Starz Nasdaq: STRZA

Home , Anchor Bay Entertainment, Chris Albrecht, Overture Films

January 30, 2014 Volume XL, Issue I Starz Nasdaq: STRZA

Dow Jones Indus: 15,848.61 S&P 500: 1,794.19 Russell 2000: 1,139.36 Trigger: No Index Component: NA Type of Situation: Business Value, Consumer Franchise

Price: $ 27.98 Shares Outstanding (MM): Class A: 103.2 Class B: 9.9 Fully Diluted (MM) (% Increase): 120.5 (7%) Average Daily Volume (MM): 0.9 Market Cap (MM): $ 3,372 Enterprise Value (MM): $ 4,405 Percentage Closely Held: Malone 9%, 43% voting 52-Week High/Low: $ 30.48/15.95

Trailing Twelve Months Price/Earnings: 15.0x Introduction Price/Stated Book Value: 35.3x Starz (“STRZA” or the “Company”) is the third Long-Term Debt (MM): $ 1,064 leading premium pay TV programmer in the U.S. Asset Implied Upside to Estimate of Analysis Focus initially profiled Starz as part of its then- Intrinsic Value: 37% parent Liberty Media (LMC) in our Summer 2012 “Corporate Action” issue. At the time, we viewed the Dividend: NM pending spinoff of Starz into an independent company Payout NM as a potential catalyst for closing the large holding Yield NM company discount historically applied to LMC and, by proxy, Starz. That thesis played out even faster than Net Revenue Per Share: expected; in just over a year, Starz shares have TTM $ 14.81 doubled from their initial lows following the January 11, 2012 $ 13.30 2013 spinoff. 2011 $ 13.10 Despite Starz shares’ rapid ascent, we continue Earnings Per Share: to believe the market is under-appreciating the TTM $ 1.87 Company’s competitive position and long-term value. 2012 $ 2.05 The premium pay TV industry features stable 2011 $ 1.98 subscription revenue and structurally high margins, with large barriers to entry. Despite investor concern to the

contrary, we believe the premium TV category is also Fiscal Year Ends: December 31 best-positioned to navigate the transition to Internet- Company Address: 8900 Liberty Circle delivered content. The subscription model (no Englewood, CO 80112 advertising revenue loss risk), a la carte distribution (no Telephone: 720-852-7700 un-bundling risk), and premium content (better CEO/Director: Christopher P. Albrecht positioned to win viewers in a more competitive video Clients of Boyar Asset Management, Inc. own 650 shares of Starz environment) all translate well online. At the same time, common stock at a cost of $30.00 per share. its under-penetration (vs. fully-penetrated basic cable) Analysts employed by Boyar’s Intrinsic Value Research LLC own means Internet distribution could actually boost shares of Starz common stock.

- 21 - Starz subscribership over time. We believe these trends are evident in the outsized subscriber growth at Starz and its peers in recent years, despite the rise of subscription video on demand (SVOD; e.g. Netflix) competition. Subscribership increased 35% from year-end-2007 to 22 million as of 3Q 2013 at the flagship Starz channels, despite the deeply recessionary economy during much of that time.

Even after the price appreciation, Starz shares still trade at a reasonable 9.6x EV/TTM OIBDA. More importantly, shares trade at only 11.4x TTM free cash flow. We believe free cash flow can continue to accelerate going forward on the back of annual rate increases, subscriber growth, and outsized savings from lower film acquisition costs. The latter savings will allow Starz to invest in expanding its original programming hours, which the Company expects to more than double by 2015 vs. 2010 levels. We believe the Company’s content strategy (targeted demographics, expense control) is sound and are comforted that former HBO head Chris Albrecht is leading the transition. Both HBO and Showtime have experienced record growth in recent years driven by improved original programming, and we believe Starz can execute a similar strategy. Nonetheless, we conservatively assume subscribers and revenue grow at low-to-mid single-digits going forward. Placing a 10x EV/OIBDA multiple on 2015 projections, we derive a forward-looking intrinsic value estimate of approximately $38 per share for Starz. Incremental long-term upside could come from favorable renegotiation of Starz’s affiliate fees (which we believe are under-priced), international distribution gains, and monetization of Starz’s content via Internet channels. Finally, Starz’s leadership (43% voting shareholder John Malone and chairman Greg Maffei) have expressed the benefits of consolidation and we believe Starz is a prime acquisition candidate. Barring M&A, the Company should continue to unlock shareholder value by aggressively repurchasing shares (7.4% purchased since the spinoff).

History & Business Overview Starz traces its roots back to Encore Media, a company controlled by cable industry tycoon John Malone’s companies Tele-Communications Inc. (TCI) and its spinoff Liberty Media. Led by cable industry entrepreneur John Sie, Encore Media launched the upstart premium pay TV channel Encore in 1991 with distribution available through TCI’s national cable systems. Encore’s programming primarily featured classic movies from the 1960s-1980s. On February 1, 1994, Liberty and TCI launched sister premium pay TV network Starz, which offered premium first-run films from major studios including Universal, New Line, and Disney’s Touchstone. Starz was initially available to TCI customers at a cost of $4.99 per month including access to Encore. Encore and Starz were formally combined as Starz under the Liberty Media umbrella (with 20% still controlled by TCI) in 1997. In conjunction with TCI’s merger with AT&T in 1999, Starz/Liberty Entertainment ownership was wholly assumed by Liberty Media/Capital.

Starz racked up $203 million in deficits in its first 3 years due to challenges gaining wider distribution as cable companies feared cannibalizing the existing premium networks. However, Liberty’s patience would eventually be rewarded, as the growth of digital cable and satellite would serve as a boon for Starz. This brought new distribution contracts and also allowed Starz to expand its multiplex lineup including the addition of HD channels and video-on-demand services. Starz turned cash flow positive in 1998, and Starz’s growing scale allowed the Company to expand its content offerings including signing first-run film output and large back library deals with Sony in 2000 and 2006, respectively. In 2006, Liberty acquired IDT Entertainment with the goal of building Starz’s original production and distribution platform. Renamed Starz Media, IDT included the two- dimensional animation subsidiary Film Roman and home video distributor Anchor Bay Entertainment. Also in 2006, Liberty separated into Liberty Interactive and Liberty Capital tracking stocks. Liberty Capital was further segmented with the creation of a Liberty Entertainment tracker in 2008, which housed Starz as well as Liberty’s majority interest in DirecTV and other cable assets. When the DirecTV stake was merged into DirecTV in 2009, Starz stayed with Liberty (in a decision John Malone has said DTV regrets). Starz was re-consolidated with Liberty Capital as part of the formal separation of Liberty Interactive in 2011. The dismantling of the Liberty conglomerate continued with Starz finally becoming an independent company when the spinoff from Liberty Media was completed following the market close on January 11, 2013. As part of the terms of separation, Starz paid $1.8 billion in cash dividends to Liberty Media.

