Karmazin Dismisses a DirecTV Bid

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New York— Viacom Inc. president and COO Mel Karmazin told a group of analysts last week that his company is in no rush to obtain distribution —à la an acquisition of DirecTV Inc. — mainly because of its vast programming strength.

"Does Viacom feel the need to own distribution? No," Karmazin told a packed audience at the Deutsche Bank Alex. Brown Media Conference here last week. "We have these great brands, and we spend a tremendous amount of money on our content. The assets are complete; we don't really feel we need to own anything."

Karmazin added that Viacom has nothing to fear from a potential combination of DirecTV and News Corp., or DirecTV and EchoStar Communications Corp.

"We're not threatened by any situation that would happen with DirecTV," Karmazin said.

Nevertheless, Karmazin said that there are some things he still covets, although the federal government prohibits him from owning them.

"I would like to see the rule change to where you could own ABC [and] where you could own NBC," Karmazin said. "I would love to see the ability — it doesn't mean that we would ever want to do this — but it would be great to have the regulatory environment cleared so that Viacom would be able to buy [The Walt] Disney [Co.], or Viacom would be able to buy NBC, if GE [General Electric Co.] were to spin it off.

"It would have to be accretive. It would have to be better than our stock price, but this is America."

Viacom owns the CBS broadcast network; Disney owns ABC Inc.

Karmazin spent most of his time driving home the point that Viacom is a "free cash-flow machine," adding that even as the economy has faltered, Viacom has shown double- digit growth in revenue and earnings before interest, taxes, depreciation and amortization. Free cash flow is equal to total cash flow minus capital expenditures.

For example, while the economy grew about 5 percent in 2000 — and the advertising industry declined 9.8 percent — Viacom reported 13 percent EBITDA growth, Karmazin said.

The same is holding true for the first quarter of this year, when the economy was up 1.3 percent and advertising was down 3 percent, but Viacom EBITDA rose 15 percent.

"On a free cash-flow basis, when everybody was talking about how gloom-and-doom it was, we managed to show 20 percent free cash flow growth when the economy was only growing 1.3 percent," Karmazin said.

Karmazin said that free cash-flow growth at Viacom is driven by strict controls on capital expenditures. While the company does invest in its properties, it makes sure that none of those investments are wasted.

"We want EBITDA to grow, but if we uniquely have the ability to grow that EBITDA without having to spend that much on capital expenditures, we're better off than a company that is growing its EBITDA and having to spend a lot on capital expenditures," Karmazin said. "Free cash flow is critical. That's the way you create wealth.

"We've been using an awful lot of that free cash flow in making accretive acquisitions and to buy back our stock."

Through Dec. 31, 2000, Viacom had bought back about 28 million shares of its common stock for about $823 million.

Some at Viacom consider its stock, which closed at $57.10 per share on June 1, to be undervalued. But despite the downturn in the ad market — which some have estimated is off by as much as 20 percent in New York City — Viacom's stock has soared. Its shares were up 25.7 percent, from $45.44 on Jan. 2 to $57.10 on June 1.

Karmazin said Viacom has fought off the sluggish ad market by selling across its media platforms — radio, broadcast television, cable television and outdoor advertising. Viacom Plus, the company's new vehicle along those lines, has gained 19 major customers, including Procter & Gamble, Merrill Lynch & Co., Fidelity Investments, Kraft Foods, DaimlerChrysler Corp. and Johnson & Johnson, he said.

Karmazin was slightly coy concerning reports that P&G had agreed to a $300 million advertising pact with Viacom, citing published reports about the deal because "I promised Procter & Gamble I wouldn't talk about it."

The P&G agreement cuts across 12 Viacom platforms, he added.

Viacom also expects to expand internationally. Karmazin said that in the first quarter about 15 percent of company revenue came from outside the United States, up from 13 percent in the previous year.

"You can assume that one of our highest priorities is to expand globally in the same discipline that we've done here. That discipline is we need to make accretive expansion plans," he said. "And when we expand, the growth rate in that expanded area needs to be at least as good as the growth rate we have in our other businesses."

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