On The Money

Be Careful What You Wish For

With Dauman out, it’s the Redstones' turn to deliver 8/22/2016 1:30 PM

Sumner Redstone once again got his way in the continuing soap opera that is Viacom Inc., with long-time CEO Philippe Dauman throwing in the towel in their months long battle for control of the programmer, agreeing to step down as CEO immediately and give up his executive chairman spot on Sept. 13. Dauman will have to lick his wounds with the help of an estimated $72 million severance package. He also gets to pitch his plan to sell 49% of Paramount Pictures to the board of directors, but given that Redstone strongly objected to the Paramount sale in the first place, it is a long shot.

 

On the surface, the outcome seems to be as good as could be expected – Redstone gets rid of what he believed was one of the big reasons behind Viacom’s recent decline, and Dauman gets to cash another big check (it has been reported that he has reaped about $400 million in compensation in the past 10 years as Viacom CEO). But now that the deck is cleared – curiously, chief operating officer Tom Dooley, Dauman’s right hand man for more than a decade,will take over as interim CEO at least until Sept. 30, the end of the fiscal year -- the real work begins. Dooley will have a shot at the permanent CEO spot, but it is likely that others may also vie for the role – former DreamWorks Animation CEO Jeffrey Katzenberg, former Disney COO Tom Staggs, and 21st Century Fox COO Chase Carey have all been named as possible candidates.

 

But no matter who takes on the unenviable task of righting the Viacom ship, the eyes of Wall Street and the rest of the entertainment community are squarely on Redstone and his daughter, Viacom vice chairman Shari, who initiated the shakeup at the programming juggernaut. Getting rid of Dauman – something that investors and Wall Street analysts have been hinting at for a while – was just the beginning of what could be a very long road.

 

And already analysts are offering some possible paths to a solution.

 

MoffettNathanson media analyst Michael Nathanson said in a blog post last Friday that while the choice of Dooley as interim CEO was curious – he  wondered ow much of a change-agent Dooley could be given his history with the company – a CBS merger is more important than ever.

 

But Nathanson added that any accretion that could have been assumed in past years in such a deal has all but been eliminated, making any stock-for-stock deal less palatable for CBS shareholders. Assuming a 20% premium to Viacom’s share price, an all-stock buy-out of Viacom and $400 million in cost synergies would be just 6% accretive to CBS’ shareholders. Nathanson added that Viacom also needs to hire a savvy programming CEO and focus on stopping the talent drain of the past few years. But again, if it were that easy, Dauman would have done it years ago.

 

Morgan Stanley media analyst Ben Swinburne suggested in a note to clients that Viacom should circle the wagons around its kids’ content, focusing on beefing up its Nickelodeon channel and placing at least a short-term moratorium on SVOD licensing deals for kids’ shows. Swinburne also suggested that Viacom should consolidate its nearly 20 networks down to a core of five or six – Nickelodeon, MTV, Comedy Central, BET and Spike. That makes a lot of sense, given that one of the big complaints from distributors is the sheer number of Viacom channels. For what it’s worth, Swinburne noted that Viacom itself has said it drives about 85% of affiliate revenue from its top six networks and he estimated that the vast majority of segment profit comes from that core as well.

 

Swinburne also called for a reduction in the ad load at Viacom’s channels, given that its core millennial audience already has a low tolerance for advertising.

 

“In our view, Nickelodeon is the crown jewel and has seen some content success of late on both Nick and Nick Jr.,” Swinburne wrote. “We argue building this network(s) is the key to long-term durability of the company, and Viacom may need to (at least for now) leave its content exclusive to its networks and apps.”

 

BTIG media analyst Rich Greenfield, a long-time critic of Viacom and Dauman, said the CEO’s departure presents an opportunity to sell the company outright.

 

“We believe Viacom is now in play,” Greenfield wrote in a blog post Monday.

 

He pointed to reports that said one of the potential buyers of the 49% interest in Paramount Pictures, China-based conglomerate Dalian Wanda, had wanted to purchase the entire studio for about $10 billion. Greenfield wrote that Dalian Wanda or others could instead buy all of Viacom and sell off what they don’t want.

 

Greenfield’s also is a backer of merging with CBS – he said talent loves CBS chairman and CEO Les Moonves, while he believes Dauman is “despised by his employees, other senior media executives and investors…” Attracting new talent – both creative and management – would help put Viacom back on track. And perhaps more importantly, with Moonves at the helm the perception of the cable programmer would change dramatically.

 

“Investors have faith in Moonves, having witnessed his remarkable run at CBS, combining a culture that breeds creativity with a continuous stream of financial engineering to drive shareholder returns,” Greenfield wrote.

 

Faith is something that Viacom has lacked in the past few years and even in the wake of Dauman’s departure, isn’t something that Viacom shareholders are used to. Already the stock price, which rose 1.5% on Friday when news of the changes first surfaced, is beginning to fall back. The stock was down as much as 5% in early trading Monday and by early afternoon was priced at $41.96 each, down 3.5% or about $1.53 per share.