Viacom Putting Crown Jewel on Sale Signals Big Media Dilemma

Hollywood Studios' Sales May Fall Below Record $10.6 Billion Without Strong Holiday Season

An entrance to Paramount Pictures in Los Angeles.

Photographer: Jonathan Alcorn/Bloomberg
  • High valuation for Paramount unit could trigger other deals
  • DreamWorks Animation expresses interest in entire film studio

After buying the parent of Paramount Pictures in an epic $10 billion takeover battle in 1994, Sumner Redstone said he wanted to own that business “forever.”

Last week, his successor as chairman of Viacom Inc., Chief Executive Officer Philippe Dauman, said he’s looking to sell a slice of the storied studio, a crown jewel of the movie industry that produced “The Godfather” and “Raiders of the Lost Ark.”

The move shows how far Viacom has fallen. Both of its businesses, TV and movies, are in turnaround mode, and Redstone, the company’s 92-year-old controlling shareholder, is in frail health and facing questions about his mental competence. 

Those problems have been exacerbated by the same pressures the whole media industry is experiencing. Viacom’s main business -- cable TV networks -- has withered in a changing climate marked by shrinking ad sales, viewer losses and potent online rivals like Netflix Inc. Other media companies are also vulnerable to those changes and may have to consider their own drastic measures in the coming months.

“What does Viacom need? They need some money,” said Mario Gabelli, whose Gamco Investors Inc. is the second-largest holder of Viacom’s voting shares behind billionaire Redstone. “Philippe has to do something.”

DreamWorks Animation SKG Inc. expressed interest in Paramount Tuesday at a Morgan Stanley investor conference in San Francisco, with CEO Jeffrey Katzenberg saying a combination of the companies would be valuable.

The independent animation studio is only interested in a full merger and not just a stake in Paramount, Katzenberg said. A Viacom spokesman wasn’t immediately available to comment.

Just a couple years ago, media shares were surging as the industry appeared to have successfully navigated the transition to digital distribution while protecting its lucrative pay-TV revenue. Walt Disney Co. upended that view in August with the revelation that even must-have cable channels like ESPN are losing subscribers. That led to a 15 percent drop in the Standard & Poor’s 500 Media Index, which includes Disney, Comcast Corp. and Viacom.

TV-Centric

Viacom, with 78 percent of its revenue coming from cable networks like Nickelodeon and MTV, has fallen hardest. Its Class B shares are down 34 percent since August.

“The content stocks have been slaughtered, particularly Viacom, which is the poster boy of a bad media stock,” said Barton Crockett, an analyst at FBR Capital Markets. 

Gabelli, a longtime media investor, said others in the business, including AMC Networks Inc., Sony Corp. and Lions Gate Entertainment Corp., may be forced to find partners to navigate these choppy waters. Some are predicting a shakeup where smaller players are forced to sell out, and larger players turn to technology companies or foreign investors as a source of cash or strategic help.

Cross-Ownership

Starz, the premium cable network controlled by cable billionaire John Malone, has been seeking a tie-up with another media company since 2014. A year ago, Malone swapped some of his Starz shares for a stake in Lions Gate, the independent film and TV studio. Lions Gate, with a 14.5 percent voting stake in Starz, said in February it plans to resume talks on a merger. Some analysts also say the studio would fit with Paramount.

“Consolidation is going to happen,” Starz CEO Chris Albrecht said at a Morgan Stanley conference Tuesday in San Francisco. Albrecht added that he didn’t feel pressure to merge even though Starz shares are down more than 40 percent since July of last year. Malone is a long-term investor, he said.

In addition to Starz, two of Malone’s companies, Discovery Communications Inc. and Liberty Global Plc, have shareholdings in Lions Gate as well. As part of that arrangement, the studio will create scripted shows for Discovery, which has focused in the past on unscripted fare for its namesake channel and networks including Animal Planet.

Viacom isn’t the only big media company facing pressure. Time Warner Inc., which fought off a hostile takeover from 21st Century Fox Inc. two years ago, should consider spinning off its HBO premium channel, according to longtime media analyst Porter Bibb of Mediatech Capital Partners. HBO has a programming archive that’s a “treasure trove” and could trade at a higher value as a separate company, Bibb said.

Size Matters

Chief Executive Officer Jeff Bewkes said on a recent earnings call “the combined scale of our businesses is critical” to taking advantage of the growing demand for video programming. In addition, some of Time Warner’s debt is guaranteed by HBO, complicating a potential spinoff. Keith Cocozza, a Time Warner spokesman, declined to comment.

Some of Viacom’s troubles are self-inflicted. Over the past five years, the company has spent $15 billion buying back shares, more than its profit over that span, while long-term debt has risen two-thirds to $12.3 billion. Film releases at Paramount dwindled to nine in 2013 before recovering, and the company was last among the majors in domestic box-office sales in 2015 after leading four years earlier. Last month, Viacom reported fiscal first-quarter sales slid 6 percent, as ad sales continued to slump. Net income was down 10 percent.

Viacom is also undergoing a leadership transition. Longtime controlling shareholder Redstone is 92 and in failing health. He stepped down as chairman last month, with CEO Dauman taking the job in a board vote contested by Redstone’s daughter Shari. The elder Redstone, who also controls CBS Corp., is also heading to trial over an ex-girlfriend’s claims that he’s mentally incompetent, a case that could affect who oversees his empire.

Dauman has said Viacom is headed in the right direction, investing in new TV shows and movies, audience tracking tools for advertisers and international channels. At a Jefferies Group LLC conference last week, he said the decision to sell part of Paramount has given him a window on the studio’s international and digital growth opportunities.

“I’ve gotten a glimpse of what some of that can be based on discussions that I’ve had,” he said. “And we would like to be able to pursue some of those discussions to bring not just financial benefit but strategic benefit to help drive the growth of Paramount as we go forward, and of course it will have a benefit for Viacom as a whole.”

Selling a piece of Paramount to a Chinese company or a major tech company “could be really eye-opening,” said Crockett, the analyst.

Depending on valuation, a sale could benefit Viacom shares and those of other studios thought of as potential take-out targets, like DreamWorks Animation SKG Inc. and Lions Gate, he said. A sale could also push Viacom to sell stakes in other parts of its business. The company’s international cable networks are solid.

“If you get a smart strategic buyer of a big stake in a studio then you could get people thinking more about consolidation,” Crockett said.

The pace of consolidation is likely to be slow because many companies have ownership structures that major shareholders are reluctant to change, Greg Maffei, CEO of Malone’s Liberty Media Corp., said Tuesday.

“That’s a real impediment,” Maffei said at the Morgan Stanley conference. “But I do think there’s a lot of value to be created through that kind of consolidation.”

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