Strong and Consistent Free Cash Flow Generation (millions)

Note: Numbers are as reported. FCF defined as cash from operating activities less capital expenditures. Source: Company presentation, November 2014

In addition to operational benefits, we would note that Discovery’s free cash flow should also be bolstered by the reduction of its tax rate going forward. With Discovery utilizing more of its content outside of the U.S. and with international operations accounting for a disproportionate share of total revenues, DISCA believes there is a meaningful opportunity to further lower its tax rate in the coming years. During the third quarter of 2014, DISCA’s effective tax rate declined by 400 basis points to 35%. Commenting on the reduced tax rate, DISCA CFO Warren stated, “We now have line of sight to our being able to reduce our global effective tax rate below 30% by FY 2017. This sustained year over year reduction in our tax rate will not only drive net income growth but also accelerate our free cash flow and capital availability growth as well.”

Capital Allocation – Share Repurchases Should Accelerate Since 2010, Discovery has deployed $5.4 billion toward share repurchases, reducing shares outstanding by over 20%. The repurchases include the purchase of preferred shares held by Advance/Newhouse. We believe that share repurchases will continue to be a use for excess capital reflecting Discovery’s strong balance sheet and free cash flow generation. At September 30, 2014, Discovery had ~$6.7 billion of long-term debt, but with only $850 million in near term maturities (June 2015). In addition, we would note that over 30% of Discovery’s long-term debt has maturities beyond 2040 as the Company has taken advantage of favorable credit market conditions in recent years. In our view, DISCA has significant capacity and flexibility to continue aggressive share repurchases and we believe the current share price weakness provides an excellent opportunity for the Company to become aggressive with its share buyback program. We would also note that DISCA’s leverage ratio (debt/adjusted OIBDA: 2.8x) is at the mid-point of its targeted 2.5x-3.0x range.

While sophisticated investors do not usually become excited about stock splits, Discovery’s recent stock dividend offers a meaningful catalyst for significant share repurchases. In August, 2014 Discovery distributed a stock dividend with each holder of Discovery’s Series A (DISCA) and Series B (DISCB) receiving one additional share of the Company’s Series C (DISCK) common stock. The stock dividend, which was effectively a 2-for-1 stock split, has created significantly more liquidity for the Company’s Series C shares, which currently trade at

- 43 - Discovery Communications, Inc. an 3.8% discount to the Series A shares. During a May 2014 investor conference CFO Warren stated, “Now one of the reasons we did the split is we bought back a lot of our stock and we wanted a more liquid opportunity to do that. And this split I think will give us a chance to be more aggressive..”

Discovery Improves Liquidity of Series C Shares DISCA DISCB DISCK Series A Series B Series C Pre Dividend Shares 219.0 13.5 113.7 % of Total 63.3% 3.9% 32.8%

Post Dividend Shares 290.5 20.5 373.3 % of total 42.4% 3.0% 54.5% Note: Share amounts assume preferred stock conversion

Corporate Governance and Share Ownership Shares of Discovery Communications are effectively controlled by John Malone and Advance/Newhouse. For corporate matters other than the election of directors, Dr. Malone and A/N hold approximately 22% and 25%, respectively, of the aggregate voting power. With respect to the election of directors, Dr. Malone controls approximately 29% of the aggregate voting power relating to the election of the eight common stock directors while A/N, through its ownership of preferred stock has the right to designate three preferred stock directors to DISCA’s board (subject to certain conditions), but does not vote with respect to the election of the eight common stock directors.

In our initial 2006 report on Discovery, we referenced a quote from DISCA chairman John Malone from Liberty Media’s 2005 investor meeting that stated, “The only way anybody is going to get my Discovery stock is out of my cold dead hands.” However, based on a 2014 filing, CEO Zaslav may have the opportunity to acquire Malone’s stake. While Malone does not have any current plans of leaving his chairman’s post, he recently (February 2014) gave Discovery CEO David Zaslav the right of first refusal to acquire his voting stake in Discovery. Malone, who entered into a similar agreement with the CEO of Liberty Global for his stake in that company, commented on the agreement saying, “Nothing is changing right now. I have no plans to transfer any of my voting shares and plan on staying actively involved in both Liberty Global and Discovery Communications going forward. But in the event I do in the future decide to pursue the sale of my voting position, I am excited about providing these two strong executives, who have both created significant shareholder value, with a path toward acquiring that stake in preserving the long-term stability and continuity of the companies they have built and will continue leading in the future.” 1

Addressing a Number of Investor Concerns Over Discovery Communications DISCA’s shares have underperformed its peers by a wide margin declining by approximately 30%. At current levels, DISCA now trades at a 5% discount to its media peers on an EV/EBITDA basis after commanding a meaningful premium in recent years.

