How To Cure Ailing Viacom? Wall Street’s Prescriptions Are Mixed

Associated Press

So what should Viacom do now?

That’s the big question on Wall Street today as investors digest the agreement, completed over the weekend, that re-affirms Sumner and Shari Redstone’s power at the entertainment company. It ends two lawsuits challenging the competence of 93-year-old Sumner, with Philippe Dauman leaving as CEO and replaced, at least until September 30, by former COO Tom Dooley.

The prevailing view is that the company needs major surgery, if it isn’t sold outright.

BTIG’s Rich Greenfield, for one, considers Viacom to be in play for the Redstones, who control 80% of its voting shares. China’s Wanda Group — which owns AMC Theatres and is interested in a 49% stake in Paramount that Dauman has been shopping — “should seriously consider buying all of Viacom and then look to sell off what they no longer want,” the analyst says.

The case for a major overhaul was buttressed by the shockingly bad weekend performance of Ben-Hur, which Paramount  co-produced with MGM. Viacom shares closed down 4% today.

Here are some of the more popular ideas being floated.

Shutter the smaller cable channels. The company’s biggest channels — Nickelodeon, MTV, Spike TV, VH1, BET, Comedy Central, TV Land, and CMT — account for about 80% of Viacom’s cable network revenues.

So maybe it’s time to focus on them, and let go of others such as MTV2, Nick Jr.,  TeenNick, Nicktoons, VH1 Classic, Nick 2, Centric, and Logo. They could be left in the cold anyway as traditional and online distributors try to attract cost-conscious viewers by crafting skinny bundles that only offer the most popular channels at a lower price than the traditional expanded basic package.

Although ditching channels would hurt revenues and earnings, “over time Viacom could emerge with a concentrated portfolio of relevant media content,” says RBC Capital Markets’ Steven Cahall.

Slash ad clutter and digital syndication. Morgan Stanley’s Benjamin Swinburne says that Viacom networks have too many ads, and that the company is hurting itself by selling re-runs to streaming VOD services  such as Amazon Prime.

Here, too, “short-term pain for long-term gain may be the best path,” he says. But big change is needed because the “level of audience erosion over the last 5-10 years is staggering, and there is risk that for many of Viacom’s networks, cultural relevance has faded too far.”

Prepare a direct to consumer offering. This is another Swinburne recommendation. It’s “critical” for Viacom to prepare to offer “a bouquet of apps focused on kids, music, and comedy,” he says. Although nobody really knows what kinds of distribution platforms will succeed, with Viacom’s target audience of young viewers — who are most interested in watching programming via discreet apps — “it should be leading in this area, experimenting more than others with different models, not following.”

Sell Paramount. That makes sense “given the very difficult competitive climate the film industry currently faces and the relative lack of top-tier IP” at the studio, Cowen and Co’s Doug Creutz says.

MoffettNathanson Research’s Michael Nathanson calls the situation “truly shocking.” He believes Paramount will lose more than $350 million this year. “Short of firing the entire Paramount leadership team, there is little a new CEO could do quickly to improve its film pipeline.” Better to “sell its studio now to either a strategic buyer who can take out massive costs or find some ‘easy’ money which always seems to be available.

Sell 49% of Paramount. With some hefty debt payments coming up, Viacom needs cash.

Selling a minority stake in the studio, valuing it at $4 billion or more, “makes complete sense and is in fact necessary to de-lever the company and provide capital to invest in the businesses,” Brean Capital’s  Alan Gould says.

The “only” reason he can see to not make a deal is if the Board wants to sell Viacom and “the prospective buyers have indicated that they would pay more or that the deal is conditional on controlling all of Paramount.”

Keep all of Paramount. Following the same logic, Guggenheim Partners’ Michael Morris says it might be best to keep 100% of the studio. Selling 49% wouldn’t raise enough cash to make up for years of underinvestment. What’s more, “fixing this valuable content-creation engine is one of the strongest draws for attracting a new CEO,” he says. “We see Paramount playing a significant role in the future of Viacom.”

Merge with CBS. There’s a 50-50 chance this will happen, Brean Capital’s Alan Gould says. “CBS would have to balance the opportunity of turning around Viacom vs. the risks involved and its long-term strategic focus on having only 2 core brands — CBS and Showtime — rather than having a larger number of less valuable networks.”

Wunderlich Securities’ Matthew Harrigan calls a re-union of the companies that were split in 2006 “the most desirable outcome,” but “very difficult to work out” given Viacom’s depressed stock price.

Indeed, CBS should keep its distance for now, Nomura Securities’ Anthony DiClemente says. “Unlike Viacom, CBS has adequately preserved the stability of its current leadership team and thus its operating strategy, and we believe CBS shareholders and employees are likely hopeful for this to remain the case.”

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