Viacom's Management Shake-Up: What's Next?

Redstone_Dauman_Split - Getty - H 2016
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Redstone_Dauman_Split - Getty - H 2016

Turning around ratings and ad momentum at key networks and boosting Paramount's financials are among the items on the to-do list, along with decisions on whether to sell a stake in the studio and recombine with CBS, as some suggest.

Now that Viacom chairman and CEO Philippe Dauman and controlling shareholder Sumner Redstone are finalizing a settlement of their feud before a trial forces them both to expose even more of their dirty laundry, the fire of the legal fight has been put out. But the next battle, the one to decide where Viacom will go from here, will come into immediate focus.

The company's board met Thursday night to approve a deal that would see Dauman leaving with a $72-million-plus golden parachute and COO Tom Dooley becoming interim CEO. Viacom's stock was up 2.3 percent at $43.82 as of 9:50 a.m. ET on Friday.

Theories and suggestions abound for what's next for Viacom. Wall Street and Hollywood alike have in particular been discussing whether CBS Corp., also controlled by Redstone, could possibly acquire Viacom or if the two companies could merge again, possibly reversing a split that took effect at the start of 2006.

Plus, there is the issue of whether Viacom could sell a minority stake in Paramount Pictures, whose profitability has been taking a hit amid a smaller number of releases and some flops.

Mario Gabelli, the billionaire investor who owns shares of both Viacom and CBS and is Viacom's second-largest shareholder behind Redstone, told The Hollywood Reporter that he’s not opposed to the idea of a recombination with CBS, and he'd support CBS Corp. chairman and CEO Les Moonves heading the combined company. In that case, Gabelli suggests an arrangement whereby National Amusements, which owns 80 percent of the voting shares of both companies, should strike a deal with Moonves that allows him to vote those shares for as long as he remains CEO of the remarried CBS-Viacom.

Activist shareholder Eric Jackson of SpringOwl Asset Management said if CBS were to acquire Viacom, it should pay at least a 20 percent premium, especially given Viacom shares have been down about 50 percent over the past two years. “You can’t just turn the keys over to Les Moonves — who is a great guy — for half price,” he said.

Redstone is 93 years old and very fragile, and daughter Shari Redstone is set to inherit (in some fashion) the 80 percent stake in the voting shares, and she opposes Dauman’s plan to sell a 49 percent stake in Paramount. Gabelli, though, is open to the idea.

“No one in the industry thinks Paramount will succeed by staying the course,” he said. “Clearly, it has a great library, it just needs to be kept fresh. You have to go over-the-top, like CBS has, then you have to re-energize the film studio. I’m assuming there’s someone they could hire who knows how to make movies like Warner Bros. and Disney know how to make them.”

Jackson is on board with Gabelli and adds that Dalian Wanda would make a great 49 percent partner in the studio, given it controls more movie theaters than any other entity in the world. “People don’t understand the sort of power Dalian Wanda has,” he said.

The rivals have been working to finalize a settlement deal because neither side wanted a court trial: Dauman would have to explain why he was insisting that Redstone was fine a year ago when a former girlfriend tried to prove otherwise, and Redstone wasn't eager to testify given that his speech is impaired and he isn’t nearly as sharp as he once was. “It’s sad that my clients, the shareholders, have been paying these legal bills,” Gabelli said Thursday as the two sides hammered out final issues. “I’m tired of this. They’ve been in courts in Los Angeles, in Boston, in Delaware. You can’t make this stuff up!”

With Dauman on his way out, Dooley is expected to serve as interim CEO at Viacom through at least September, when the company's fiscal year ends, with the board expected to decide on a full-time CEO then. Dooley is well respected on Wall Street and is seen as a safe choice as a temporary leader. Plus, Viacom would have to pay Dooley $64 million if Dauman is fired and he is not offered the CEO job, according to regulatory filings.