1 “Malone Starts to Lay Out Succession Plans for Media Empire”, Amol Sharma, The Wall Street Journal http://www.wsj.com/articles/SB10001424052702304899704579391560057893716

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DISCA – 1 Year Share Price Comparison

DISCA

In our view, this valuation is inconsistent with Discovery’s industry leading profitability and meaningful growth opportunities. We believe investors have overreacted to a host of uncertainties including recent cable ratings pressure, distributor consolidation, over the top uncertainties, potential for sports rights acquisitions, foreign exchange headwinds and geopolitical concerns.

Cable Ratings Under Pressure - Questioning Measurement and Analyzing Potential Impact Ratings on cable TV experienced significant softness during the third quarter of 2014. As illustrated in the following chart, many cable TV network companies experienced double-digit declines during the quarter.

Cable Network Ratings Decline 3Q 2014 vs. 3Q 2013

4000 3673

3500 3251 3168 2907 3000 3Q 2013 3Q 2014 2764 2489 2500 2149 2132 2000 1908 1677 1659 1479 1455 1500 1318 1143 1130

Primetime Ratings (thousands) Ratings Primetime 1000 668 614 500

0 % Change 12% -1% -8% -11% -11% -13% -13% -14% -22% Fox Scripps AMC Discovery Viacom Time Disney NBCU A&E Networks Networks Warner

Source: Nielsen, MoffettNathanson Analysis via Variety.com, November 2014, http://variety.com/2014/tv/news/cable-network-ratings-1201346782/

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During Comcast’s third quarter earnings call held on October 23rd, NBC Universal President Steve Burke noted that “The fact of the matter is, the next five or 10 years in basic-entertainment cable, as it relates to ratings are going to be much more difficult than the last five to 10 years. Our big cable channels particularly when sold as a portfolio are very attractive and very powerful. I just think it’s unreasonable to assume the ratings for those businesses are going to grow if you look over a five-or 10-year period.” The ratings weakness coupled with Burke’s analysis spooked investors in media stocks. While the ratings pressure on the surface looks alarming, the actual extent of decline may be significantly overstated. Many industry observers believe that cable audiences are not being properly measured with consumption in today’s digital environment occurring in many different ways be it on mobile devices, DVRs, VOD, etc. During Discovery’s 3Q 2014 Discovery CEO Zaslav stated, “But when we look at the actual set-box data we see a different story. And we do think that Nielsen is quite antiquated.” Frustrated with Nielsen’s measurements, Comcast announced in January that it would no longer be using Nielsen’s ratings measurements for CNBC and has switched to Cogent Reports. In a recent article about the accuracy of Nielsen cable ratings media guru Michael Wolf stated the following in the Hollywood Reporter:

“There is, too, another difficult part of the dialectic: parsing the difference between “television” and “cable” as a distribution channel and “television” and “cable” as a business. The Nielsen model, with its virtues and flaws, measures the former but is remote from – if not pretty much clueless about – the latter. In the latter, a host of behaviors inarguably have changed the way television is distributed through new platforms and across new devices with increasing flexibility. But, arguably, those behaviors do not represent a change in appetite or demand for television. They might, in fact, be increasing it. Anecdotally, television seems as central to the culture as ever before – perhaps more. Indeed, the most reasonable explanation for the discrepancy between Nielsen data and cable operator subscription fees is a phenomenon larger and more interesting than cord cutting. Viewers are maintaining their cable subscriptions but simultaneously expanding their viewing habits – aided by their cable subscriptions and, at more cost, added on to them – across many new devices and platforms. They are watching differently – subtleties Nielsen can’t measure – but not watching less. Intuitively they are watching more.”2 – Michael Wolf, The Hollywood Reporter, January 15, 2015

While cable network ratings may not expand at the same rate as recently experienced this does not necessarily imply that advertising revenues will be under pressure. We would note that even as main broadcast networks have ceded share to cable networks, its advertising pricing has actually increased. We believe that ad pricing on cable TV networks could experience similar trends due to cable’s ability to deliver large audiences in today’s fragmented media landscape.

2 “Michael Wolf Blasts Nielsen Cable Ratings: What if they Aren’t Real?”, Michael Wolf, The Hollywood Reporter http://www.hollywoodreporter.com/news/michael-wolff-blasts-nielsen-cable-763293 - 46 - Discovery Communications, Inc.

