Viacom Should Sell Paramount and BET, Take Core Business Private, Analyst Says

Viacom Illustration - H 2016
Illustration by Quickhoney

"There is no hope in the status quo," writes Sanford C. Bernstein's Todd Juenger, who has been bearish on the conglomerate and its stock. "The business is stuck in a perpetual negative cycle."

"There is no hope in the status quo for Viacom," so the company should sell Paramount Pictures, BET and its international networks and take its remaining U.S. networks business private rather than keep it listed on the stock market, one prominent Wall Street analyst said in a research report on Monday.

Sanford C. Bernstein analyst Todd Juenger, who has been bearish on the stock and has been rating it at "underperform," entitled the report "What Would We Do If We Were In Charge?"

"We take our estimates and target price down (to $30), again," he wrote. "We believe the business is stuck in a perpetual negative cycle. Flattish revenue, rising costs, de-levering, eventual loss of distribution."

His proposed solution: "Sell the assets that are sale-able, and take the residual businesses private (including flagships Nick, MTV, Comedy Central)." He argued that the sale-able businesses are ones with value but little cash flow.

He valued Paramount at $4 billion, BET at $2.95 billion, British broadcaster Channel 5 at $419 million and other international networks at $1 billion, leading him to an estimated total price tag for these assets, with combined annual earnings before interest, taxes, depreciation and amortization of around $660 million, of nearly $8.5 billion.

Amid a declining stock price and lagging financials, Viacom and its chairman and CEO Philippe Dauman have faced investor worries and criticism. Some on Wall Street have been calling for the sale of assets to raise cash, especially Paramount, which has long been a key part of the entertainment conglomerate created by 92-year-old mogul and Viacom chairman emeritus Sumner Redstone, whose health has been the topic of much debate.

Bloomberg data shows a one-year negative return of 47 percent on Viacom's stock, with the company closing Friday's trading session with a market value of $14.16 billion.

Analysts have put the value of Paramount at up to $5.5 billion, mentioning Alibaba, Wanda and other cash-rich Asian companies as possible buyers. Dauman, however, has emphasized that his team has been focusing on boosting the financial performance of Paramount by expanding its slate and its TV production work, among other things.

Juenger explained his $4 billion price tag for Paramount by saying: "On the merits of its own operating cash flow, if we give the studio credit for $300 million operating income and valued that at about 10x, plus a 33 percent takeover premium, that gets to $4 billion."

But he emphasized that the studio hasn't earned that much since fiscal year 2012. "Using comparisons, we think it's worth pointing out both Marvel and Lucasfilm recently traded, and they were both acquired by Disney for approximately $4.2 billion. In what universe is Paramount worth significantly more than Marvel or Lucasfilm? We realize Paramount has 100 years of library (and Marvel/Lucasfilm do not), but for practical (financial) purposes, the first 80 years of that don't really matter."

Juenger wrote that his proposed asset sales would leave Viacom's remaining core U.S. networks, with EBITDA of around $3.33 billion and an estimated enterprise value of $18.52 billion, to be taken private. "We don't believe the public markets will be an effective vehicle to harvest the legacy cash flows of the network's businesses," Juenger argued. In case of the company taking its core networks private, "the private equity holders could then harvest the cash flow run-off directly, while also taking the necessary radical re-organization steps outside of public scrutiny to try and craft a surviving entity."

But he cautioned: "The bad news, however, is when we lay out our itemized list of sale-able assets and estimated liquidation values, we believe the private equity value of the remaining assets (about $12 billion) is well below the public market enterprise value. After the creditors [are] paid off, the equity value could be as little as half of the current public market cap."

Added the analyst: "The even worse news is, this entire reorganization exercise is purely theoretical. There seems almost no chance that the board or management is going to divert from the status quo. Which leaves us with our financial forecast, a dismal cycle of perpetual declines leading to ever-decreased equity value."