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Business Description Starz is a leading premium subscription-based video programming (“premium pay TV”) provider to multichannel video programming distributors (MVPDs) in the United States. Starz is a holding company that operates through its wholly-owned subsidiary Starz, LLC. Starz operates across 3 segments: Starz Networks, Starz Distribution, and Starz Animation. As illustrated in the financial table on the following page, Starz’s primary operating and reporting unit is its premium pay TV network, Starz Networks (formerly referred to as Starz Channels). Starz also includes the former Starz Media business, now composed of the Starz Distribution business unit (home video, digital media, and worldwide distribution) and the Starz Animation unit.

Starz Networks Starz Networks is the Company’s core business unit, providing premium video programming to U.S. MVPDs across a multiplex of 17 channels under the Starz, Encore and MoviePlex brands. The flagship Starz multiplex of channels primarily airs “blockbuster” first pay TV window and second-run movies as well as original series without advertising interruption, and is supplemented with 5 additional themed channels (all 6 channels available in HD). (Note: Films are typically made available in a “first window” on premium TV channels 8-13 months after theatrical release and lasting ~18 months. A second window may last another 12 months on premium pay TV, sometimes with alternate distribution in between.) The Encore network consists of 8 genre themed channels that air a mix of first-release and somewhat older “classic contemporary” movies. MoviePlex includes 3 premium channels that primarily offer art house and independent films as well as older “classic” movies. Encore is primarily targeted at the male 35-50 demographic, with MoviePlex aimed at both men and women 35 and older. Starz Networks subscriptions also include extensive video-on-demand (VOD) content as well as Internet streaming content via the Starz Play app.

As of September 30, 2013, there were approximately 22.0 million Starz subscribers and 35.0 million Encore subscribers. Starz is only distributed in premium pay TV packages with other premium channels like HBO and Showtime or on an a la carte basis. Encore may be bundled with Starz or in larger premium packages, or in lower-tier programming packages depending on the distributor. MoviePlex is typically bundled with Encore or distributed in lower-tier packages, and the Company does not release separate subscriber numbers for the channels. Starz’s channels are licensed to MVPDs under either consignment agreements (with revenue linked to the number of subscribers) or fixed-rate agreements, or occasionally a hybrid model, depending on the distributor. As of 3Q 2013, approximately 57% of Starz subscribers and 62% of Encore subscribers were contracted under fixed-rate agreements. Two MVPDs (presumably Comcast and DIRECTV) accounted for 22% and 15% of the Company’s total revenue in 2012.

Starz Distribution Starz Distribution includes the Company’s Home Video, Digital Media, and Worldwide Distribution businesses. The Home Video business distributes DVDs globally, principally operating under the majority- owned Anchor Bay Entertainment subsidiary, with The Weinstein Company owning 25%. The physical DVD manufacturing and distribution operations are outsourced to Fox under a 5 year agreement signed in June 2010 that replaced a prior agreement with Sony. Distributed content includes some developed or produced content, including Starz originals, as well as The Weinstein Company’s movies under a 5-year agreement that commenced in January 2011. The business also distributes a smaller amount of third party content. The Digital Media unit globally distributes digital and on-demand rights for owned content, The Weinstein Company content, and other third party content for which the Company holds non-pay TV ancillary rights. Worldwide Distribution distributes video content for which the Company has acquired or licensed television rights in the U.S. and globally, including Starz Networks’ original programming.

Starz Animation Starz Animation produces two-dimensional animated content for third parties, operating under the Company’s Film Roman subsidiary.

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Starz Historical Financial Performance by Segment ($ thousands) Fiscal year ended December 31, Nine months ended September 30, Revenue 2010 2011 2012 2012 2013 Starz Networks $ 1,224,136 $ 1,269,924 $ 1,276,815 $ 960,994 $ 975,643 Starz Distribution $ 367,477 $ 310,927 $ 320,671 $ 223,646 $ 365,708 Starz Animation $ 50,007 $ 45,273 $ 42,436 $ 31,567 $ 22,820 Inter-segment Eliminations $ (36,283) $ (12,091) $ (9,226) $ (7,711) $ (1,380) Total $ 1,605,337 $ 1,614,033 $ 1,630,696 $ 1,208,496 $ 1,362,791

Adjusted OIBDA Starz Networks $ 416,390 $ 427,689 $ 447,368 $ 326,292 $ 337,359 Starz Distribution $ 66,182 $ 4,567 $ (4,926) $ 14,829 $ 24,528 Starz Animation $ (2,419) $ (850) $ (932) $ (507) $ (1,835) Inter-segment Eliminations $ (12,136) $ 18,182 $ 3,322 $ 2,843 $ (296) Total $ 468,017 $ 449,588 $ 444,832 $ 343,457 $ 359,756

Attractive Business Model and Competitive Position Asset Analysis Focus has highlighted many opportunities in the television programming industry over the years. We have long been attracted by the industry’s dual revenue stream, secular growth drivers, and economies of scale (channel bundling and content acquisition), and in recent years we have found attractive valuations that likely reflected investors’ excessive concern over the cord-cutting phenomenon. While we still see pockets of attractiveness in the broader industry, in our view today the premium pay TV industry offers particular structural advantages that have been overlooked by investors. We describe some of these factors as well as advantages particular to Starz below.  Stable Revenue Stream: Premium pay TV programmers like Starz derive the vast majority of revenue from affiliate fees, which are long-term in nature (avg. ~5 years) and normally contain annual escalators linked to CPI. The subscription model eliminates the revenue unpredictability characteristic of the broader programming industry caused by advertising, which is dependent on the macroeconomy and viewership trends and frequently fluctuates by double-digits on an annual basis.  No DVR Risk: An additional benefit of Starz’s subscription, advertising-free business model is the elimination of DVR and related technology risk—i.e. losing advertising revenue due to lower primetime viewership and ad-skipping technology.  Barriers to Entry: In our view, there are significant barriers to entry into the premium pay TV industry. These include the difficulty of gaining distribution and marketing relationships; large upfront programming investment requirements necessary to support a premium subscription service, which typically includes premiere film rights; and the importance of consumer brand recognition in building a subscriber base. For decades, the U.S. premium pay TV field has essentially consisted of HBO, Showtime, and Starz alongside their respective secondary networks including Cinemax, The Movie Channel and Flix. Other premium pay TV network start-ups over the years were primarily launched by the incumbents and failed to gain traction (e.g. Spotlight, Home Theatre Network) or eventually converted to lower-tier, ad-supported networks like Sundance. The recent entrant is Epix, which launched in October 2009. A joint venture between Paramount (Viacom), Lions Gate, and MGM studios, Epix was uniquely positioned to exploit the studios’ theatrical content. Epix’s profitability has been buoyed by content licensing deals with Netflix and Amazon and the Company recently gained carriage with Time Warner Cable, but Epix has still faced an uphill battle to gain distribution and build subscribers since launch. Starz has built a recognizable consumer brand and sturdy distribution relationships over two-plus decades, and has locked up first-run film rights for many years, as detailed later. Ironically, Netflix CEO Reed Hasting (OTT threat addressed below) described the industry in his April 2013 letter to shareholders,

