Viacom's Big U.K. Bet: CEO Philippe Dauman Discusses Channel 5 Deal
He addresses content and growth plans and explains why the company is shelling out $760 million for its biggest deal since the CBS Corp. split.
LONDON – Viacom on Thursday said it has agreed to acquire U.K. broadcaster Channel 5 for $760 million, adding a free-to-air presence in Britain where it already has about 20 programming services.
It won an auction that Discovery Communications had dropped out of after a $585 million offer and marks the company's biggest acquisition since Viacom and CBS Corp. split in early 2006.
Using cash on hand, Viacom said the deal would be accretive to operating earnings in its first year and will strengthen its international business and allow for cross-promotion and other benefits.
"Viacom generated 16 percent of its revenue from Europe in 2013, so this acquisition in one of the strongest markets in Europe will help diversify the company's exposure," ISI Media analyst Vijay Jayant said.
Channel 5 has improved its ratings with the local version of Big Brother, U.S. hits such as the CSI franchise and The Mentalist and a popular kids programming block.
Viacom CEO Philippe Dauman in an interview with The Hollywood Reporter explained the importance of increased original programming for boosting Channel 5's ratings further and how the U.K. broadcaster may end up airing shows that could find its way to the U.S.
THR: Why this deal for Channel 5 and why now?
Dauman: Opportunities like this don't come along very often. Channel 5 has been on a good trajectory, and I think we can take it from here to a whole other level.
THR: This is Viacom's biggest since the CBS split. Why is this the right big deal?
Dauman: As I have said for many years, we don't see any big transaction, which in the Viacom context is a lot bigger than this. We have been looking for good opportunities, including in the international arena. Opportunities in the international arena that are attractive don't come along very often. In the last several years, we haven't seen anything like this that has a lot of positive characteristics. Channel 5 is in a good market, the U.K., it's a good stable market where we have done deals, see opportunities to grow and we have substantially increased our investment in programming over the years.
This gives us another opportunity to invest in more programming, especially original programming on the Channel 5 group of networks that can then also be used on our paid networks in the U.K. and exported to our networks outside of the U.K., including Continental Europe and the U.S. given that U.K. programming and formats work well in the U.S. and other parts of the world.
Being part of a global entity like us provides a lot of opportunities. The cross-marketing opportunities are great - just look at the kids programming area where we also have the Nickelodeon brand in the U.K. Channel 5 has the Milkshake! programming block, which has some Nickelodeon programming. But the opportunities just in this area to enhance the programming, cross-promote and drive consumer product plans, that alone is an exciting prospect.
Also, financially, we were able to get it at a good valuation that is immediately accretive. Plus, we are funding it with non-U.S. cash that has been sitting abroad not earning very much money. This is an opportunity to put money that is sitting off the U.S. shores unproductively to productive use in a way that is very strategic.
THR: Do you know yet how much more Viacom will invest in original content at Channel 5?
Dauman: Our approach is consistent with the approach we have in the U.S. and around the world. And that is we have been increasing our monetary investment in programming to now over $3 billion at a mid to high single percentage rate and as we do that, we focus more and more on original programming versus acquired programming. You can see that same approach and attitude applied to the U.K. market.
We have a greater ability to use content that we develop across platforms. We have also been making technological investments into apps, which are not possible for single-country entity like Channel 5 to make. We will bring our technology assets, expertise and know how to enrich the consumer experience, which we think will reinforce viewership even for the existing programming and continue the trajectory that Channel 5 has also been following of increasing original programming across its platforms.
THR: The deal will give you a presence in broadcasting again, which Viacom hasn't had since the CBS split. Why and will that require any new approaches or thinking?
Dauman: We are already in the free-to-air business in some countries where that is an opportunistic, smart form of distribution, such as Spain and Germany. We have gotten more and more into scripted programming across our portfolio and broad reality programming. And Paramount is getting into the TV production business. There is a confluence of things that give us the creative and programming firepower to bring to bear what was probably not available to us several years ago. It is a good moment in time for our programming strategy to add this channel to our portfolio. And we already have a very strong position across our 20-odd pay networks in the U.K. where we have also embarked on original production.
If you look at Comedy Central, which is very different in the U.K. from what you see in the U.S., we have been developing original scripted U.K. programming. This is the right time, the right opportunity. We think we can marry our capabilities with the existing capabilities. There are some very good executives and people on the Channel 5 team.
This marks our commitment to the U.K. as a growth market and will create a lot of opportunities on both sides of the house once we get through the regulatory process.
THR: Are there major plans for layoffs or other cost cuts?
Dauman: This acquisition is really focused on growth in revenue and profits. We didn't look at this and say it's a cost cutting opportunity. We don't seek a priori any efficiencies. Our focus has been on how we can grow the revenue.
THR: What does Viacom have to keep in mind in terms of Channel 5's public broadcasting requirements?
Dauman: We are very well aware of the regulatory environment in the U.K. We have been a corporate citizen of the U.K. for going on three decades. We know the people there, the regulators and we are fully committed to meeting and exceeding and enhancing all the requirements of a public sector broadcaster. We are committed to owning this asset forever, and we will own all of it. I think we will be great stewards of this public franchise.
THR: You mentioned that the U.K. has been doing well in general for TV networks and Viacom in particular. Why?
Dauman: Every country in the world has issues, but the U.K. economy has in relative terms held up quite well generally. For us specifically, we have our finger on the pulse of our audiences. We especially have the finger on the pulse of young audiences. With Channel 5 we want to appeal to all demographics, going from little kids to every generation upwards from there. We are a company that culturally and institutionally is 100 percent focused on content, consumer experiences and living in a new world where people want to consume content on different devices and have a social media conversation on the content experience. They want fresh content and live experiences. This is all in our wheelhouse. If we do all that well, which is our focus, we should continue to grow market share.
THR: Programming-wise, any prediction on changes or new genres or types of shows that could come to Channel 5? Any early thoughts on content opportunities and whether you will continue acquire U.S. shows for Channel 5?
Dauman: We are a major programmer based in the U.S. and for our older skewing networks we ourselves in addition to developing original programming, we acquire shows and formats. Channel 5 has done a good job with Big Brother and others. We will be able to access an even broader portfolio. The programmers among us are very excited on both sides about developing a vigorous plan for the years to come. The work is just beginning. We will now have a much broader discussion about this.
THR: Any idea when the deal could close and whether you will leverage the ad sales services of BSkyB that you are already using in the U.K. at Channel 5?
Dauman: We are going to go through the regulatory process and hope it will go smoothly. We are hoping it will close within our fiscal year, which ends in September. We certainly see no reason why it wouldn't close this year.
As far as our plans for ad sales go, our intention is to continue with the Channel 5 sales house. It will be business as usual. We have for our pay networks an existing relationship with BSkyB that is broad and deep. They are our joint venture partners in Nickelodeon and have a minority stake in Comedy Central. As far as Channel 5 goes, we are going into this with the current intention of continuing the ad sales house as it currently exists.