Viacom Surges After Buyback Program Boosted to $20 Billion

Viacom Inc., owner of cable networks MTV and Nickelodeon, surged in trading after the company doubled its stock buyback program to $20 billion -- more than half its market value -- and posted higher-than-estimated sales.

The shares gained 6.5 percent to $79.17 at the close in New York, the biggest one-day gain in almost two years. The bonds fell, meanwhile, as ratings companies downgraded its debt.

In addition to the repurchases, a 6 percent gain in fiscal third-quarter ad sales was “a positive surprise,” according to Todd Juenger, an analyst at Sanford C. Bernstein & Co. Licensing fees paid by cable and satellite systems also rose, increasing 28 percent in the period. Viacom expects the fees to rise in the high “single-digit” percentages in the September quarter, with advertising revenue climbing 6 percent or higher.

The New York-based company, which relies on its television business for more than 90 percent of annual operating income, is benefiting from steady gains in affiliate fees from pay-TV systems that carry Viacom’s networks. And while younger viewers are watching MTV and Nickelodeon less, advertisers have few alternatives to reach those age groups, according to Juenger.

“We expect the market will be happy,” Juenger said in a research note today. The New York-based analyst has the equivalent of a hold rating on the shares.

The shares have climbed 50 percent this year, reaching a record high.

Buyback Pace

Viacom, controlled by billionaire Sumner Redstone, said it will continue its current pace of share repurchases -- except for the next few months, when it will acquire an additional $2 billion in shares. The company’s market value as of today’s close is $38.4 billion.

The company had an average of 491.9 million diluted shares outstanding in the third quarter, down 7.3 percent from a year earlier. Reducing the number of shares in circulation helps increase the value of the stock investors own.

Still, the move led Moody’s Investors Service to downgrade the company’s long-term debt rating to Baa2, the second-lowest investment grade, from Baa1. The ratings service expressed concern that the buyback would increase debt.

“The company’s decision to accelerate share repurchases is a result of slowing revenue growth in recent years, and appears to be a one-time effort to smooth over the anemic growth by returning more capital to win the favor of shareholders,” the ratings service said today in a statement.

Credit-Default Swaps

Credit-default swaps on Viacom, which typically rise as investor confidence deteriorates and fall as it improves, climbed 11.4 basis points to 66.6 basis points at 4:04 p.m. in New York, according to Bloomberg prices. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The company’s $1.45 billion of 4.375 percent bonds due 2043 dropped 4 cents to 82.5 cents on the dollar to yield 5.58 percent at 3:42 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry

Excluding some items, earnings were $1.29 a share, missing the $1.30 analysts predicted on average, according to data compiled by Bloomberg.

Net income increased 20 percent to $643 million, or $1.31 a share, from $534 million, or $1.01, a year earlier. Sales rose 14 percent to $3.69 billion. Analysts had estimated $3.57 billion on average.

The company’s cable networks had “very good growth” in prime-time ratings, Chief Executive Officer Philippe Dauman said on a conference call following the earnings report. “It really helps us drive advertising sales as the value of ratings in those time periods is critical for us.”

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