Citi Research’s Jason Bazinet went way out on a limb this morning with the kind of bold prediction that can make or break an analyst’s reputation. He contributed to a 6.1% drop in Viacom’s stock price to $68.20 in mid-day trading after warning that the entertainment giant might see its earnings plummet — and have to look for a mega-deal — if Dish Network drops its channels. The analyst slashed his target price for the stock by nearly 30% to $62, and switched his recommendation to “sell” from “buy.”
The change is predicated on Bazinet’s belief that there’s at least a 50% chance Dish will drop Viacom channels including MTV, Nickelodeon, Comedy Central, BET, and VH1 when their carriage deal expires. (He says it could happen as early as this year; a Viacom spokesman says the current agreement does not expire in 2015 but declined to provide the exact end date.) The reason? Dish has dug in its heels in recent negotiations, allowing Turner Broadcasting networks (including CNN and Cartoon Network), CBS, and Fox News to go dark. Meanwhile small distributors including Cable One and Suddenlink appear to have done well financially after dropping Viacom. “Do you see a pattern?” the analyst asks, predicting that renewal talks between Viacom and Dish will become “a key event.”
Without Dish’s 14 million subscribers, Viacom could lose $704 million a year in affiliate fees and ad sales, the analyst figures. That might translate into a 32% drop in the stock price — but Dish’s value “would actually rise if it dropped Viacom” because the cost savings would outweigh the lost income from subscriber cancellations.
To avoid such a possibility, Bazinet says that Viacom might try to buy CBS or sell itself to someone else before it has to grapple with Dish. He puts the odds at 40% that Chairman Sumner Redstone will bless an arrangement to reunite the two big media companies that he controls; Viacom and CBS separated in 2006. The idea would be that Dish, and others, wouldn’t dare drop Viacom if it also meant losing CBS’ must-have programming. But Viacom might have to pay as much as $36 billion for CBS — possibly forcing the cable programmer to issue more than $20 billion worth of stock. As a result “this transaction would be neutral for Viacom.”
It might be harder, though, for Viacom to find a buyer; the analyst says there’s just a 10% chance of that happening. Discovery would be the likeliest partner. It could afford the $37.2 billion that Viacom probably would want. And since both focus on niche programming “a combination could reduce the risk profile of both firms.” As for other Big Media companies: Disney hasn’t been interested in buying cable networks. Time Warner wants must-have channels. Fox said it didn’t see a need for another big deal after Time Warner rebuffed its merger offer last year. And Scripps Networks and AMC Networks can’t afford Viacom.
Viacom isn’t commenting on the report. Yet CEO Philippe Dauman assured analysts in November that he feels secure about his company’s prospects. He secured multi-year deals over the previous 12 months with distributors including Time Warner Cable and Verizon that collectively supply about 25% of the programmer’s domestic customers. “We now have 70% of our subscribers covered by affiliate agreements that won’t expire for at least three years and go out for as long as eight years,” he said. “These renewals were completed on terms that confirm our long-term guidance from high-single- to low-double-digit growth in year-over-year affiliate revenue.”