His task — for however long he keeps the job — will be drawing up a plan to reverse a ratings and advertising slump at some of Viacom's key networks, including MTV, and figuring out how to rejuvenate Paramount, whether or not it remains 100 percent owned by Viacom.

“What should happen is a complete internal review by fresh eyes and aggressive outreach to the most valuable and talented employees,” said Steven Birenberg of Northlake Capital Management. “The final membership of the board, the trust and the rights to National Amusements are critical factors.”

Some on Wall Street say Viacom needs to increase content investments and shut down smaller cable networks to focus on its big core brands.

Some also call for a smaller dividend. "Absent concurrent enhancement of audience ratings performance and advertising sales, a dividend reduction alone would not be sufficient to hold the current rating," Moody's Investors Service analyst Neil Begley wrote earlier this month in reducing his ratings outlook for Viacom's debt to "negative," meaning he could downgrade his rating. "But it would certainly help preserve liquidity and reduce debt more rapidly as the company continues to align its operations to withstand risks from changes in the traditional media ecosystem."

While there are no immediate plans for CBS to buy Viacom, according to sources, Wall Street analysts have discussed the scenario with increasing focus in recent months and have even asked executives about the possibility in public. CBS COO Joe Ianniello, for example, said at an investor conference Tuesday in New York that CBS would not want to overpay for Viacom if it decided to look at a deal, but also signaled that he hasn't looked at a deal.

"I don't know the asset well enough. It's been over a decade since we were there, so I haven't studied it,” Ianniello said. "We have a strong independent board, we have a solid management team, headed by obviously Les, and we would approach any acquisition — so this goes to any acquisition — with the same sort of discipline."

CBS investors would be hesitant about a deal as it would slow down the company's financial momentum and be a drag on its stock, according to analysts, even though some argue that adding cable networks to its portfolio could further boost CBS' clout. In contrast, Viacom investors generally are seen as favoring a sale, especially to a management team that has a strong reputation for providing results.

“We think there's a compelling case for a merger because it provides a platform, from which Viacom can undertake the much-needed restructuring of its cable networks," RBC Capital Markets analyst Steven Cahall said in a report this week. “A merger-of-equals scenario would avoid excessive transaction and financing fees. We think CBS' leadership team would need to be supportive as we believe it would be the preferred management."

As "low-hanging fruit" after a recombination, he cited a possible sale of Epix and an estimated $400 million in annual synergies. In addition, he suggests a sale of Epix, and adds: “We propose that Viacom could divest 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.”

MoffettNathanson analyst Michael Nathanson is also one of Wall Street’s champions of combining CBS-Viacom, writing in a late May report: “Maybe Sumner Redstone realizes the lunacy of his asset separation and wants to make things right by recombining these assets.… Nothing will be solved until the pieces are put back together again.”

On the less-bullish side is Sanford C. Bernstein analyst Todd Juenger, who wrote in a recent report: "Even if the CBS board and management can be convinced to acquiesce to acquiring Viacom, we don't think it would be good for either stock. We don't think Viacom shareholders would be paid a premium, and we think CBS shareholders are better off with the company they currently have.”

And Wells Fargo's Marci Ryvicker recently wrote in a report, entitled "We Do Not Foresee a Merger," that a CBS-Viacom combination would be "value destructive and highly unlikely."

She gave several reasons: "1) In such a rapidly changing ecosystem, we can't see Les 'pausing' to fix Viacom. 2) While National Amusements can technically force a combination, we don't think this occurs without Les's blessing. 3) We believe that Les is aware of CBS' structurally advantageous position as a standalone broadcast network. 4) While just slapping Viacom onto CBS does seem accretive at first, we can't find a scenario where the pro forma company grows faster than standalone CBS over the long run." 

A merger may also not be the ideal scenario to turn around Viacom, Ryvicker argued. "We believe Viacom needs to be fixed — not slapped onto another company," she said. "The best way to do this, in our view, is to hire a CEO who is solely focused on Viacom and who has the incentive and wherewithal to make big strategic change and investment."