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As Viacom Falls, Analysts Question Company's Entire Premise, Rethink The Split

This story was written by Joseph Weisenthal.
The deep slide of Viacom (NYSE: VIA) stock says a lot about how fast Wall St. can turn on a company. Last week, we wrote about Rich Greenfield's analysis, calling for Sumner Redstone to take the company private via leveraged buyout. And this weekend, Bernstein analyst Michael Nathanson called out the company's original sin, the manner in which it was separated from corporate sibling CBS (NYSE: CBS). A report titled A Bad Plan, Poorly Executed starts off by saying: "Let the record show that we never liked the idea of splitting Viacom and CBS." I didn't see his report back then, though either way, the following statement rings true: "While old Viacom was languishing, the notion of creating CBS for the value' crowd and Viacom for the 'growth' guys felt naively simplistic."

Not only have the stocks done poorly, but classifying certain companies as "growth" or "value" is best left up to mutual fund managers looking for a marketing hook to justify their existence ("Are you retiring soon? Transfer into our no-load value select fund"). CBS hasn't been satisfied being no-growth (see: its various internet purchases) and Viacom's growthiness isn't a permanent state.

As evidence that the companies have destroyed shareholder value by separating, Nathanson cites the brewing premium cable battle. Viacom is building a competitor to CBS-owned Showtime, while CBS is getting into film: "So, rather than secure value by finding a middle ground, both groups go off and use incremental capital to develop businesses that already exist in each other!" He also argues that Viacom's cable assets could be in a stronger negotiating position for retransmission fees if they had a national network to hang onto, a la Disney/ABC and Fox.

Another factor that may be weighing on Viacom is its divorce with Stephen Spielberg. As this LAT article explains, while Viacom may own DreamWorks' assets, it's the principals involved with the studio that will make things messy. For his part, multiple reports have said Spielberg is close to a major funding deal with Indian firm Reliance. But Nathanson wonders why Paramount, was kept with Viacom in the first place, given its low margins, high capital intensity,income volatility, and the fact that its TV production arm was put with CBS.

Though he doubts it would ever happen, Nathanson would like to see the CBS network, various large market stations, Showtime and the TV production/syndication assets folded back into Viacom, with the rest run in a "liquidation vehicle" for assets, like radio, outdoor and non-core TV. Such a movebasically an undoing of the splitis probably far less likely than taking Viacom private.

In the meantime, Viacom is down over 2 percent, hitting another fresh low. Expect more reports such as these to come as analysts pile on, and more pressure on the company to do some kind of big shaking up move.


By Joseph Weisenthal