Viacom Analysts Take Different Views on Impact of Dish Carriage Showdown

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Viacom and Dish are engaged in a carriage showdown

One Wall Street observer warns about "massive cost cuts" and a dividend suspension in the case of a blackout, while another one says the stock "will mainly benefit from getting the renewal talk over with."

Wall Street analysts on Wednesday spoke out about the carriage showdown between Viacom and Dish Network after the entertainment company had warned of a blackout of its channels, including Comedy Central, MTV, Nickelodeon and BET.

The threat of Viacom losing access to Dish's nearly 13.9 million subscribers sent its stock 8.3 percent lower on Tuesday, while Dish shares rose 1.8 percent in a sign that Wall Street was more worried about the fallout for Viacom.

Analysts differed in their concern about the fallout for Viacom and its stock.

In the case Dish customers lost the company’s channels, “Viacom would be forced to make (another round) of massive cost cuts, including double-digit [percentages] in sales, general and administrative [expenses] and high single digits in content (continued at low single digits into out-years),” wrote Sanford C. Bernstein analyst Todd Juenger, who has an “underperform” rating and $30 target price on Viacom shares, in his latest bearish report on the company on Wednesday.

He also suggested: “Despite those cuts, earnings before interest, taxes, depreciation and amortization (EBITDA) would still decline,” and Viacom “would have to suspend the dividend to pay down debt.” We believe Dish has done this same math, and will use this leverage to their strong advantage. It is much easier for us to believe Dish would be OK without Viacom (as long as they don't lose 15% more subs), but Viacom would not be OK without Dish.

FBR analyst Barton Crockett, who has an “outperform” rating and $51 target price on the stock, took a more bullish view on the effects of the showdown on Viacom. “The day of reckoning with Dish Network is upon us, with Viacom making public statements that its deal with Dish Network expires on Wednesday,” he said in a report. “The bear consensus is that this has to be negative for Viacom. However, we argue that, with Viacom shares down 48 percent [over the past year], the worst (a 20 percent loss of EBITDA) is already discounted and that Viacom's stock will mainly benefit from getting the renewal talk over with, however it turns out.”

He also argued: “Blackouts followed by renewals are standard operating procedure for Dish, and we expect that here. But if Dish drops Viacom permanently, that could spur more pressure to sell/split up Viacom once control passes from Sumner Redstone to his family trust.”

Discussing the risk of lower carriage fees for Viacom, Crockett said: “Even if Dish got 10 percent lower rates, and all other Viacom distributors got a 10 percent haircut, that would only be a $420 million revenue loss.”

Would that lead others to also drop Viacom? “We doubt it,” the analyst argued. “Dish's rivals, by keeping Viacom, would have popular content that Dish lacks, and they could use that to poach Dish subs.”

Meanwhile, Jefferies analyst John Janedis, who has a “buy” rating and a $49 price target on Viacom’s stock, wrote in a report: “We believe that an agreement will ultimately be reached. However, in the interim, we estimate that a blackout could have a $25 million-$30 million per-month impact on affiliate revenue, in addition to being a near-term overhang for the stock” of Viacom.

He argued that a blackout would not be “a game-changer,” but also wrote: “Resumption of carriage is important for Viacom as affiliate revenue in fiscal year 2016 is already negatively impacted by rate adjustments related to AT&T DirecTV, and headlines around droppability related to Dish have been in the headlines for 18 months. Meanwhile, satellite packages are expected to continue losing share to cable.”

Concluded Janedis about Viacom: “We believe that management is taking a hard line in an attempt to mobilize negotiations. It is unlikely that the negotiations have been hung up solely on price, but rather the inclusion of other components — such as data, Sling TV and TV Everywhere.”

Dish reported its first-quarter results Wednesday morning and the Viacom showdown is expected to be a topic on the noon ET earnings conference call.