NOTE 5. INVESTMENTS

The Company’s investments were comprised of the following:


	Ownership Percentage as of December 31, 2016		As of December 31, 2016		As of June 30, 2016
			(in millions)
Equity method investments:
Foxtel^(a)		50%	$	1,162	$	1,437
Other equity method investments		various		105		101
Loan receivable from Foxtel^(b)		N/A		325		338
Available-for-sale securities^(c)		various		126		189
Cost method investments^(d)		various		214		205

Total Investments			$	1,932	$	2,270

^(a)

During the three months ended December 31, 2016, the Company recognized a $227 million non-cash write-down of the carrying value of its investment in Foxtel to fair value. As a result of Foxtel’s performance in the first half of fiscal 2017 and the competitive operating environment in the Australian pay-TV market, the Company revised its future outlook for the business, which resulted in a reduction in expected future cash flows. Based on the revised projections, the Company determined that the fair value of its investment in Foxtel declined below its $1.4 billion carrying value, which includes the gain recognized in connection with the acquisition of Consolidated Media Holdings Ltd. (“CMH”). Significant unobservable inputs utilized in the income approach valuation method were a discount rate of 9.0% and a long-term growth rate of 2.5%. Significant unobservable inputs utilized in the market approach valuation methods were EBITDA multiples from guideline public companies operating in similar industries and a control premium of 10%.

In November 2012, the Company acquired CMH, a media investment company that operates in Australia. CMH owned a 25% interest in Foxtel through its 50% interest in FOX SPORTS Australia. The CMH acquisition was accounted for in accordance with ASC 805 “Business Combinations” which requires an acquirer to remeasure its previously held equity interest in an acquiree at its acquisition date fair value and recognize the resulting gain or loss in earnings. The carrying amount of the Company’s previously held equity interest in FOX SPORTS Australia, through which the Company held its indirect 25% interest in Foxtel, was revalued to fair value as of the acquisition date, resulting in a step-up and non-cash gain of approximately $1.3 billion for the fiscal year ended June 30, 2013, of which $0.9 billion related to Foxtel.

Following the write-down, the carrying value of the Foxtel investment was approximately $1.2 billion at December 31, 2016. Any significant shortfall of the expected future cash flows of Foxtel could result in additional write-downs for which non-cash charges would be required.

^(b)

In May 2012, Foxtel purchased Austar United Communications Ltd. The transaction was funded by Foxtel bank debt and pro rata capital contributions made by Foxtel shareholders in the form of subordinated shareholder notes based on their respective ownership interests. The Company’s share of the subordinated shareholder notes was approximately A$451 million ($325 million and $338 million as of December 31, 2016 and June 30, 2016, respectively). The subordinated shareholder notes can be repaid beginning in July 2022 provided that Foxtel’s senior debt has been repaid. The subordinated shareholder notes have a maturity date of July 15, 2027, with interest payable on June 30 each year and at maturity. On June 22, 2016, Foxtel and Foxtel’s shareholders agreed to modify the terms of the loan receivable to reduce the interest rate from 12% to 10.5%, to more closely align with current market rates. Upon maturity, the principal advanced will be repayable.

^(c)

Available-for-sale securities primarily include the Company’s investments in APN and The Rubicon Project, Inc. During fiscal 2016, the Company participated in an entitlement offer to maintain its 14.99% interest in APN for $20 million. During the three months ended December 31, 2016, the Company participated in an entitlement offer for $21 million and its interest was diluted from 14.99% to 13.23%. APN operates a portfolio of Australian radio and outdoor media assets.

^(d)	Cost method investments primarily include the Company’s investment in SEEKAsia Limited and certain investments in China.

The Company measures the fair market values of available-for-sale investments as Level 1 financial instruments under ASC 820, “Fair Value Measurement,” as such investments have quoted prices in active markets. The cost basis, unrealized gains, unrealized losses and fair market value of available-for-sale investments are set forth below:


	As of December 31, 2016		As of June 30, 2016
	(in millions)
Cost basis of available-for-sale investments	$	125	$	155
Accumulated gross unrealized gain		1		34
Accumulated gross unrealized loss		—		—

Fair value of available-for-sale investments	$	126	$	189

Net deferred tax (asset) liability	$	—	$	13

Equity (Losses) Earnings of Affiliates

The Company’s share of the (losses) earnings of its equity affiliates was as follows:


	For the three months ended December 31,					For the six months ended December 31,
	2016			2015		2016			2015
	(in millions)					(in millions)
Foxtel^(a)	$	(233	)	$	13	$	(244	)	$	22
Other equity affiliates, net		(5	)		2		(9	)		1

Total Equity (losses) earnings of affiliates	$	(238	)	$	15	$	(253	)	$	23

^(a)

During the three months ended December 31, 2016, the Company recognized a $227 million non-cash write-down of the carrying value of its investment in Foxtel to fair value. The write-down is reflected in Equity (losses) earnings of affiliates in the Statements of Operations for the three and six months ended December 31, 2016. Refer to the discussion above for further details.

Additionally, in accordance with ASC 350, the Company amortized $18 million and $37 million, respectively, related to excess cost over the Company’s proportionate share of its investment’s underlying net assets allocated to finite-lived intangible assets during the three and six months ended December 31, 2016, respectively, and $13 million and $25 million in the corresponding periods of fiscal 2016, respectively. Such amortization is reflected in Equity (losses) earnings of affiliates in the Statements of Operations. The increase in amortization expense recognized by the Company in the current year period was offset by a corresponding decrease in amortization expense recognized by Foxtel as certain intangible assets were fully amortized in fiscal 2016.

Summarized financial information for Foxtel, presented in accordance with U.S. GAAP, was as follows:


	For the six months ended December 31,
	2016		2015
	(in millions)
Revenues	$	1,220	$	1,185
Operating income^(a)		184		184
Net income		40		94

^(a)	Includes Depreciation and amortization of $103 million and $111 million for the six months ended December 31, 2016 and 2015, respectively. Operating income before depreciation and amortization was $287 million and $295 million for the six months ended December 31, 2016 and 2015, respectively.

For the six months ended December 31, 2016, Foxtel’s revenues increased $35 million, or 3%, as a result of the positive impact of foreign currency fluctuations as revenues decreased modestly in local currency. Operating income was flat primarily due to the positive impact of foreign currency fluctuations and lower depreciation and amortization expense, which offset the lower revenues in local currency and planned increases in programming spend. Net income decreased mainly due to losses associated with Presto of $26 million, primarily resulting from Foxtel management’s decision to cease Presto operations in January 2017, and $22 million in losses associated with the change in the fair value of Foxtel’s investment in Ten Network Holdings.

During the first quarter of fiscal 2017, Foxtel was deemed to have significant influence over its investment in Ten Network Holdings. As a result, Foxtel is required to treat this as an equity method investment. Foxtel has elected the fair value option under ASC 825, Financial Instruments, and will adjust the carrying value of the Ten Network Holdings investment to fair value each reporting period. This adjustment will be recorded as a component of Foxtel’s net income.