The announcement of a settlement with Viacom Inc. (NASDAQ:VIAB) CEO Philippe Dauman, and his replacement by Thomas Dooley, puts an end to one chapter in the company’s story, leaving the Redstone family back in control. The deal with Dauman is costing $72 million, but it eliminates uncertainty about corporate control, and that is always a good thing for VIAB stock.
It does not, however, end the story.
Shari Redstone, the daughter of founder Sumner Redstone, whose capacity to manage the business at age 93 was the subject of the long struggle with Dauman, now has to make the company work.
What Can Viacom Do?
She starts at what a turnaround-oriented CEO would call an attractive bottom.
Viacom stock presently sells at a price-to-earnings multiple of 8.25. Two analyst firms have downgraded it recently, with Moody’s suggesting they need to slash the dividend from its present level of 40 cents, a current yield of 3.73, to pay back debt and remain competitive.
The easiest move for VIAB right now would be a merger with CBS Corporation (NYSE:CBS), which the Redstones also control through their National Amusements Co.
CBS currently has a P/E of 15, and just one-third of its assets are subject to long-term debt. Viacom, by contrast, has more than half its assets subject to debt. Combined, the two companies would leave $18 billion in debt holding up about $45 billion in assets. That’s still higher than rival Time Warner Inc (NYSE:TWX), with over $24 billion in debt on $64 billion in assets, but comparable, and TWX has a P/E of 16.
While many of VIAB’s cable networks have been losing ground, CBS has been holding steady under CEO Les Moonves. Its ratings were steady for the year, and once again, led the way in broadcast TV. The company also owns a collection of TV stations in major markets that remain profitable.
Redstone could also sell an asset considered the VIAB’s crown jewel, the Paramount movie studio, and create a fast profit for shareholders. Redstone has said in the past she would not do that, but control could give her the courage.
Viacom’s biggest problem is that it has been steadily losing its talent and audience, resulting in lower ad sales. That can be fixed with money paid to creatives, once it’s clear that someone is in charge.
Many of VIAB’s cable networks are showing their age, and need new investment. Comedy Central has been losing talent, MTV has not been relevant in years, and the Nickelodeon networks have been losing shares to Walt Disney Co (NYSE:DIS) networks.
Many question whether there is an appetite for cable in an era of over-the-top programming, where people get their entertainment from the internet, but it’s also clear that good programming brings eyeballs.
The Paramount movie studio, meanwhile, is entering a nervous time, as it releases Ben-Hur, Florence Foster Jenkins and looks to see if Star Trek: Beyond has legs. The studio is still capable of churning out hits, but it has recently had some big misses, like the Tina Fey vehicle Whiskey Tango Foxtrot, and Ben Stiller’s Zoolander 2.
Again, these are turnaround stories that can be seen as opportunities for new management.
Bottom Line on VIAB Stock
It is an open question whether Shari Redstone will make major moves now that she has cleared the deck of rivals. But it’s a question a speculator can place a bet on. VIAB stock is dirt-cheap at these levels, she doesn’t want to keep losing money and she now has the power to make change happen.
A speculator can place a bet here.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in DIS.