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“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.”  Interests Aligned with MVPDs: As evidenced by the explosion of public disputes and even temporary blackouts, MVPDs are increasingly resisting cable networks’ demands for ever- escalating affiliate fees. MVPDs’ programming costs have been increasing at double-digit annual rates, while video subscriber growth has slowed and actually declined in 2013 according to the latest figures. Under the basic cable bundling model, there is no direct link between a network’s viewership/customer demand and MVPDs’ revenues. By contrast, the a la carte nature of the premium channels means distributors can see a direct link between popularity and subscribership and revenue. Furthermore, as still-underpenetrated channels (as evidenced by the industry’s growth in recent years, detailed below), Starz and its premium peers offer a sought-after growth opportunity for MVPDs with high margins on incremental sales. Premium channels are an important cash cow for the distributors, aligning MVPD and premium network interests in promoting subscriber growth. The groups frequently engage in highly-effective, large-scale cooperative advertising and marketing and promotional offers. While Starz and its peers still face conflicts with MVPDs over the terms of revenue sharing arrangements, generally this makes for a much more amicable relationship and Starz notes they have never experienced a full blackout/dropped service.  Star Management: Starz is led by capable CEO Chris Albrecht. Mr. Albrecht has an extensive track record of tremendous programming and financial success at HBO, including in the position of head of programming and later chairman and CEO from 2002 until personal issues forced his departure in 2007. His presence meaningfully boosts our confidence in Starz executing from both a programming and distribution perspective. Since joining Starz in 2010, Albrecht has orchestrated a strategic makeover including closing the cash-draining Overture Films studio and striking the Weinstein deal, while spearheading a new content strategy. Additionally, Starz still remains heavily under the influence of Liberty chairman John Malone (~43% voting interest), the cable industry legend who launched Encore/Starz. Liberty CEO Greg Maffei is chairman at Starz, and we believe the leadership of Malone and Maffei should ensure Starz continues its early track record of smart capital allocation—as well as thoughtfully evaluating strategic alternatives, as the two have discussed numerous times.

Cord Shaving, Over-the-Top Threat to Starz Overhyped? The cable industry has long been seen as vulnerable to “cord cutting’ due to escalating consumer costs and the proliferation of Internet delivered alternatives. This is no longer purely a theory; as noted, video subscribers likely declined in 2013. The “over the top” (OTT) Internet-delivered video model eliminates the MVPD barrier and offers access to free or cheaper video content from the likes of YouTube, Hulu, Amazon Prime, etc. At the higher end, Internet-based subscription video-on-demand provider (SVOD) Netflix has rapidly amassed 33 million domestic streaming subscribers and continues to aggressively acquire content while also successfully venturing into the production of original programming. The premium TV segment has been singled out as particularly vulnerable to “cord shaving” as Netflix and other online content supposedly will erode consumers’ willingness to pay for traditional premium services. For a recent example, in January 2014, NPD Group published a widely-cited article in which the research firm estimated a 6%, 2-year decline in U.S. household premium TV subscribers versus a 4% increase in Internet SVOD subscriptions, while suggesting a causal link between the divergent statistics.

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Starz Subscriber Growth Unimpeded by Netflix’s Ascent

Subscribers (millions) 10

0 2006 2007 2008 2009 2010 2011 2012 3Q 2013

Starz Encore Netflix*

Source: Company filings. * U.S. subscribers; U.S. streaming subscribers post-2010

The actual numbers (NPD relied on a limited survey from which it subsequently distanced) tell a far different story, as HBO, Showtime, and Starz were all quick to point out. A spokesperson for Showtime stated, “Showtime and every other premium network have increased both subscribers and penetrations over the past 2 years.” Showtime noted the network added 1 million subscribers per year 6 of the past 7 years, while HBO disclosed it added 1.9 million subs in 2012 (a record) and expects to report similar adds in 2013. Meanwhile, the Starz multiplex reported a cumulative 3.8 million gain in subscribers from the close of 2010 to 3Q13 and Encore added 2.2 million subscribers over the same period. In our view, the premium TV segment’s strong growth in recent years—despite the meteoric ascent of Netflix and SVOD peers—proves the former’s staying power. In fact, Reed Hastings recently made similar comments, although addressed to HBO specifically:

“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

We believe there are several reasons for this mutual growth trend. Unlike basic cable networks, Starz and its peers remain underpenetrated vs. the ~100 million domestic households. Furthermore, the segment’s subscriber base is skewed toward upper income households; Starz estimates the Company is ~50% over- indexed to households with annual household incomes over $100K. These households are least likely to cut the cord for economic reasons. Last but certainly not least, we believe the subscriber gains for premium TV and SVOD both reflect a broader migration in consumer programming consumption toward higher-quality and more diverse content. This is also reflected in the outsized viewership gains at cable networks that have invested in fresh original content in recent years such as AMC and FX. This growth has come at the expense of broadcast networks and other traditional outlets. According to Morgan Stanley and Nielsen, broadcast ratings collapsed by ~50% between 2002-2011 (see following chart).

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Broadcast Ratings Collapse, 2002-2011

Source: Broadcast Ad revenue, Nielsen ratings data, via www.businessinsider.com

Content is King: Starz Moving in Right Direction Netflix CEO Reed Hasting has described two types of competition: competition for consumers’ time (vs. alternative pastimes) and “competition-for-content.” We expect competition for programming content will be the key factor for Starz’s long-term subscriber growth and profitability. Depth, quality, and value (ROI) of content, both acquired and produced, will be essential. As described, we believe Starz’s scale and premium pricing model provide advantages against traditional networks and upstart streaming services in terms of acquiring valuable content. However, increased competition for exclusive content and content cost inflation are real risks, especially when competing against larger players like HBO and now Netflix. This became apparent in December 2012, when Starz lost out to Netflix in its efforts to extend its contract with Disney for first window rights to Disney films. A centerpiece for the Starz lineup since its launch in 1994, the Disney content loss rattled investors’ confidence in Starz’s long-term position and shares (then still Liberty Media) sunk by over $5 following the announcement. Netflix management also suggested they would consider bidding for Sony content after Sony’s agreement with Starz expired in 2016. A month later, HBO also announced a film output extension with Universal. With HBO having extended its contract with Fox the prior August, this created much investor fear that Starz would be shut out of content from the 6 major film studios.

