Friday, August 21, 2015

Viacom (VIA) : The Terrible Truth: Management IS the Problem

Hasn't the plot thickened with this collapse in the Viacom’s share price? The terrible truth at the heart of this story is that management is the problem-not the cable industry nor the company’s beleaguered brands. 

Large declines in revenues are based on fundamental declines in viewing and advertising. Is there one single reason? No, audiences are fragmenting, time shifting, using a variety of devices. What is interesting is that only about $140 million of the national TV $1.1 bn decline is drawn from cable TV,  the Viacom nets seem to be underperforming even within this secular trend. 
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  •  All VIA nets are down and the declines are not simply a measurement issue as management claims.  MTV has totally lost its way and even stalwart Kids programmer, Nickelodeon, has not had a hit show in 15 years- since Sponge Bob and Dora the Explorer. Comedy Central has managed to lose its two biggest names, Stephen Colbert and John Stewart in six months. Really? How do you let that happen if you are a major league content provider?
  • Viacom management, like other cable content producers (vis TWX) doesn’t get the fundamental nature of the industry change. Stock buy backs, really? Revenue growth by jacking up affiliate fees (approx 1/2 media network revenues), when cable affiliates Cable One and Suddenlink (amounting to 2 million) have dropped the company’s services? Really? This is not an option anymore. (BTW, higher basic rates also damage premium services because subscribers have to buy through basic services to get them. Isn’t this the missing argument for HBO GO?)
  • With the loss of two million net subscribers from affiliate rolls, BOTH advertising and affiliate fees will take a hit-even if the ad market improves!  By our estimate a 10% decline in advertising revenue will lead to a 13% decline in EBITDA- assuming no increase in program spending to stem the tide of viewer losses. A loss of two million subscribers from affiliate rolls will harm EBITDA by $20 million, which, though not as big as blow as continued  advertising erosion will reduce affiliate fee growth to flat. And of course eliminate 2 million potential viewers.  
  • In this quarter as in past quarters, Viacom EBITDA was flat down and free cash flow declined by (30%) to $380 million while debt to over $13bn from $12.7bn and cash declined by $600 million. 
  • One the plus side, MTV, Nick, and Comedy Central still have strong brand identification (even if  management has milked them dry). And, in current quarter, big ratings for Jon Stewart’s last appearances on the Daily Show, could offset some ratings declines but these are likely to re-accelerate, once he leaves the anchor chair. At the same time, Paramount has two big releases this quarter- MI 5 and Minority Report which will boost moribund Entertainment revenues.  
  • Conclusion:  Somebody Please Put VIA OUT of Its Misery. While Viacom’s assets and brands still have appeal to target audiences they are being wasted. Management is the problem and yet management has been paying itself -exorbitantly- with so called equity compensation, (Dauman $37 million !! and Dooley $34 million respectively last year!)  The stock had stabilized in the high sixties on financially unsupportable share repurchases. But these are not an option given the declines in EBITDA and increases in debt. Redstone can’t provide adult oversight any more and, besides, has been selling shares for estate tax purposes. Somebody has to put Viacom out of its misery.  
  • CBS, which was supposed to be the slow growth, cash cow in the Viacom break-up plan, has capitalized on retransmission fees and Showtime’s strength to outpace the sleeker growth oriented Viacom and embarrass the Dauman/Dooley team. Clearly, as a Redstone owned business, CBS's CEO LEs Moonves would likely get the first call from Redstone family to rescue Viacom. But who knows whether Moonves/CBS has the appetite and whether Dauman would demand too much if Moonves were to take over. 
  • As an alternative, Malone could-should form a coalition of the willing-which would include Charter, Lions Gate, Starz/ Encore and Liberty Broadband. Paramount-LionsGate is a perfect fit. Both companies know reach other well. Lionsgate/Paramount would be a killer combination of studio and library, (which would also benefit from a shift to lower Canadian tax rates, while STARZ/Encore would add the MTV Networks, Nickelodeon,  Comedy Central and ePix. 

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