Coho Capital letter to partners for the second quarter ended June 30, 2015.

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Dear Partners,

Please find your quarterly statement attached. Coho Capital lost 0.61% during the second quarter and returned 3.58% through the first half of the year. This compares to an increase for the S&P 500 of 0.28% during the quarter and 1.23% for the first half of the year.

We made two purchases during the first half of the year, which we detail below:

Coho Capital: Videocon d2h (VDTH)

Videocon d2h is a satellite television provider in India. The Indian PayTV market is the fastest growing in the world and VDTH is the fastest growing PayTV provider in India with a 20% market share.

Satellite TV is an attractive business model with recurring revenue streams, significant operating leverage and recession resistant economics. It is also a market that naturally lends itself to oligopolistic structures as growing economies of scale provide substantial barriers to entry for new competitors.

Videocon went public as a result of a transaction with Silver Eagle, a Special Purpose Acquisition Company (SPAC), which acquired a 38% stake in VDTH. Remaining shares in VDTH are owned by Videocon Group, a family conglomerate with interests in oil and gas, retail and consumer electronics.

Silver Eagle was started by two highly respected media executives, Harry Sloan and Jeff Saganasky. Between them, Mr. Sloan and Mr. Saganasky have run more than a half dozen entertainment companies and movie studios including TriStar Pictures, MGM, Sony Pictures, and CBS Entertainment. Both Mr. Sloan and Mr. Saganasky have an impressive record for value creation. Mr. Sloan started SBS Broadcasting with an initial investment of $5M and grew it into Europe’s second largest broadcaster, reaching 100 million people in nine countries and helping to pioneer the model for PayTV along the way. SBS was sold to KKR in 2005 for $2.5 billion dollars. Mr. Sloan saw similar success with New World Entertainment, purchasing the company for $2M in 1983, leading the company through multiple acquisitions, including Marvel Entertainment, before selling the business for $260M less than six years after launch. Mr. Sloan’s studio experience also includes stints as CEO of MGM Studios and Chairman of Lionsgate Films.

For his part, Mr. Saganasky lifted CBS’ television ratings from worst to first and grew network cash flow at a 25% annual clip while serving as President of the unit for five years. Apart from CBS, Mr. Saganasky also served as head of programming at NBC where he developed Miami Vice and Cheers. Mr. Saganasky has studio leadership experience as well having served as Co-President for Sony Pictures, where he acquired Telemundo and then sold it three years later for six times Sony’s investment. While at Sony he also presided over the merger of one of the world’s largest movie theater companies in combining Loews with Cineplex Odeon.

Sloan and Saganasky will be serving on the board of directors at Videocon. One could argue that their lack of experience in the Indian market makes their background less relevant, but both executives have a record of producing stellar results. In addition, their familiarity with content providers and media negotiations should yield useful insights as Videocon scales.

Coho Capital: India’s TV Market Offers Tantalizing Growth

India is an attractive market with a long runway for growth. With an average age of 26 and a population of 1.3 billion people the potential opportunities are vast. Prime Minister Narenda Modi, elected in May of 2014, has set about reducing bureaucracy and opening up India’s economy to make it more business friendly. The reforms are having their desired effect with India’s economy on pace to grow 7.5% this year and over 8% next year.

At 168 million TV households, India has the second largest TV market in the world behind China. However, household TV penetration is low at 61% compared to other developing markets, such as China at 97%, Vietnam at 86% and the Philippines at 83%.

Historically, the Indian PayTV industry has been highly fragmented with tens of thousands of local operators selling pay TV service to connect to cable company networks. Increased modernization of India’s media infrastructure has flipped this dynamic with the growing scale of larger players resulting in a more orderly marketplace where brand cachet carries more value.

Rising incomes and increased leisure time should spur demand for home-based media and entertainment consumption. According to KPMG, the Indian TV market is expected to grow at a 16% compound annual growth rate between 2015-19.

We think VDTH represents a play on India’s growing middle class and believe the company will pay a key role in the modernization of the country’s media infrastructure. The company is currently the second largest satellite TV provider in India behind Dish India. VDTH’s marketing efforts have focused on localizing programming options as a distinct offering from packages offered by foreign owned DISH. The approach appears to be paying off with VDTH growing its market share from 11% three years ago to 20% today. In contrast, Dish India has seen its share of the market slip from 28% three years ago to 27% today. VDTH continues to narrow the gap capturing 26% of satellite subscriber additions during the first half of 2015.

Coho Capital: Well-Positioned to Capture Additional Market Share

VDTH has a compelling program offering with the greatest number of overall channels across every conceivable package option including sports, premium and regional channels. VDTH also offers 37 HD channels as well as a suite of education focused services for children and a multi-channel music offering. Despite more channels, VDTH offers attractive price points with some of the industry’s best pricing. The company has a history of innovation in content curation and delivery with many popular channels debuting on VDTH including National Geographic, Discovery and ESPN.

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