Plenty of Film Content for Years Despite the negative reaction on Wall Street and the loss of high-profile content, we believe Starz is better off today, both financially and in terms of content strategy. The Disney decision made strategic and financial sense for Starz. Netflix reportedly agreed to pay up to $300-$400 million per year for exclusive first-run rights (including a slightly accelerated theatre-to-SVOD release schedule) beginning with 2016 theatrical releases, as well as the rights to some older library titles. This represented an estimated $100-$200 million increase over the current contract’s annual rate—terms which Starz management described as uneconomical for the Company. We tend to agree; we would rather see price discipline than excessive content acquisition spending like Netflix has done to date. Management described the Disney deal as providing “optics” (a few easily recognizable, blockbuster movies) as much as content; the Disney deal only brought ~7-9 movies per year in recent years. Starz also subsequently locked up its contract with Sony and we believe Starz still retains plenty of valuable licensed content locked up for many years:

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 Disney: The Company maintains exclusive rights, including digital streaming rights, to Disney studio films produced through 2015. Given the typical theatrical release and windowing schedules, this means Starz will continue to receive first-run films through 2016 with access running deep into (or through) 2017. This includes titles from Disney, Marvel, Pixar, and Lucasfilm studios—the latter of which will in all likelihood include a new Star Wars title.  Sony: In February 2013, Starz and Sony Pictures announced they had reached an extension on the film licensing agreement. The 5-year extension secures Starz exclusive first-run output rights, including streaming, to Sony Pictures films through 2021 theatrical releases. We would note that Sony’s studios also collectively release meaningfully more movies than Disney per year.  Deep Library: Starz offers a leading back library of classic and contemporary classic titles, including recently signed deals with Fox and MGM. The Company offers ~2,300 unique film offerings across its multiplex vs. ~1,300-1,500 at the Showtime and HBO multiplexes based on 2013 data.

Starz Output Programming Agreements as of Dec. 31, 2012 Summary of Significant Output Summary of Significant Library Programming Agreements Programming Agreements Studio Term* Studio Term Sony Dec-2021 Lionsgate Sep-2025 Disney (aka Buena Vista) Dec-2015 Sony Pictures Nov-2020 Anchor Bay Entertainment, LLC Jun-2015 Paramount Oct-2020 MGM Jun-2018 Warner Bros. Jan-2017 Universal Feb-2016 Twentieth Century Fox Aug-2013 *Dates based on initial theatrical release

Next Up: Original Content Strategy Ever since its founding, Starz was first-and-foremost built as a destination for movies. The Company’s original programming has slowly grown over time, but Starz’s programming is still heavily weighted toward movies, which account for ~95% of airtime. As illustrated below, Starz averaged only ~30 hours of annual original scripted programming in recent years. This compares to 75-100 hours annually at Showtime and HBO. However, in 2013 the Company began to implement a more rapid pivot toward airing more original serialized content. We believe this is the correct strategic move. With film rights acquisition competition heating up and Internet services offering more and more video content, it is increasingly difficult for Starz to differentiate itself via film content. Original content can be higher value-added, and exclusive serialized content also offers a superior marketing source for distributors. Starz is under-indexed based on current viewership trends; despite accounting for only ~5% of airtime across the 17 channel multiplex, CEO Chris Albrecht noted originals account for ~40% of the Company’s 100 highest viewed titles. The failure to negotiate a Disney contract extension only elucidated the need for a transition. Of course, the content production business carries plenty of risks and Starz has an unimpressive track record in originals historically. In recent years, only Spartacus was able to build a consistently strong viewership and get green-lit for a third season. Starz was only nominated for 3 Emmy Awards in 2013 vs. 108 at HBO and 31 at Showtime, and even 14 at upstart Netflix. Nonetheless we believe Starz is well positioned to navigate the transition and management has elucidated a compelling, conservative strategy:  Experienced Management: As noted, CEO Chris Albrecht has arguably the best record in running original programming in the premium TV business and he has assembled an experienced team.  Flexibility of Extended Timeline: With Starz’s extensive film library and first-run deals still locked up for many years to come, the Company has plenty of time to experiment and slowly grow its original

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programming. The Company’s strong growth in recent years under the existing content arrangement further minimizes downside risk.  Differentiated Content: In order to build the Starz brand and separate itself from competitors, Starz is targeting content that will market well to under-served demographics and translate well internationally. As evidenced in the Company’s upcoming production slate (detailed later), this includes period pieces and costume dramas based on global properties, and series geared toward women, African Americans, Hispanics, and younger audiences. Starz Distribution provides a ready- to-go platform for international sales.  Expense Discipline: Management has emphasized their devotion to expense controls in developing original programming. The Company will look toward up-and-coming creative talent rather than expensive creators; utilize co-production partners where sensible; spread the budget across several series rather than aiming for one hit; and maintain strict production budgets. The Company intends to maintain Starz Networks margins at ~35% going forward despite the increased production spending. Importantly, reduced cash expenditures on film acquisition is expected to provide a counter-balancing funding source. Cash programming expenditures declined 18% in 2013 and are expected to continue to decline modestly over the next few years before dropping precipitously as the Disney deal rolls off. At an estimated $150-$200 million per year, this provides a huge funding source for Starz. Annual Original Scripted Hours

120 114 100 100 89 85 85 80 57 60

40 34 31 28 20

0 2010 2011 2012 Starz Showtime HBO

Source: IMBD, Starz Analysis via Starz Company Presentation

Under these conditions, we believe Starz’s strategy has a good probability of success with asymmetric risk-reward characteristics. We would also note that Showtime successfully executed a similar programming strategy in recent years. Showtime essentially abandoned its first-run, major studio film strategy in 2008 after it failed to reach an extension with Paramount Pictures in 2008. Former independent studio license partners Lionsgate and MGM also jumped ship to form the Epix JV with Viacom. Nonetheless, Showtime has continued to prosper in recent years, growing revenue and OIBDA at double-digit rates as the network successfully ramped up its original programming and produced hit series such as Homeland, Dexter, and Weeds.

