Viacom Split No Wall Street Thrill

Oct 10, 2005  •  Post A Comment

If Sumner Redstone wanted the proposed breakup of his media empire Viacom to generate cheers from Wall Street, he must be feeling disappointed.

Since it was announced last March that Viacom was to be split into two separately traded companies, one with the cable assets and the other with the broadcasting assets, shares in Viacom have fallen-down 9 percent as of last Thursday, even as Mr. Redstone, Viacom’s chairman, and his lieutenants, co-Chief Operating Officers Tom Freston and Leslie Moonves, travel around the country making the case for the split.

The lack of investor enthusiasm was highlighted last Wednesday after the company submitted its spinoff plan to the Securities and Exchange Commission. Even with a 315-page document that detailed just how Viacom plans to break itself into two public companies, Wall Street seemed unimpressed, sending Viacom’s widely traded Class B shares down 38 cents, a decline that outpaced the broader market’s decline.

“After months of anticipation, the filing of Viacom’s S-4 proved to be a nonevent, both in terms of the information provided and the impact on the stock,” said Merrill Lynch analyst Jessica Reif Cohen. The S-4 is the form Viacom used to provide details of the proposed breakup.

Under the terms described in the SEC document, each share of the current company will be exchanged for a half-share of stock in the new Viacom and a half-share of CBS Corp.

The new Viacom will consist mainly of the assets of MTV Networks and Paramount Pictures, while CBS will comprise the broadcast network, television production operations, Infinity Radio and all publishing assets. The new Viacom will trade on the New York Stock Exchange under the symbols VIA and VIAB, while CBS will trade as CBS and CBSA.

Following the split the current Viacom co-presidents, Mr. Freston and Mr. Moonves, will head the new Viacom and CBS, respectively, as CEOs, with Mr. Redstone retaining the title of chairman at both companies. More than half of each company’s board will be made up of independent directors, according to the filing.

Four current Viacom board members will retain board seats at the new companies. They are Mr. Redstone; his daughter Shari Redstone, who will serve as vice chairman at both companies; Philippe Dauman, a director at National Amusements; and former Verizon Communications Chief Financial Officer Frederic Salerno.

The filing did not give a date by which Viacom officials expect the split to be completed. Most Viacom executives have said the breakup will take place sometime in the first half of 2006.

The motivation behind the split is to help jump-start Viacom’s stock price, which has tumbled more than 26 percent since January 2002. Viacom officials have blamed the stock performance on confusion among investors about what kind of company Viacom is-a growth company or a value company.

After the split, Viacom officials have argued, investors who had difficulty classifying Viacom before will now be able to pick the stock that best suits them. The new Viacom will be a high-growth company, with the expectation being that it has a fast-growing stock that can be used for acquisitions. CBS, meanwhile, will be the so-called value company, generating significant cash flow that would be used for stock repurchases and dividends.

While some on Wall Street have lauded Viacom’s move toward clarity, some observers have asked whether Viacom will be able to re-energize its stock.

Some have questioned the motivation behind the split. Mr. Freston and Mr. Moonves were once rivals in a race to succeed Mr. Redstone, who is 82 and has agreed to step down in a little more than a year. Some have suggested privately that Mr. Redstone broke up Viacom to avoid having to choose a successor.

Observers have mused about whether it is a good for the cable and broadcast assets to break off ties ahead of the next negotiations for cable and satellite carriage agreements. Viacom officials have said their existing carriage agreements are long-term and by the time the next set of negotiations arrive, having cable and broadcast networks linked will no longer be a key factor in negotiations.