Blog: Spirit of Money, Financial Fluidity
by munificent


Redstone takes on a lot to say he built Viacom- eez, how can an ego remain that BIG at 82 years of age-? Art of winning-??

Date:   12/26/2005 10:26:02 AM   ( 16 y ) ... viewed 1549 times

Viacom Comes to the Great Divide, and Calls It a Path to Growth

Published: December 26, 2005
On Jan. 3, Sumner M. Redstone will get his wish when Viacom, the sprawling media company he built, is split into two separate entities.

John P. Filo/CBS
Leslie Moonves, left, is to head CBS, while Thomas Freston runs Viacom.

Greg Gayne/Warner Brothers
Popular shows on CBS like "Two and a Half Men" have revived the network's fortunes under Leslie Moonves, and helped bolster Viacom's stock price.
Now what?

Even before the actual separation, the two companies - Viacom, which includes Paramount and the cable networks like MTV and Nickelodeon, and will be led by Thomas E. Freston; and CBS, encompassing the CBS network, television and radio stations, Simon & Schuster and an outdoor advertising business, to be run by Leslie Moonves - have been establishing their own identities. And lately Wall Street has begun to show a bit of enthusiasm.

When the split was announced on March 17, Viacom stock closed at $36.72 a share. By October, it had dipped to $30.06 a share, but it has since risen somewhat to close at $33.34 a share last Friday.

One question for investors is whether the split is a prelude to a buying spree; that is, does Mr. Redstone plan to build up two new companies, just as he built up Viacom the first time?

A bigger question is whether Mr. Redstone will decide to sell off assets if the split fails to bolster the stock price of either company.

No one has more riding on the breakup than Mr. Redstone himself, who will remain chairman of each company.

The 82-year-old entrepreneur has always been focused on the company's stock price and has been vocal in his concerns about its decline.

Mr. Redstone adamantly denies that he has plans to part with either company. "I have no intention of selling," he said firmly in a telephone interview last week.

"I happen to like both companies, not just Tom's company," he said. "I happen to like Les's company."

Mr. Redstone's daughter, Shari E. Redstone, who is to serve on the boards of both companies, and who one day is to control the family's holdings, is equally adamant.

"No, this is not a precursor to selling the businesses," Ms. Redstone said. "They are two different companies, and they have two very different visions. This was done to maximize the value, and we are going to do it. There is no intent to sell this. That is absurd."

Some analysts are skeptical, pointing out that Mr. Redstone, who has rarely sold stock, has watched his Viacom holdings decline by roughly half, to $6 billion. That has prompted some speculation that Mr. Redstone is teeing up one of his properties for a sale.

"Regardless of what they say, whether it is their intention or not, I think a sale is a real possibility," said Richard Routh, a media analyst at Jeffries & Company. "Sumner has set it up in such a way that it makes perfect sense."

Mr. Redstone built Viacom into a media behemoth by acquiring Paramount Communications in 1994 for nearly $10 billion and merging with CBS in 1999 in a $37 billion deal.

At its height in August 2000, Viacom stock traded at $71.13 a share. Since then the stock has tumbled as investors worried that the radio station and television businesses were in jeopardy as new media outlets competed for audience and advertising.

Whether they agree that carving up Viacom is a smart strategy, investors generally consider Mr. Freston and Mr. Moonves "very good managers," as Christopher J. Marangi, a media analyst at Gabelli & Company, whose affiliate, Gamco Investors, owns 10 million shares of Viacom, put it.

To be sure, when companies get smaller, there is always the possibility that they will immediately turn around and race to make acquisitions, undermining the very reason they were overhauled and recreating the conglomerates they had sought to dismember.

Indeed, CBS earlier this year said it would spend $325 million to acquire the College Sports Network, to increase its presence in cable sports.

Since the CBS network owns the universal rights to the National Collegiate Athletic Association, it can, for example, promote those games on its new cable channel.

To Leo J. Hindery Jr., a former cable executive who now heads InterMedia Partners, a private equity firm, that purchase underscored the pointlessness of splitting the company.

"Their strategy is belied by their actions," said Mr. Hindery. "Soon after the decision to split, CBS acquires a cable channel just like the kind it left behind."

So far at least, the planned acquisitions at both companies are relatively small. Earlier this month, Viacom and its studio division, Paramount, made a big splash by announcing it would acquire DreamWorks for $1.6 billion.
But in a move that helped soothe anxious Viacom investors, $800 million to $1 billion of the price is to come from private equity partners, significantly reducing Viacom's exposure to the uncertainties of the movie business.

Mr. Redstone seems intent on avoiding large deals. "I told the guys that they would only make 'tuck in' acquisitions,' " he said in a telephone interview last week.

He added that when the first opportunity to buy DreamWorks for $1.6 billion came up, he told Mr. Freston. " 'Tom, this is your call, but the board will never approve it and it won't fly with Wall Street.' "

Viacom is to continue to build its portfolio of cable channels overseas in a series of smaller acquisitions. Last year, for example, it acquired Viva Media, a clutch of music channels in Germany, in an effort to broaden its menu of programming for advertisers. That strategy is aimed at highlighting the fast-growing cable network business.

Meanwhile CBS is taking steps to make its stock more attractive to value investors, those who seek reliable income and dividends rather than rapid growth.

First, it is to maintain the current dividend that the old Viacom paid. That works out to about a 2 percent yield. The company is also to contribute a portion of its cash flow to its underfinanced pension plan. Corporations are allowed to deduct the entire amount they contribute to their pension plans from pretax earnings.

"For book purposes you spread it over many years, but for tax purposes, you can get it in the first year," said Richard Bilotti, a media analyst at Morgan Stanley. "So you can get a big tax benefit and it boosts earnings."

Mr. Bilotti, who favors the split, says that financing the pension would not have been meaningful at the old Viacom. "I think that each company will benefit from concentrating more intently on their discrete financial issues," he said.

But even if these moves fail to pay off, a number of people who know the family well say they believe that Mr. Redstone will never sell the new Viacom, where he has been deeply involved for a decade.

Indeed, his autobiography, "A Passion to Win" begins with the quote "Viacom is me. I have a love affair with this business and this company."

But clearly, he has a lot at risk. "The company has been undervalued for some time, and the split will shed some new light on Viacom and surface the value that is there," said Mr. Marangi of Gabelli.

If this does not prove to be a catalyst, what will he do?

"Sumner has a very valuable asset in this industry, and if the market does not give it real value, I have to believe there are other players who would buy those assets," said Richard Greenfield, of Fulcrum Global Partners. "He is taking drastic action acknowledging how significantly the media landscape has changed over the past couple of years.

"Radio is not the business people had thought it was. TV stations have been impacted by the TiVo phenomenon and the overall shift of ad dollars to the Internet."

Within the next year Mr. Redstone and his investors will find out whether being smaller means being richer.

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