Starz has already made some early strides in its originals strategy, expanding to ~40 hours of original programming in 2013. The Company is aiming for 5 shows or 50 hours in 2014, 65-75 hours by 2015-2016 and 75-85 hours annually longer term. Even without a breakout hit show, early results suggest Starz’s strategy is having a positive impact. The Company realigned the Starz channel’s programming schedule last year, moving the Company’s leading mini-series The White Queen to the Saturday 9 PM timeslot and swapping blockbuster movies to the vacated Friday evening spot. This enabled the Company to better showcase its originals, while the Friday movies provide a natural promotional lead-in opportunity. Starz reported a ~70% increase in Saturday

- 29 - Starz evening viewership and a ~120% boost in live +7 day (L+7) viewership. Below we highlight some of the Company’s recent and upcoming original programming slate, which demonstrates Starz’s thematic focus on women, minorities, and historical dramas that could play well internationally:

 The White Queen: This ten-part mini-series was based on Philippa Gregory’s popular novel series on 15th century English royalty and aired beginning in August 2013. Co-produced with BBC and nominated for a Golden Globe for Best Mini-Series, the first half of the series attracted close to 5 million L+7 viewers for Starz. This compares to ~6.5 million average L+7 viewers for Showtime’s Homeland season 3, its highest rated series. Starz is exploring a follow-on mini-series The White Princess based on Gregory’s novel series.  Black Sails: An 18th century pirate drama set as a prequel to Treasure Island, Black Sails is executive produced by Michael Bay. Starz premiered the series on January 25, 2014. The premiere debuted to 846,000 live viewers for the 9 PM premiere and more than 2.6 million viewers during the weekend. Including online streaming and on-demand, weekend viewership was ~3.5 million. These figures are nearly on par with The White Queen, which was Starz’s highest-rated premiere. Starz owns all rights to the series and already green-lit a second season. The series is being produced on land in South Africa in order to control expenses.  Outlander: Licensed from Sony, Starz recently began production on a 16-episode order for a TV series adaptation of Diana Gabaldon’s eponymous novel. The novel is the first in Gabaldon’s 7-book (and counting) genre-bending, time traveling historical romance series that gained a cult following among women and sold over 25 million copies worldwide. The series is set to premiere in 2014 and Starz hopes to build on the female audience loyalty created by The White Queen. If successful, the novel series could be used to develop a long-running series akin to HBO’s Game of Thrones strategy.  Flesh and Bone: Starz recently announced they commissioned another original dramatic series aimed at women, this one recounting a young ballet dancer’s struggles in the craft.  Power: A crime drama set in New York City’s club scene and drug trade, Power is executive produced by rapper 50 Cent. Starz holds all rights to the series, which recently began production.  Survivor’s Remorse: In September 2013, Starz announced the development of a half-hour scripted comedy series following two North Philadelphia residents who escape poverty to fame and fortune. Executive producers include LeBron James and Tom Werner.  WonderWorld: Starz recently announced the Company will develop this scripted drama starring Owen Wilson and written by Rene Balcer. The plot follows undercover FBI operations during the Ronald Reagan era.

Financial Performance and Long-Term Growth Prospects Starz has posted impressive financial performance in recent years, particularly considering (1) the historically challenging macro economy; and (2) the entrance of new competitors in the form of SVOD and other Internet video services. As of 3Q 2013, subscriber numbers swelled by 7.7 million (28%) from 2006 levels to 35 million at Encore and by 6.5 million (a tremendous 42%) to 22 million at Starz. As illustrated below, this growth continued through the recession with only a modest decline in 2009. However, revenue at Starz Networks has grown more slowly in recent years, inching up only 0.5% in 2012 and 1.5% YTD 3Q 2013. In 2012, the discordant subscriber vs. revenue trends reflected the move of a large distributor’s (we suspect AT&T) affiliation agreement from a consignment to fixed rate structure. Affiliation agreements with 3 subscribers expired at the close of 2012, with the contracts representing 30% of Starz Networks’ revenue, primarily from 2 large subscribers (which we believe included Comcast). Starz disclosed the contracts were renewed at rates that would cause an effective 3% decline in revenue over a full year, holding all else steady, prior to annual escalators kicking in. Despite this headwind, Starz Networks still posted 1.5% revenue growth YTD reflecting incremental subscriber gains.

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Historical Starz and Encore Subscribers by Type, 2007-2013 (millions) Starz Encore Dec. 31, Total Fixed Consignment Total Fixed Consignment 2006 15.5 27.3 2007 16.3 30.7 2008 17.7 31.7 2009 16.9 30.6 2010 18.2 8.6 9.6 32.8 19.5 13.3 2011 19.6 9.4 10.2 33.2 19.6 13.6 2012 21.2 13.0 8.2 34.8 23.2 11.6 3Q 2013 22.0 12.6 9.4 35.0 21.8 13.2

Fiscal year ended December 31, Nine months ended September 30, Starz Networks 2010 2011 2012 2012 2013 Revenue $ 1,224,136 $ 1,269,924 $ 1,276,815 $ 960,994 $ 975,643 Adjusted OIBDA Margin 34.0% 33.7% 35.0% 34.0% 34.6% Revenue Growth, Y/Y N/A 3.7% 0.5% N/A 1.5%

While revenue growth has been meager, Starz Networks continues to maintain healthy margins. Adjusted OIBDA margins increased ~130 bps to 35.0% in 2013 and are up 60 bps YTD 3Q 2013. In large part, these outsized margins reflect the attractive features of a scaled TV network business—such as high revenue visibility with long term contracts, a sticky customer base, large barriers to entry, and a primary cost of business (programming expenditures) that is highly variable long-term. As illustrated in the table of Starz’s consolidated historical financial results below, the Company has effectively held programming expenses in check while cutting operating and G&A expenses in recent years. Starz’s results also reflect the attractive subscriber acquisition costs (particularly in terms of advertising and marketing) of the premium pay TV model, where distributors can efficiently and cheaply market to existing or prospective basic video subscribers. We would note Starz spent just $105.7 million on advertising and marketing in 2012 versus $484.7 million by Netflix. While Netflix also added ~3x net subs as Starz (3.2 million for Starz vs. 5.46 million domestic streaming and 4.27 million international net additions for Netflix), this reflects Netflix’s outsized growth internationally (44% of net additions) where the company is still in the earliest growth phase.

