Viacom watchers have more questions than answers about the company’s fate following last night’s board vote for a deal that reaffirms the power of controlling shareholder Sumner Redstone — and his daughter, Shari.
The stock rose 1.5% today as everyone waited for lawyers to nail down the fine points. But the main terms make it a turning point for the country’s most troubled Big Media company.
Philippe Dauman agreed to drop lawsuits seeking to retain his central role in Redstone’s media empire. He’ll resign as Viacom’s CEO, pocketing $72 million, and remain non-Executive Chairman until September 13. He’ll work on a deal to sell 49% of Paramount, which would only take effect if the board unanimously approves.
Tom Dooley goes from COO to interim CEO until September 30, the end of Viacom’s fiscal year. It’s up to the board — expanded to 16 with five people picked by the Redstones — to decide whether he remains in charge beyond that date.
Big changes. But what do they portend for a company whose cable networks have been losing viewers and ad dollars, whose studio likely will end this year losing money, and whose stock has lost about half its value over the last two years? Here’s an early look.
Q: What can Viacom do today that it couldn’t do before the settlement?
A: It can make big decisions. Executives could only engage in business-as-usual until Delaware’s Chancery Court determined whether Sumner Redstone, 93, was mentally competent enough to exercise his right to change Viacom’s directors. Now the handcuffs are off, with a board that includes five additional directors picked by the Redstones.
Q: Is there an immediate decision directors have to make?
A: In the few weeks during which he’ll stay on as non-Executive Chairman, Dauman will try to work out a deal to sell 49% of Paramount. If he’s successful, then he can present it to the board. But it will require unanimous support to pass.
Q: What are the odds?
A: Flip a coin. The Redstones have opposed a deal. Sumner won Paramount after a bitter bidding war in 1993, and considers it one of his brightest trophies. They’ve also said that having a partner would make it hard to sell Paramount or Viacom — or merge it with CBS.
Q: If they’re opposed, then why give Dauman a few weeks to negotiate a deal and present it to the board? Is that just a charade?
A: Not necessarily. Up to now, a Paramount deal would have strengthened Dauman’s case to remain CEO. That shouldn’t matter now that he’s headed out. We could see that the real power has shifted from Sumner to Shari, who likely feels less sentimental about Paramount. In any case, a deal would make sense if the Redstones want to keep Viacom.
Q: How would selling a stake in Paramount help Viacom?
A: The company needs cash. It has nearly $11 billion in debt with $400 million due this year, $1 billion in 2017, and $500 million for 2018. Moody’s Investors Service warned this month that Viacom’s debt rating could be downgraded if it can’t “demonstrate clear progress in fixing its underperforming business units” and explore “strategic alternatives.”
Meanwhile, Wall Street covets the company’s $600 million a year in dividend payments.
Q: What do investors expect?
A: An arrangement that values Paramount at $4 billion or more would be deemed “a major positive” — especially with this weekend’s Ben-Hur remake looking like “the latest studio misstep” — Wunderlicht Securities’ Matthew Harrigan says.
MoffettNathanson Research’s Michael Nathanson would prefer to see Viacom dump Paramount entirely.
“Short of firing the entire Paramount leadership team, there is little a new CEO could do quickly to improve its film pipeline,” he says. “[A]s Hollywood has become more and more of a global, tentpole business, Paramount doesn’t have the franchises to compete with Disney, Universal or Warner Bros.”
Q: Viacom and CBS, which the Redstones also control, were in the same company until 2006 — and CBS is doing well. Why not reunite them?
A: Viacom investors would like that. It’s “hard to believe that anything will be solved until the CBS-Viacom pieces are put back together again,” Nathanson says.
Supporters of a new union fear that a lot of Viacom’s networks will be left out as pay TV distributors craft skinny bundles with fewer channels, and a lower price, than today’s expanded basic packages. A re-merged company could insist that anyone who wants the must-have CBS also must carry channels such as Comedy Central, Spike, and VH1.
Q: Sounds like a no-brainer.
A: Not quite. CBS’ independent shareholders would bury directors with lawsuits if they agree to a deal that mostly helps Viacom. A merger would be a lot easier to justify if Viacom can first demonstrate that its networks and studio are improving.
Q: Who’s Tom Dooley, and what should we expect now that he’s interim CEO?
A: He’ll have to assure Shari Redstone, other investors, employees, and Hollywood that he understands their concerns about the company, and can help it to get back on track.
They already know him well, though. He has been at Viacom since 1980, except for a period from 2000 to 2006: Redstone helped Dooley and Dauman to go off and form a private equity firm, DND Capital Partners, after Viacom bought CBS and its chief, Mel Karmazin, wanted the company owner’s confidants out of the way. In 2004, Karmazin was replaced by Tom Freston, who lasted two years before Redstone kicked him out and brought back Dooley and Dauman.
Q: Will Dooley clean house?
A: Possible, but unlikely — for now. His tenure as interim CEO just lasts through September, the end of Viacom’s fiscal year. If he wants to stay in the job without the “interim” modifier then he’ll need to win the support of a board that’s still dominated by directors who are (or at least were) close to Dauman.
Power will shift early next year: Three of Viacom’s directors will leave. That presumably will give Sumner and Shari Redstone, and the five directors they just added, the majority of what will then be a 12-member board.
Q: Viacom’s been a mess. Seems like anyone could do a better job than Dauman.
A: He’s made plenty of mistakes by focusing too much on short term earnings, waiting too long to engage with digital media, and failing to keep or cultivate talent. But Viacom’s biggest problem is that its networks including MTV, Nickelodeon, VH1, and Comedy Central target young viewers who are switching from conventional, ad-supported linear TV to Internet-delivered and on-demand sources.
Q: So what really changes? Did Viacom just replace one bean counter with another?
A: Dooley has loyally stood in Dauman’s shadow. If he has a different strategic vision, he has kept it private.
Still, he has important managerial skills that his stiff and lawyerly predecessor seemed to lack. Dooley is shrewd as well as smart. He’s comfortable in his own skin. He enjoys engaging with people. And he frequently answers tough questions without sounding like he’s reciting PR talking points.
Those qualities made him popular on Wall Street, and among others seeking insight into the world that Redstone and Dauman often preferred to keep walled off.
Q: Any other changes?
A: Yes, and it’s significant: Dauman’s power came from his ability to please Sumner Redstone, a father figure with a huge ego and insatiable appetites. He didn’t simply make Dauman Viacom’s chief. Redstone gave him positions on his family trust and National Amusements that put him in line to control his patron’s media empire — including CBS.
Dooley should have a far less fraught relationship with Shari, who stands to run her family’s holdings. They’re about the same age. They share a deep interest in digital media. And Dooley would clearly be a hired manager, not a potential rival.
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