CBS-Viacom Merger Analyst: "Wall Street Wants Brad Grey's Head"

Paramount Pictures Exterior - H - 2016
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"Wall Street wants Brad Grey's head for writing off $115 million on an unreleasable film," said Laura Martin of Needham & Co. "You can quote me on that. You can exclamation-point that. We're lost on why that person should keep his job."

National Amusements, which controls Viacom and CBS, officially called for the two conglomerates to merge, setting off speculation of what a reunited company might look like — and it may not bode well for some employees.

Some of Viacom's TV channels could be restructured or sold off and some are calling for leadership changes at the underperforming Paramount film studio, which recently took a $115 million write-down on a movie it hasn't even released.

"Wall Street wants Brad Grey's head for writing off $115 million on an un-releasable film," said Laura Martin of Needham & Co. "You can quote me on that. You can exclamation-point that. We're lost on why that person should keep his job."

Sources told The Hollywood Reporter that the movie in question is Monster Trucks, a kid's film that, after numerous delays, is now set for release Jan. 13.

Eric Jackson, managing director of SpringOwl Asset Management, which owns shares of Viacom, says the write-down is indeed a head-scratcher, but also said Grey can turn Paramount around, and its library and studio lot remain very valuable.

"Is Brad Grey the guy to lead (Paramount)?" asks Jackson. "He's obviously in charge and has to take responsibility for what's happened. However, we're not inside the company. We don't know if his hands were tied by (ousted CEO Philippe Dauman) or not. It's the responsibility of the new board to figure that out, if he should stay on. So far, they've displayed a willingness to do what's best for the business."

While talk of Viacom selling a stake in Paramount basically ended when Dauman left last month, Mario Gabelli, who owns more Viacom voting shares than anyone outside of Sumner Redstone's National Amusements, suggested that Paramount merge with Sony Pictures.

"I've been saying for a long time it makes sense, but nothing is happening," Gabelli told THR.

On the TV side, "shuttering or rebranding many of Viacom's channels makes sense," said Steve Birenberg of Northlake Capital Management. 

"In an era of skinny bundles at traditional and virtual MVPDs, the best positioned network companies are those where just a few channels produce the lion's share of revenue," said Birenberg.

But it's trickier than it seems, the analyst acknowledged, given that some small networks can turn handsome profits because of small overhead and lots of subscribers, even if the fee per sub is tiny. Nicktoons, with 65 million subscribers, banks $50 million in operating cash flow annually, for example, while Nick2 has 50 million subs and $20 million in cash flow.

"I don't see buyers for the channel space, so these are 'strand assets' with positive cash flows," Birenberg said. "Maybe declining cash flows if they lose subs and ratings. So what exactly is the play for CBS? I'm not sure."

Steven Cahall of RBC Capital Markets said Viacom could divest of more than 15 "non-core networks in order to focus on the key brands of Nickelodeon, Comedy Central, MTV, VH1, BET, Spike TV Land and CMT."

But with or without the smaller channels, a merged CBS-Viacom would have far more leverage to strike lucrative distribution deals than Viacom has had without CBS and its giant broadcast network, said Brett Harriss, a research analyst with Gabelli & Co.

"A merger will maximize the value of both companies," Harris said.

Some analysts told THR that a merged CBS-Viacom should sell its stake in EPIX, a premium network now owned by Paramount, MGM and Lionsgate.

CBS is also poised to be flush with cash as it completes a spinoff of its radio business, so even when Viacom and CBS are reunited to form a much larger conglomerate, it will have plenty of capacity for further acquisitions.

Analysts also presume about $500 million or more in annual savings due to corporate overhead, which foretells layoffs should the companies merge.

Jackson also says a combined Viacom-CBS would have the wherewithal to then acquire Time Warner, should CBS CEO Les Moonves choose to do so. "Scale begets more scale," Jackson says.

"CBS should want to buy Viacom," says Jackson. "It will give them more heft in negotiating future deals with various cable systems and satellites. Advertisers are starting to say they prefer to see NBCUniversal have more competition, like from a CBS-Viacom."