Starz Historical Financial Results, 2008-YTD 3Q 2013 ($ thousands) YTD 3Q YTD 3Q Revenue: 2008 2009 2010 2011 2012 2012 2013 Programming Networks & Other $1,253,081 $1,354,978 $1,380,349 $1,372,141 $1,419,074 $1,075,124 $1,120,945 Home Video Net Sales $160,140 $167,619 $224,988 $241,892 $211,622 $133,372 $241,846 Total Revenue $1,413,221 $1,522,597 $1,605,337 $1,614,033 $1,630,696 $1,208,496 $1,362,791

Expenses: Programming (inc. amort.) $660,322 $641,477 $647,817 $651,249 $661,157 $504,674 $477,360 Production & acq. (inc. amort.) $95,888 $107,122 $177,954 $158,789 $192,340 $117,617 $220,999 Home video cost of sales $83,420 $63,296 $69,815 $62,440 $63,880 $40,261 $51,550 Operating $75,122 $79,963 $73,260 $53,703 $53,410 $38,876 $38,925 Advertising and marketing $259,174 $229,335 $175,417 $132,183 $105,674 NA NA G&A* $129,290 $121,792 $125,421 $106,081 $109,403 $163,611 $214,201 Stock comp, long-term inc. comp $23,127 $35,142 $39,468 $7,078 $20,022 $9,888 $25,127 D&A $27,448 $23,470 $20,468 $17,907 $19,406 $13,787 $12,917 Impairments $1,432,101 NA NA NA NA NA NA Total Costs & Expenses $2,785,892 $1,301,597 $1,329,620 $1,189,430 $1,225,292 $888,714 $1,041,079 Operating Income $(1,372,671) $221,000 $275,717 $424,603 $405,404 $319,782 $321,712 *Advertising, marketing and G&A expenses consolidated as SG&A for YTD 3Q 2012-13 financials

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Unfortunately, Starz has not disaggregated A&M expense from G&A expense in 2013. Total SG&A expense has increased by ~$50 million YTD 3Q 2013. While a portion of this may reflect incentive compensation associated with the spin-off, the $51 million increase also reflects higher marketing spend related to the new distribution contract with Time Warner Cable (TWC), announced on May 30, 2013. We believe Starz and TWC had been operating on a month-to-month contract since their prior contract expired in December 2009. TWC previously accounted for >10% of Starz revenue prior to 2010 (then Starz Entertainment) but their share is no longer disclosed (<10%). As the second largest cable company with 11.2 million video subs, there could be attractive (and, we believe, overlooked) upside from subscriber gains going forward as TWC has recently aggressively re-initiated co-marketing and promotional campaigns with Starz.

Starz Networks Long-Term Growth Potential Starz has posted impressive subscriber gains in recent years, but there is still plenty of room for incremental subscriber and revenue growth over the long-term. Starz estimates approximately 30 million households subscribe to premium programming primarily in order to access originals, and the Company’s evolving content strategy could enable Starz to capture more of these households. This could also enable Starz to generate markedly higher revenue per subscriber over time. A comparison to larger peers HBO and Showtime, and even Netflix demonstrates the long-term upside. For example, HBO has 29 million domestic subscribers for its eponymous flagship network (plus 13.6 million Cinemax subscribers) and reported $3.4 billion in domestic pay TV revenue and $1.2 billion in adjusted operating income in 2009, when it last disclosed business unit financials. Showtime has ~23 million domestic subscribers to its flagship channel, and 76.6 million across Showtime Networks (Showtime, The Movie Channel, and Flix). Although CBS does not disclose Showtime Networks’ financial performance, its Cable Networks segment (Showtime plus CBS Sports Network and Smithsonian Networks) reported $1.8 billion revenue and $811 million OIBDA in 2012 and Showtime accounts for the vast majority of segment performance. Netflix reported 33.4 million domestic streaming subscribers as of December 31, 2013.

Premium Programming Category Comparison ($ millions) HBO NFLX Showtime Starz Domestic (Dom. Streaming) (CBS Cable Network) Networks 2013 E 2013 TTM 3Q 2013 TTM 3Q 2013 Subscribers (domestic, flagship channels) 29 33.4 23.0 22.0 Subscribers (domestic, total multiplex) 43 NA 76.6 57.0 Revenue >$4,000* $2,754 $1,932** $1,291 OIBDA >$1,400* $623 $844** $458 Margin ~35%E 22.6% 43.7% 35.5% Est. Revenue per Sub (core network) ~$12-$13 $7 ~$6-$6.50 $5.03 Est. Revenue per Sub (total subscribers) ~$8-$9 NA ~$2 $1.92 *HBO Domestic estimates based on 2009A financials. Subscriber levels are approximations. **Showtime financial represents CBS Cable Networks, which includes CSB Sports Network and Smithsonian Network Source: AAF estimates based on public company filings and commentary

This peer comparison shows the long-term potential for Starz. It is impossible to determine precise revenue per subscriber statistics for competitors based on the lack of disclosure and the array of bundling options. But extrapolating from the aforementioned figures, we estimate HBO generates at least $8/sub per month and Netflix ($8/month for the basic streaming plan) averages closer to ~$7/month after discounts. By comparison, Starz averages only ~$2/sub per month. Even after estimating the impact of presumably lower- margin Encore subscribers, we estimate Starz still generates only ~40% of the revenue per subscriber as HBO. Starz also meaningfully lags Showtime on this basis. Importantly, we believe the revenue gap between Starz and its premium pay TV peers is larger than the viewership gap. Starz’s top original series have averaged 80% or more of the viewers for comparable Showtime series and ~50% of HBO’s ratings. According to Starz, the Company actually averages more viewers than its competitors based on full-day viewership across the full multiplex, reflecting its deep film library. Furthermore, it should be noted that Starz is typically priced at the same rate ($14-$20 depending on the distributor) as its premium peers at the MVPD level, prior to promotions and bundling discounts.

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In addition to discounting, Starz’s pricing gap reflects the Company’s high percentage of subscribers under fixed-rate distribution contracts. These contracts have helped incentivize MVPDs to promote Starz and put its product into more households while providing long-term revenue stability, but they are likely under-priced and effectively eliminate Starz’s upside from subscriber gains. By comparison, HBO historically operates only on consignment distribution contracts. While we never expect Starz to come close to the HBO gold standard, if Starz can build viewership and brand loyalty, the transition back to consignment could offer incremental revenue upside over the long term. We believe Starz’s pricing power should improve over time as the Company builds its higher value-added original programming. The upside to this transition is evident at Showtime. While Starz and Showtime generate fairly comparable revenue per subscriber, we would note that CBS’s Cable Networks division has been increasing revenue at ~10% annually, reflecting substantial rate increases and subscriber gains at Showtime fueled by its originals success. Revenue grew 19.3% and OIBDA increased 11.7% (44% margin) YTD 3Q 2013. The growth in original programming should help Starz solidify its competitive position and close the pricing gap versus its premium pay-TV peers over the long-term.