Advertiser Demand For Large TV Audiences Results in Pricing Increasing Faster Than Ratings Decline

Source: Company data, Morgan Stanley research

DISCA’s share price weakness in the face of industry ratings uncertainties seems curious given DISCA’s strong base of affiliate revenues. As illustrated in the following chart, DISCA generates significantly more revenues from affiliate fees that are secured under multi-year contracts, which should allow Discovery to better navigate the actual (or perceived) ratings headwinds.

Affiliate Revenue as % of Total Revenue

Source: Company presentation, November 2014

Distributor Consolidation Comcast’s proposed acquisition of Time Warner Cable and AT&T’s pending takeover of DIRECTV have created uncertainty for content companies. Should these mergers be approved, Comcast will have ~30% of all multichannel video programmer distributor (MVPD) subs in the U.S. (up from ~22%) while AT&T/DTV will control 26% of subs compared with DIRECTV’s current ~20% market share. Investors have reason to be concerned that the distributors’ increased heft will give them the upper hand in future content negotiations. However, in the wake of Comcast’s bid for TWC, David Cohen, who serves as head of regulatory affairs for Comcast noted in February 2014, “People who think we will have a huge amount of additional leverage don't understand the enormous amount of power that has developed on the content side. …The balance of power in programming negotiations, even with a 30-million customer company, is not going to tilt decisively in our favor.” While there is - 47 - Discovery Communications, Inc. good reason to be skeptical of Mr. Cohen’s comments, the high single-digit/low double-digit programming expenses experienced by the industry’s largest distributors in recent years seem to reinforce his view. Between 2004 and 2013, Comcast’s programming expenses increased by 120%. Another potential concern for content companies is the fact that the CMSCK/TWC combination would pass 60-70% of all broadband homes. With an increasing amount of content consumed over high speed broadband this is a valid concern for a content company, especially given the direct to consumer opportunity that content companies may have down the road. However, we would note that Comcast is currently operating under net neutrality restrictions as a part of the NBCU merger and we believe that this would likely also be an ongoing condition of the TWC acquisition. In addition, President Obama’s recent broadband industry directive pushing for Title II classification of broadband should be viewed favorably by content companies. Even in the event that Title II is not enacted, we believe it is likely that some sort of legislation preventing the prioritization/favoring of Internet traffic will be adopted.

Although the potential industry consolidation could create challenges for content companies, we believe there are some positive implications from these transactions that are worth highlighting. While the CMCSK/TWC acquisition would remove a sizable industry participant, it is simultaneously increasing the scale of another participant in Charter whose video subs under management will increase to 8.0mm from 4.2mm. The aforementioned proposed distributor transactions should help preserve the current content ecosystem. In our view, this is a favorable development for content companies as these distributors now have significant resources to deploy for programming and ancillary distribution rights (TV everywhere, SVOD, etc.). Finally, we would not be surprised if the recent distributor M&A spurs consolidation among content companies. It should be noted that Discovery ($19 billion market cap) is dwarfed by a number of media juggernauts that are potential DISCA suitors including Disney ($155 billion), FOX ($69 billion) and Time Warner ($65 billion). We would also not dismiss the potential for interest in Discovery on the part of non-traditional media companies including Microsoft, Google, and Amazon, each of which could easily digest the Company.

Over-The-Top Services and “Skinny” Video Packages - Friend or Foe? In our view, many investors have incorrectly interpreted the impact that over-the-top (OTT) services are having on linear cable TV viewing. While cord cutting makes for interesting headlines, OTT services are largely incremental offerings rather than replacement pay-TV services. Due to the fact that Discovery owns virtually all of its content, the Company is platform agnostic in terms of the distribution of its content. At a recent investor conference Discovery CEO Zaslav stated, “ … our strategy is if we have strong IP that works on different platforms and if we can continue to grow our market share that we’ll be able to do very well. And we own all our content.” The significant content investment made by TV networks (Broadcasting and Cable) also suggest that these offerings are likely to be complementary products for the foreseeable future. According to recent industry research, TV networks spent $44 billion on original content compared with just $3 billion for the Internet companies. Further, recent studies seem to indicate that OTT services actually drive increased consumption of linear TV. As illustrated in the following chart, a recent survey of Netflix users reveals that use of the service actually increases linear TV consumption.

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Another investor concern relates to the recent decision by cable and satellite companies offering streamlined video packages that include only a limited amount of cable networks. While this could present problems for cable network companies, we do not believe that these packages will be widely embraced. The offerings are typically intended for consumers who are not currently subscribing to a video package. According to DTV, just 2% of its international skinny package subs had previously had a prior relationship with the Company. In addition, Dish’s Sling TV Streaming service does not include the main broadcast networks so it is unlikely to have a widespread appeal, in our view.

