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Two Viacoms will be better than one

The owner of such great brands as CBS, MTV, Infinity Broadcasting and Nickelodeon, Viacom announced that it would split itself into two parts early next year via a tax-free spinoff. Each segment was oriented toward distinct investor types, with all the slow-growing broadcast television, radio and publishing assets going into one new company, called CBS Corp., and all the fast-growing cable networks and film-studio assets going into a “new” Viacom entity. The former will get two-thirds of its revenue and about half of its earnings from TV, with the rest equally split between billboards and radio. The latter will get about 75% of its revenue and 90% of its earnings from cable, and the rest from films, according to estimates from analyst Jeffrey Logsdon of Harris Nesbitt.

Although each will continue to be chaired by billionaire entrepreneur Sumner Redstone, there is little doubt that this will lead to a higher valuation for each new public company, as investment managers who specialize in each group will find it much easier to assess their individual prospects. In its press release, the company said the split would allow it to become “more nimble and focused” -- a clear repudiation of Redstone's prior strategy -- and would use their already prodigious cash flow both for “significant” share repurchases and acquisitions.

Broadcast television and radio both generate a ton of cash flow via advertising revenue, and they don't require a lot of capital expenditures except for content. Advertising has certainly been lackluster of late, and high-quality programming is growing more expensive. But Viacom has already proven in the past that it has the ability to compete strongly and smartly for each.

The group will be headed by veteran CBS executive Les Moonves. The company's Paramount TV production business will remain with CBS, giving it the ability to reduce costs of programming by developing in-house shows.

How should the parts be valued? That's much more voodoo than science, but Logsdon proposes that if you place a price-to-earnings multiple of 14 to 20 on the new Viacom entity and a 9 to 13 multiple on CBS, you can foresee a blended multiple of 12 to 16. Apply that against expected enterprise value minus debt, and you get a potential new valuation of around $43 to $60 a share, or 28% to 80% more than the current price around $33.50.

The bottom line is that Viacom hasn't done its shareholders any favors in the past five years by pushing a bunch of great media operations under one roof. It also hasn't gotten much of a break, either, as poor advertising, lackluster films and poor decision-making at CBS News have all hurt results. And it badly suffers from a lack of recurring revenue, as it must eat what its advertising sales people kill each quarter. But the company appears to have a good plan to restructure intelligently, and should be at least modestly rewarded for the effort.

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