Profit Growth from Distribution, Long-Term International Upside Starz’s consolidated performance has benefited from drastic improvements at the Starz Distribution segment in recent years. The decision to shut down the Overture Films movie studio in July 2010 removed a source of heavy cash burn. The Starz Distribution segment has also profited from the addition of high quality titles from The Weinstein Company contract (e.g. The King’s Speech, Silver Linings Playbook and Zero Dark Thirty) as well as the agreement to distribute AMC content including the hit series The Walking Dead. Overall segment revenue grew a whopping 63.5% to $365.7 million YTD 3Q 2013 and the segment was a solid earnings contributor with $24.5 million OIBDA YTD. Results will continue to fluctuate given the challenges of building scale and gaining sufficient high quality content. However, management views the business as a long- term strategic asset and believes there is capacity to continue to add third party content. The business should also be a natural beneficiary of Starz’s original programming investments, which will expand the pipeline of available titles for home video and international sell-through. As noted, the Company is focusing on content that could translate well internationally. For example, Starz Distribution already reached TV/digital distribution deals covering 115 territories for the new wholly-owned series Black Sails. Starz currently generates only ~5% of revenue internationally, so there is plenty of room to run. We do not factor in the Distribution business as a meaningful contributor of intrinsic value for Starz, so any sustained profitability in the business would provide incremental upside.

Long-Term Internet Distribution Potential Starz also possesses hidden long-term optionality from Internet-delivered distribution. Starz’s advertisement-free subscription model and a la carte distribution make it particularly well suited for an Internet SVOD offering. Starz is unlikely to disrupt the current symbiotic relationship with MVPDs by exploring a true OTT offering anytime soon. However, Internet-delivered and “TV Everywhere” access could help build the appeal of the Starz brand. The Company already built the Plus branded Internet streaming platform at low cost over the past 2 years and has rolled it out as an authenticated platform across the lion’s share of its subscriber base. Management has also expressed their interest in participating in a “skinny stack” MVPD bundle (high- speed Internet plus subscription to premium TV via Internet streaming access) in the vein of HBO’s recent agreement with Time Warner Cable; this would reduce Starz’s exposure to the wider cord cutting risk while maintaining the current symbiotic marketing relationship with distributors.

With its deep library, Starz also offers an extremely attractive “plug and play” content solution for a digital streaming service. This could include the Netflix/Amazon Prime SVODs as well as any future “virtual MVPD” services. As detailed in the Summer 2012 AAF report on Liberty Media, Starz previously sub-licensed content to Netflix for its (then-upstart) Internet streaming service. Facing backlash from its traditional distribution partners as well as potential degradation of Starz’s premium brand value, Starz reportedly rejected a $200-$300 million per year extension offer from Netflix in September 2011. This looks like a sound decision that protects the exclusivity of a Starz subscription. However, management has expressed openness to striking a more limited licensing agreement with an upstart Internet-delivered content provider or virtual MVPD provided it is independently separated into a premium tier and the Starz brand is maintained, in the same manner as the current TV model. Longer-term, this offers an attractive opportunity for Starz to further build distribution.

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Outsized Free Cash Flow with Balance Sheet Flexibility Starz’s stable, high margin business model translates into outsized free cash flow to shareholders. Free cash flow averaged ~$250 million/year between 2009-2012 and Starz generated $296.5 million ($2.46/share) TTM 3Q 2013. The Company’s OIBDA to free cash flow conversion rate is an impressive 70% since the start of 2010, reflecting minimal capital expenditure requirements (<1% of revenue). In large part, this also reflects programming rights amortization expense that has stayed well above cash programming expense in recent years. Starz’s upfront film funding requirements have declined as studios produce fewer movies and Starz’s catalogue moves toward more lower-cost, second and third window films. The related cash flow benefit averaged $99 million/year since 2010 and was $112 million YTD 3Q 2013. This cash benefit is funding Starz’s increased investment in original programming while still allowing the Company to maintain or grow free cash flow. Importantly, management expects this benefit to continue in 2014-2015 and the cash savings should accelerate beyond 2015 as cash programming outlays for first-run films drops off due to the Disney contract expiration. While there are many variables (especially cash programming costs), we project free cash flow should exceed $300 million/year going forward.

Starz Historical Free Cash Flow ($ thousands) Nine months ended Fiscal year ended December 31, September 30, 2009 2010 2011 2012 2013 Program rights amortization $611,615 $611,041 $617,789 $442,797 Cash program rights payment ($532,566) ($554,341) ($456,558) ($323,220) Film & TV program inv. amort. $116,928 $126,102 $141,553 $172,877 Cash inv. film and TV programs ($117,035) ($213,655) ($284,063) ($217,474) Net Excess Programming Amort. $78,942 ($30,853) $18,721 $74,980

Operating Cash Flow $212,076 $191,139 $347,973 $292,077 $190,015 PPE Purchases ($8,000) ($7,099) ($7,723) ($16,214) ($6,165) Free Cash Flow $204,076 $184,040 $340,250 $275,863 $183,850

As we noted prior to the spinoff, share repurchases were likely to be the default use of capital post- spinoff (particularly if shares initially traded at a discount as expected) considering Starz’s external capital deployment opportunities looked limited; Liberty management had cited Starz’s large cash hoard and a dearth of suitable investment opportunities in the decision to re-consolidate Starz back in 2011. This unfolded even faster than we expected. Starz repurchased 7.4% of initial shares outstanding in the first ~9 months as an independent Company (average price: $24.21/share), including 4.0 million shares (3%) between August-October 2013 alone. We expect opportunistic, large-scale share repurchases to continue going forward—particularly if the recent equity market volatility continues.

In fact, we believe there is plenty of room for incremental leverage and return of excess capital. Starz distributed $1.8 billion to Liberty Media prior to the separation, including $1.2 billion in January 2013. Liberty Media funded the payments with cash on hand, its $1.0 billion revolving credit facility, and issuance of an aggregate $675 million in 5.0% senior notes due 2019. As of September 30, 2013, Starz’s total debt outstanding was $1.1 billion. With net debt a reasonable 2.3x TTM OIBDA and nearly $700 million in credit facility capacity, Starz maintains plenty of liquidity. John Malone and Greg Maffei are well known for their leveraged return on equity philosophy and have recently expressed their particular willingness to take advantage of the current cheap borrowing environment.

