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Redstone Wants to Grow

1/16/2005 7:00 PM Eastern

Viacom Inc. chairman Sumner Redstone said last week he might be willing to accept a lower credit rating to gain access to capital for share buybacks or acquisitions — and he might get that lower rating whether he wants it or not.

Last Tuesday at the Citigroup Smith Barney Media, Entertainment and Telecommunications conference in Phoenix, Redstone said he would be willing to accept a lower credit rating than the current A-minus if that meant the company could either buy back more stock or make new acquisitions.

BILLIONS IN VIEW

Redstone didn't say how low he would go, but said reducing the rating to triple-B could free up billions of dollars in cash.

“We are now scrutinizing our A-minus rating,” Redstone said. “Our competitors have ratings below that and we are looking at the question as to whether we should accept a lower rating, leverage the company up and use the money to benefit our stockholders.”

That benefit could be in the form of increasing its stock buyback program — it already has purchased about $2 billion of its own stock and has authorized an $8-billion buyback program — or buying cable channels.

The ratings agencies didn't waste any time. Last Wednesday, the day after Redstone's presentation, Moody's Investors Service placed Viacom on review for possible downgrade, citing the chairman's comments.

Moody's said the rating could be lowered even if Viacom's board does not decide to increase the company's leverage “because of concern over management's softened commitment to maintaining the rating, which increases the risk of higher leverage targets to achieve the same goals in the longer term.”

The higher the credit rating, the better a company's able to access capital at low interest rates.

While taking on more debt could make future access to capital more expensive, it is unlikely to have a serious effect on Viacom.

Viacom has one of the strongest credit ratings among cable programmers — Redstone said Viacom's competitors all have lesser ratings — and, according to Merrill Lynch & Co. cable analyst Jessica Reif Cohen, could boost its borrowing capacity by $4.7 billion by lowering its rating to triple B.

That, Cohen wrote in a report last week, would give Viacom plenty of firepower to buy a cable network like Rainbow Media Holdings Inc. (which includes AMC, Independent Film Channel and WE: Women's Entertainment), valued at $3.6 billion to $3.9 billion.

Redstone would not specify just what cable networks he would consider purchasing.

“We're in the market for any good cable channel that is within our price range,” he said.

Other areas earmarked for that additional money are the Internet, where Redstone said Viacom was “underinvested and underrepresented,” and video games.

Redstone said he would like to return Viacom to the 15% to 16% annual growth rates of the past by 2006, with keys to that goal being improvements at the Paramount Pictures movie studio and the Infinity Broadcasting Corp. radio unit.

Redstone said Viacom also wants to shed underperforming assets, like its Canadian theater circuit and small-market radio and television stations.

Viacom stock was down 11 cents, to $38.53, in afternoon trading Wednesday.

IGER'S INTO GAMES

Earlier in the conference, The Walt Disney Co. president Robert Iger also expressed interest in moving into the video-game market, adding that Disney would rather buy a video-game developer than a publisher, which would be too costly.

Asked what his priorities would be if became Disney's CEO — Iger is a leading candidate to replace current chief Michael Eisner when he retires in 2006 — Iger said he would continue Disney's focus on creativity and innovation.

Iger said he would focus on three areas: creativity and content; international growth and creating a growth-oriented culture at Disney.

“The heart and soul of the company is creativity and innovation,” Iger said. “The most important thing for a CEO is to respect that and make sure it's a priority.”

September