Strong Dollar Will Likely Impact Near Term Results, But Could Provide Long-Term Opportunities Discovery will likely be disproportionately impacted vs. cable network peers by the rising dollar due to the fact that the Company now derives over 50% of revenues from outside the U.S. Helping to mitigate the dollar’s rise is the fact that 70% of its international costs are in local currency. Discovery’s largest foreign exchange exposure is to the Euro and Nordic currencies, which account for ~45% of its International Networks revenue.

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International Networks Revenue Breakdown By Region Q3 2014

Source: Company presentation, November 2014

During December 2014, Discovery noted that the adverse exchange movements will impact its 2014 revenue and EBITDA by ~$110 million and ~$55 million, respectively. For 2015, revenue and EBITDA could be impacted by ~$150 million and ~$75 million, respectively. While the adverse FX movements are creating near term headwinds, the currency weakness could provide Discovery with opportunities to bolster its footprint in the region at attractive prices. Discovery has stated that bolt on acquisitions in Europe and Asia are places that the Company is looking to deploy some of its excess capital.

Sports Rights Bidding Discovery’s recent acquisition of Eurosport has vaulted the Company into the sports content business in a significant way. While the Company is currently primarily positioned in lesser tier sporting events (tennis, cycling, skiing, etc.) for which has secured rights for the next 2-3 years, the Company has been rumored to be interested in acquiring top tier events for the platform. Given the escalation in sports rights in recent years, the prospect that Discovery will be paying up to acquire sports rights has created investor uncertainty. Recent press reports have suggested that Discovery is considering acquiring Formula One and Premiere League soccer rights. While the acquisition of these rights could involve a significant investment, Discovery has stated that if it does pursue sports rights that it will be in a disciplined manner and will likely be part of a joint bid with a distributor, which will help minimize cost associated with acquiring the rights.

Russia Concerns Overblown In July 2014, Russian President Putin announced that there would be a pay-TV advertising ban in the country beginning in January 2015. While the move will impact Discovery, the financial headwinds should be minimal. Russia accounts for less than 2% of Discovery’s total revenues and the Company generates a little over 70% of its revenue in the country from distribution, which has been increasing at a good rate. In fact, Discovery believes that it should be able to offset a portion of the lost advertising revenue from affiliate fee growth.

Valuation and Conclusion We believe the recent 30% decline in the shares of Discovery is an overreaction and presents a very attractive opportunity to own a premier content company with multiple growth avenues at a discount to its publicly traded peers and precedent cable network industry transactions. We have provided a summary of select comparables below and would note the mid-teens EV/EBITDA multiples that cable networks have commanded in recent years.

- 50 - Discovery Communications, Inc.

Selected Publicly Traded Comps Enterprise Revenue EBITDA EBITDA EV/TTM EV/TTM Name Ticker Market Cap Value TTM TTM Margin EBITDA Sales Disney DIS $154,632 $166,052 $48,810 $13,830 28.3% 12.0x 3.4x Viacom VIAB $26,139 $38,719 $13,930 $4,310 30.9% 9.0x 2.8x Time Warner TWX $65,344 $84,694 $30,770 $8,230 26.7% 10.3x 2.8x Twenty-First Century Fox FOX $68,796 $84,346 $32,690 $6,790 20.8% 12.4x 2.6x Scripps Network Interactive SNI $9,747 $10,970 $2,650 $1,130 42.6% 9.7x 4.1x Average: 29.9% 10.7x 3.1x

Discovery Communications DISCK $19,014 $25,786 $6,126 $2,562 41.8% 10.1x 4.2x

In determining our estimate of intrinsic value, we have utilized a sum of the parts valuation for each of the Company’s three segments. For the U.S. Networks segment, we have applied an 11x multiple to our estimate of 2017 adjusted OIBDA reflecting the segment’s superior profitability (58% adjusted OIBDA margins). For the International Networks segment we have applied a lower 9x multiple reflecting lower levels (35% OIBDA margins) of profitability. Arguably, one could make the case that a higher multiple is appropriate given factors such as the segment’s higher growth rate and more attractive industry landscape (reduced distributor concentration). Based on our projections, our estimate of DISCA’s intrinsic value is $45 a share, representing 62% upside from current levels. We would not be surprised if DISCA found itself as an acquisition candidate in light of recent distributor consolidation.