Assessing the Value of an Independent Starz Starz shares have continued on a virtually unimpeded ascent since the spinoff and now stand 79% above their close on January 14, 2013, their first full trading day as an independent Company. Starz has also traded well through our $23/share initial pre-spin estimate of intrinsic value. Reassessing the Company one year in, there are numerous reasons to adjust this estimate significantly higher. Beginning just from an accounting perspective, Starz was spun off with only $1.1 billion net debt versus our prior expectation of $1.5 billion—which adds close to $4/share in equity value. The Company has also spent a massive $179 million on accretive share - 34 - Starz repurchases YTD 3Q 2013. Our prior estimate was also conservatively based on $435 million TTM OIBDA, while Starz is already on pace for closer to $500 million in OIBDA in 2013. This reflects the continued improvement in Starz Distribution profitability as well as better-than-expected results at Starz Networks; in what looks like a classic case of management setting the bar low prior to a spin-off, Starz announced in November 2012 that 2 recently-renewed distribution agreements covering 30% of subscribers were renewed at “less favorable financial terms.” Starz Networks’ revenue actually continued to grow (at a modest 1%) in 2013, but this only became evident after 7.6 million of employees’ unvested Liberty stock awards were re-priced into Starz shares and another 6.3 million options and restricted stock granted at highly attractive prices based on STRZA’s post-spin share levels.

Despite the rally, Starz shares still trade at a reasonable 9.6x EV/TTM EBITDA and only 11.4x TTM free cash flow. Free cash flow is up 12.6% YTD 3Q 2013 and it should continue to grow going forward as film output costs decline and annual price escalators on the aforementioned “less favorable” distribution agreements kick in. The recent contract renewal with Time Warner Cable and the subsequent ramp in co-marketing activity has translated into higher expenses to date but could have a bigger impact on subs and revenue in 2014. We also have a difficult time seeing the prospective merger of Time Warner Cable and Charter Communications, orchestrated/financially assisted by Liberty Media, as anything but a potential positive for Starz. As Starz continues to ramp up its original programming slate (hours set to increase close to 150% from 2010 levels by 2015-2016), this could also translate to renewed affiliate fee growth. As discussed, we believe Starz’s affiliate fees are under-priced compared to its viewership and its peers, and more high-visibility/brand-building original programming could help close the gap. Showtime is successfully executing a strategy of replacing big 6 studio film output with original programs to the tune of double-digit annual revenue gains, and we believe Starz could do the same. (Starz also has the benefit of 3 more years of nearly best-in-class film content to help ease the adjustment.) Nonetheless, in our base case we assume subscriber growth slows to 3% at the Starz multiplex and 1% at Encore while affiliate fees expand at 3% annually. We also conservatively project the recent revenue and profitability gains at Starz Distribution are temporary, leading to minimal OIBDA growth over the next two years. Valuing Starz at 10x 2015E EV/OIBDA, we derive a forward-looking intrinsic value estimate of approximately $38 per share. Notably, our valuation conservatively assumes no benefit from capital deployment in the interim.

Starz Estimate of Intrinsic Value OIBDA – 2015E $ 498 assumed multiple 10x Enterprise Value $ 4,984 Net Debt – 2015E $ (323) Equity Value $ 4,661 Diluted Shares Outstanding– 2015E (mm) 121.8 Starz Est. Intrinsic Value Per Share $ 38.27

Implied Upside to Intrinsic Value 36.8%

In addition to better than expected subscriber/affiliate fee growth, we see several possible sources of incremental upside. In our base-case scenario, we assume Starz Distribution continues at barely above break- even levels financially. Strong international sell-through of Starz’s originals, strong performance from AMC or Weinstein titles, or the addition of incremental third party content could all provide upside. Some form of monetization of Starz’s deep film library via Internet channels could also add incremental revenue with minimal costs. Finally, we continue to believe Starz is a prime candidate for consolidation. In our view Epix (which is struggling to build distribution and would bring ties to 3 high quality studios) would be an ideal merger candidate once its Netflix partnership expires. Longtime programming partner Sony would also be a logical acquirer given its content production and hardware assets. More broadly, the Company’s library, brand value, and scale/distribution agreements are all highly valuable assets that could be attractive to a programming peer, a traditional MVPD, or even an upstart SVOD or virtual MVPD (Internet-delivered) provider.

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Management/ownership has not been shy about the benefits of a tie-up; John Malone has stated Starz could use a “big brother,” while Chairman Maffei stated he is “… not going to ignore the fact that there are others out there that consolidation could be attractive.” Under their stewardship, we are confident Starz will remain patient and only engage in M&A at favorable terms. In the interim, Starz should continue to deploy its outsized free cash flow and available liquidity toward large-scale share repurchases.

Risks Risks that Starz 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; excess un-economic upfront marketing spending; increased competition for programming; failure to achieve success in original programming; loss of third party content at Starz Distribution; loss of key management personnel; or conflicts of interest where near-controlling shareholder John Malone could favor other controlled investments/companies.

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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STARZ AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands)

ASSETS Sept. 30, 2013 Dec. 31, 2012 Current assets: Cash and cash equivalents $ 30,642 $ 749,774 Restricted cash 64,506 — Trade accounts receivable, net of allowances 247,985 241,415 Program rights, net 334,736 340,005 Deferred income taxes 652 990 Other current assets 32,816 44,727 Total current assets 711,337 1,376,911 Program rights 352,274 338,684 Investment in films and television programs, net 148,748 181,673 Property and equipment, net of accumulated depreciation 90,783 96,280 Deferred income taxes 22,044 12,222 Goodwill 131,760 131,760 Other assets, net 36,359 38,520 TOTAL ASSETS $ 1,493,305 $ 2,176,050

LIABILITIES AND EQUITY Current liabilities: Current portion of debt $ 4,867 $ 4,134 Trade accounts payable 6,059 6,162 Accrued liabilities 321,358 256,062 Due to affiliate — 39,519 Deferred revenue 4,257 24,574 Total current liabilities 336,541 330,451 Debt 1,058,939 535,671 Other liabilities 8,436 7,784 TOTAL LIABILITIES 1,403,916 873,906 Stockholders' equity: Preferred stock, $.01 par value. — — Series A common stock, $.01 par value. 1,046 — Series B common stock, $.01 par value. 99 — Additional paid-in capital 417,743 — Accumulated other comprehensive loss, net of taxes (4,395) — Accumulated deficit (318,846 ) — Member’s interest — 1,311,951 TOTAL STOCKHOLDERS' EQUITY 95,647 1,311,951 Noncontrolling interests in subsidiaries (6,258) (9,807) TOTAL EQUITY 89,389 1,302,144 TOTAL LIABILITIES AND EQUITY $ 1,493,305 $ 2,176,050

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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 2014.