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Redstone Firmly Backs 2 Viacoms

Apr 25, 2005  •  Post A Comment

Viacom Chairman and CEO Sumner Redstone said last week he is “personally committed” to splitting his media empire into two companies and repeated his promise that Viacom would make a decision on a breakup sometime in the second quarter.

At the same time, Viacom co-Chief Operating Officer Leslie Moonves floated the idea of CBS charging cable and satellite operators a fee for carrying the CBS broadcast signal.

The comments by both come as Viacom officials continue to wrestle with the decision of whether to split Viacom into two separately traded companies.

The media giant several weeks ago confirmed Wall Street speculation that it is considering a breakup, with MTV Networks and Paramount Pictures combining to create a growth company while CBS, UPN and Infinity Radio join forces to create a company that generates large amounts of cash flow. The company said it would make a decision in the second quarter, with any transaction to be completed by the first quarter of 2006.

“I want all of you to know that I am personally committed to achieving this separation,” Mr. Redstone said during a conference call last Tuesday to discuss the company’s first-quarter financials. “From our perspective, in order to maintain our leadership position … and fully exploit all of the opportunities we see, we envision two companies.”

Analysts have generally praised the idea because it allows investors to buy into the assets that best fit their investment profile. As things stand now, Viacom has left many investors confused about the type of company it is-either a growth business or an entity more focused on rewarding shareholders with dividends. That’s because Viacom presently qualifies as both.

For years, MTV Networks has been on a growth tear, racking up big dollars in advertising revenue and affiliate fees. By comparison, CBS and Infinity are more mundane: While both perform well, neither unit has a bright future in terms of growth; their strengths are in generating huge amounts of cash.

“The split should force the market to value the components higher,” said Douglas Shapiro, a media analyst at Banc of America Securities, in a research note. “As the only cable programming pure-play and the most underleveraged studio, [the company made up of MTV and Paramount] should trade substantially higher than” Viacom’s widely traded Class B shares. The CBS-Infinity entity should trade at levels comparable to where Viacom shares are at today, if not higher, Mr. Shapiro said.

Meanwhile, Mr. Moonves said there is a “real possibility” that CBS could charge cable and satellite companies a fee to carry CBS signals should there no longer be a link between the broadcast network and MTV as a result of a split.

“As we look forward to the CBS side on its own, we think there is a real possibility CBS will be able to generate cash for our retrans,” Mr. Moonves said, adding that post-split his company would be a cash-generating operation with “the potential … now open to get cash for retrans.”

The subject of retransmission consent is turning out to be one of great interest to a number of analysts and observers, who argue that by splitting up the company, MTV loses a powerful piece of leverage when negotiating carriage deals with cable and satellite operators.

Co-COO Tom Freston, who runs MTV and Paramount, noted that with most of MTV’s carriage deals locked up through the end of the decade, “That game [retransmission consent] is largely over.” He predicts that when it comes time to renew, cable operators will be more interested in negotiating for video-on-demand and broadband services from content providers.

Last Tuesday, Viacom reported an 18 percent decline in first-quarter profit to $585 million, compared with a year-earlier profit of $710.5 million, while revenue advanced 5 percent to $5.6 billion.

The revenue growth was driven largely by a 19 percent revenue jump at the company’s cable networks to $1.7 billion. The increase was largely the result of a 27 percent surge in advertising dollars, a 9 percent rise in affiliate fees and a 10 percent increase in ancillary revenues.

Meanwhile, Viacom’s television operation reported a 5 percent decline in revenue to $2.1 billion due to the absence of the Super Bowl in the 2005 quarter and lower political advertising and television licensing revenues.