Pali Research media analyst Rich Greenfield called for Viacom chairman Sumner Redstone to take the media giant private last week, claiming the mogul could pay a 17% premium to the company's current stock price and still meet or exceed its free-cash-flow generation goals for the year.
Greenfield's most recent call for a private Viacom is different than in past years — in July 2006 he wrote a report titled “Dear Mr. Redstone, Take Viacom Private” after the stock broke new lows after its split-off of CBS Corp. earlier in the year. This time, the company is performing well but the market is not responding in kind.
According to Greenfield's report, two years after his first call for privatization, Viacom has replaced its CEO and chief financial officer, has exceeded earnings-per-share expectations, has repurchased $3.3 billion of its stock, is beginning to see a ratings rebound at its cable networks and its growth prospects for international cable and licensing appear to be better than they have been in years. Despite that good news, Viacom shares are down 2% over that same two-year period (the stock is down 22% this year) and its trading multiple has declined from 14.4 times 2008 estimated earnings to 10.6 times.
Although Redstone did not take the company private the first time Greenfield suggested in 2006, when the credit markets were more receptive (and there is no indication he will heed the analyst now), Greenfield wrote that Redstone could have the company relatively cheap. According to the analysts' estimates, Redstone could pay $38.50 each for the remaining Viacom stock he doesn't already own (a 17% premium to its closing price of $32.90 each on June 17), or about $21 billion. While that level of debt may be almost impossible for anyone to raise in the current credit markets, Greenfield noted that despite that amount of leverage, Viacom would still generate $600 million in free cash flow in the first full year after the privatization, rising to $857 million in 2010.
“Redstone could actually pay up to $49/share for Viacom and still be free-cash-flow break-even,” Greenfield wrote.
And as is a typical tack for the analyst, Greenfield is putting forth an extreme scenario to illustrate a less-radical point: that the stock market is not giving Viacom credit for running the business well. In the meantime, Greenfield said the company and its high-profile chairman should take advantage of the situation by increasing leverage buying back stock.