Discovery Communications - Estimate of Intrinsic Value Value ($MM) U.S. Networks @ 11x 2017E EBITDA $23,397 International Networks @ 9x 2017E EBITDA $13,939 Education @ 8x 2017E EBITDA $245 50% Interest in OWN $584 2017E Corporate Expenses @ 8x ($2,626) Less: Minority Interest (Eurosport, Hub, etc.) ($1,250) 2017E Net Debt ($8,492) Equity Value $25,797

2017E Shares Outstanding 572.5

Estimate of Intrinsic Value (Per Share) $45.06

Implied Upside to Intrinsic Value Estimate 61.6%

Overview of Key Valuation Assumptions:  U.S. Networks – We have projected distribution revenues increase at an average of 6.5% over the next three years reflecting double-digit affiliate fee increases recently secured from pay-TV distributors. In addition, we believe renewal agreements will continue to be strong reflecting market share gains and the fact that its agreement with Comcast, its largest U.S. distributor, is up for renewal in June 2015. Notably, DISCA should be able to garner higher rates from Comcast, which does not currently have TV Everywhere rights to DISCA’s content. We project a low single-digit growth for advertising revenues, which is down from high single-digits historically reflecting recent ratings softness. We project that U.S. Networks’ adjusted OIBDA margins expand by ~200 bps reflecting revenue growth and reduced content investment.

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 International Networks – For Discovery’s International Networks segment, we project low double-digit growth for both distribution and advertising revenues through 2017. Based on our projections, adjusted OIBDA margins for the International Networks will expand by ~200 basis points between 2015 and 2017 and reach ~37%. We believe this is conservative and would note that management believes that 40% margins are attainable for the segment by 2019.

 Leverage and Share Repurchases – We project that DISCA will accelerate share repurchases over the next 3 years utilizing its free cash flow generation and assumption of debt that maintains its leverage ratio within the Company’s targeted 2.5x-3.0x level. Based on our assumptions, we estimate that Discovery will repurchase $7.4 billion of its shares over the next three years at an average purchase price of ~$42 a share, ~50% above current levels. These repurchases will result in a ~24% reduction in shares outstanding.

 OWN Valuation – In valuing DISCA’s 50% interest in OWN, we have projected the network will reach 90 million U.S. subs by 2017 that will command a monthly affiliate fee of 22.5 cents per subscriber. We also forecast the network will have 10 million international subs generating 15 cents a month per subscriber. Based on our projected 40% adjusted OIBDA margin for the network and valuing the network at 12x, we derive a value of $1.2 billion or $584 million for DISCA’s stake.

Risks The Company’s risks include, but are not limited to, the potential for reduced viewership of cable networks, OTT disintermediation, adverse FX movements, and pricey sports rights acquisitions.

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.

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DISCOVERY COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (unaudited; in millions)

ASSETS Sept. 30, 2014 Dec. 31, 2013 Current assets: Cash and cash equivalents $ 376 $ 408 Receivables, net 1,464 1,371 Content rights, net 379 277 Deferred income taxes 87 73 Prepaid expenses and other current assets 278 281 Total current assets 2,584 2,410 Noncurrent content rights, net 2,028 1,883 Property and equipment, net 525 514 Goodwill 8,320 7,341 Intangible assets, net 2,091 1,565 Equity method investments 667 1,087 Other noncurrent assets 158 179 TOTAL ASSETS $ 16,373 $ 14,979

LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 209 $ 141 Accrued liabilities 1,040 992 Deferred revenues 304 144 Current portion of debt 995 17 Total current liabilities 2,548 1,294 Noncurrent portion of debt 6,153 6,482 Deferred income taxes 692 637 Other noncurrent liabilities 310 333 TOTAL LIABILITIES 9,703 8,746 Redeemable noncontrolling interests 785 36 Equity: Discovery Communications, Inc. stockholders’ equity: Series A convertible preferred stock: $0.01 par value 1 1 Series C convertible preferred stock: $0.01 par value 1 1 Series A common stock: $0.01 par value 1 1 Series B convertible common stock: $0.01 par value — — Series C common stock: $0.01 par value 4 2 Additional paid-in capital 6,905 6,826 Treasury stock, at cost (4,488) (3,531) Retained earnings 3,654 2,892 Accumulated other comprehensive (loss) income (195) 4 Total Discovery Communications, Inc. stockholders’ equity 5,883 6,196 Noncontrolling interests 2 1 TOTAL EQUITY 5,885 6,197 TOTAL LIABILITIES AND EQUITY $ 16,373 $ 14,979

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Disclaimers

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 2015.

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