Viacom "Circus" Dates Back to "Lunacy" of CBS Separation, Analyst Says

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Michael Nathanson says investors are “clearly hoping” for management change and renews his call for bringing Viacom and CBS Corp. together again.

Viacom's stock traded slightly lower Tuesday morning after a marginal gain at the start of the trading session as Wall Street analyzed latest developments in a power struggle and analysts said investors have been bidding up the stock amid hope for management changes.

“Given the market's reaction to the battle at Viacom, investors are clearly hoping for a change in Viacom leadership," MoffettNathanson analyst Michael Nathanson said in a Tuesday report based on stock moves in recent days. "After a decade of underperformance, that makes sense."

Nathanson also argued that Viacom’s recent business challenges and "circus" go back to the split of Viacom and CBS Corp. and renewed his call for a recombination of the two companies. “Maybe [Sumner Redstone] realizes the lunacy of his asset separation and wants to make things right by recombining these assets," he wrote.

As of 9:50 a.m. ET, Viacom's stock was trading down 1.2 percent at $43.71 a day after Viacom board members had sent a letter vowing to fight any attempts by controlling shareholder Redstone and his daughter Shari to oust them.

On Monday, stock markets were closed for Memorial Day. Over the past year, Viacom shares have traded between $30.11 and $69.17. The stock has lost more than 30 percent of its value over that period, but has moved higher in recent days amid a power struggle between Viacom's board and controlling shareholder Redstone and Shari.

"In terms of the stock's reaction, investors seem to favor a managerial change at all costs, even if the process by which it might occur merely serves to highlight the underlying problem of dual-class shareholding structures," Pivotal Research Group analyst Brian Wieser said, echoing Nathanson's notion. Redstone controls the company via Class A voting stock.

Meanwhile, Wunderlich Securities analyst Matthew Harrigan said Tuesday that Viacom shares are still undervalued. "Even after last week's rally, we estimate that Viacom stock discounts 4 percent advertising declines to fiscal year 2022," he wrote in a report.

The comments came as trading opened after Memorial Day amid expectations of possible new salvos in the showdown between Viacom's board and the Redstones.

Viacom board members Monday had sent a letter vowing to fight any attempts by controlling shareholder Redstone to oust them from their positions in the latest salvo in the showdown over the media giant that owns such properties as MTV, Nickelodeon and Paramount Pictures.

Frederic Salerno, lead independent director of Viacom, and his fellow board members on Monday argued that Redstone does not appear to be acting on his own "free will" and could be under the influence of Shari. The letter argued that Redstone has always made it known that he did not want his daughter in control of the company.

"We know that none of us is 'entitled' to his or her board seat," Salerno said in the letter. "But we were elected, until our terms expire or we are properly removed, to look after the interests of all the stockholders of Viacom. That is what Delaware law requires — and that is what Sumner Redstone has always expected."

Salerno also portrayed the 11-member board as defenders of mom-and-pop shareholders and held steadfast to their decision to sell a minority stake in Paramount, despite reports that Redstone is opposed to such a deal.

Co-signers of the letter included board members Deborah Norville, Charles Phillips, William Schwartz, Blythe McGarvie and Cristiana Falcone Sorrell.

There has been heavy speculation in Hollywood and on Wall Street that the Redstones would try to oust the board members and then dump chairman and CEO Philippe Dauman. Shari and Dauman have often been at odds in recent years.

Harrigan in hisTuesday report signaled that a board removal may not happen immediately. "National Amusements' 80 percent voting position in 'buy'-rated Viacom...implies that this is a plausible maneuver if Redstone is found competent," he argued. "The addition of high-profile Los Angeles securities lawyer Michael Tu also suggests a plausible effort to remove the board, including CEO Philippe Dauman."

Meanwhile, big Viacom investor Mario Gabelli, who also has been outspoken regarding the corporate soap opera at Viacom, has called for a special shareholders meeting to discuss the latest twists of the corporate and family drama that escalated in recent weeks in a flurry of legal action between Dauman and Redstone. Dauman and another longtime Redstone ally were ousted from the mogul’s trust, which will control Viacom and CBS once the mogul dies or is deemed incapacitated, and the board of National Amusements, through which he controls the companies.

Some say that ouster wasn't the real beginning of the recent drama at Viacom though. “In our view, the circus at Viacom was put into motion more than 10 years ago by the ill-fated move to separate CBS and Viacom,” Nathanson argued in his report Tuesday. “The idea that the market was mistakenly valuing the old Viacom asset made zero sense to us at the time.”

The analyst recently downgraded his rating on Viacom shares to “neutral” after many years of a “buy.” Nathanson explained that with such catalysts as a carriage deal renewal with Dish and some recovery in ratings having played out, the stock was “devoid of positive surprises." 

He also renewed his call for a recombination of Viacom and CBS. “When we made this call a year ago, CBS was strongly opposed to a recombination,” Nathanson wrote. “Their argument is clear: consumers want smaller bundles and adding Viacom's long-tail cable networks strongly works against that logic.” He concluded: “Nothing will be solved until the pieces are put back together again. We just aren’t sure how or when that happens.”

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