Can Viacom's Stock Rally Last?

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Sumner Redstone

Shares of the entertainment conglomerate rallied as Sumner Redstone ostensibly fired more than half the directors, setting up (another) protracted legal battle.

The battle for control of Viacom is playing itself out in court, but Wall Street is placing bets that Sumner Redstone will emerge in control of the media conglomerate behind MTV, Nickelodeon and Paramount Pictures.

Investors continued to pour cash into the media giant’s stock ahead of the market’s open on Friday, building on a 7 percent surge the day before. The amount of shares being bought and sold on the New York Stock Exchange has doubled versus an average trading day.

The big jump: Analysts believe change is happening. In what might boil down to the biggest corporate coup in history, the 93-year-old mogul ordered the bulk of Viacom’s board sacked and appears days away from firing former protege Philippe Dauman from the chief executive post.

"Is this drama coming to an end?" says Marci Ryvicker, an analyst at Wells Fargo Securities.

Sumner Redstone’s trust, National Amusements, which controls 80 percent of Viacom’s shares, voted to replace the majority of Viacom’s board. Ousted lead independent director Fred Salerno has vowed to sue to overturn the action, claiming Shari Redstone is influencing her father, who Salerno claims is mentally incapacitated.

Both sides have filed lawsuits, but nothing has been scheduled. The biggest legal skirmish will be about the new vs. old board members.

National Amusements voted in new directors to replace the old ones at Viacom, and most observers figure that when the new board is allowed to officially meet — probably not for several days — its first order of business might be to replace Dauman with a new CEO.

"We don't know how long it will take to get new (and good) leadership to make a material difference," Ryvicker on Thursday told her clients in a research note.

The analyst added that better ratings at the TV channels, like MTV, Nickelodeon and Comedy Central, won't come overnight, nor will better results at Paramount. The film studio, in fact, is partially in limbo, given that Dauman and his management team have been actively seeking an investor to take a big stake in it, though the Redstones and their allies have been against the plan.

"We think the next potential catalyst will be the announcement of a new CEO — followed by some sort of restructuring plan," said Ryvicker.

Richard Greenfield of BTIG cheered the removal of the board members by slapping a "buy" rating and $55 price target on Viacom stock, shares of which closed $2.85 higher to $45.05. The move, while nice for existing shareholders — including thousands of Viacom employees — is of little solace, considering the shares remain about half as valuable as they were two years ago.

Greenfield on Thursday (and several times in recent days) called for Viacom to merge with CBS (also controlled by the Redstones through National Amusements) and hire CBS chief executive Leslie Moonves as CEO of the recombined company.

"As a recombination is set in motion, there is the potential for an outside bidder to look at Viacom," Greenfield said Thursday. "Viacom's current stock price does not adequately reflect the benefit from a new board, new management and the protection their distribution footprint would receive from a recombination with CBS."

Meanwhile, Matthew Harrigan of Wunderlich Securities predicts that the Redstones will prevail in any legal challenge to the ousting of Viacom board members. He says that COO Tom Dooley, a board member loyal to the Redstones, is a likely candidate for interim CEO at Viacom if Dauman is forced out.

Legal expert Stuart Slotnick of New York's Buchanan Ingersoll & Rooney also believes the Redstones have a strong case.

"Majority shareholders can remove individuals from the board of directors," said Slotnick, who has represented numerous high net-worth individuals, including casino magnate Steve Wynn, but is not involved in the Viacom case.

Salerno, Dauman and others have maintained that Shari Redstone is actually calling the shots through the manipulation of her ailing father.

Late Thursday, Salerno, with the support of the other independent ousted directors, filed a lawsuit "seeking an expedited determination that Shari Redstone's removal and replacement of Viacom directors is invalid."