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Viacom Split-Up Becomes a Reality

6/17/2005 8:00 PM Eastern

With “synergy” — once a hallowed corporate buzzword — seemingly out of vogue, Viacom Inc. last week officially began the process of unwinding one of this decade's major media mergers.

In an effort to help the company's stock price, Viacom's board unanimously approved a plan, first proposed in March, to divide the media conglomerate into two separately traded public companies.

The board's imprimatur clears the way for Viacom to separate its high-growth assets, namely its cable networks and movie studio, from its more-mature businesses, its broadcast-TV and radio stations.

TAX-FREE SPINOFF

Viacom stockholders will have shares in both companies to be created in the tax-free spinoff slated to take place early next year. As expected, Sumner Redstone will serve as chairman of both the spinoffs, while his daughter, National Amusments Inc. president Shari Redstone, was appointed to the newly created position of nonexecutive chairman of the board.

Viacom is essentially dismantling the 2000 merger of Viacom and CBS Corp. Under one umbrella, a company retaining the Viacom Inc. name will be formed, comprising MTV Networks [including MTV: Music Television, VH1, Nickelodeon, Nick at Nite, Comedy Central, CMT: Country Music Television; Spike TV, TV Land and various international networks]; Black Entertainment Television; Paramount Pictures; Paramount Home Entertainment; and Famous Music. Tom Freston will head that company.

The other spinoff, led by Leslie Moonves, will be called CBS Corp. It will include the CBS and UPN broadcast-TV networks; the Viacom Television Stations Group; radio-station owner Infinity Broadcasting Corp.; Viacom Outdoor; the CBS, Paramount and King World TV-production operations; Showtime Networks Inc.; Simon & Schuster; and Paramount Parks.

Currently, Freston and Moonves are co-presidents and co-chief operating officers of Viacom.

Many details related to the split remained uncertain. For example, it's expected that both Freston and Moonves will each get a CEO title, but they weren't granted that mantle last week.

And there are other questions. Showtime, which will be part of CBS, owns part of mini-pay service Sundance Channel, along with partners NBC Universal and actor-director Robert Redford.

At an unrelated press conference last week, Sundance Channel president Larry Aidem said he didn't know if Showtime's stake in his network would fall under Viacom or CBS after the spinoff. “I don't honestly know where we're going to end up,” Aidem said.

Viacom hopes the split will increase the value of the company's stock, which has lagged. Investors interested in high-growth businesses will be able to put their money in Viacom, while those who like high cash flow can buy into CBS.

And some Wall Street analysts seemed to agree with that strategy.

GREENFIELD APPROVES

“While the split-up is certainly not a 'cure-all' for the malaise affecting Viacom and the broader media sector [outside the Internet], we believe the creation of a new Viacom that is 90% cable networks will be a unique company that will attract significant investor attention,” Fulcrum Global Partners analyst Richard Greenfield wrote last week.

“On the other hand, a dividend yield-driven CBS entity [that is repurchasing significant amounts of stock with its free cash flow] with solid, moderately growing cash flows should appeal to value investors,” Greenfield wrote.

Following the spinoff, Merrill Lynch analyst Jessica Reif Cohen calculated a “sum-of-the-parts valuation” upside price potential of at least $48. She lauded MTVN as “arguably the best-run and fastest-growing cable network group in the entire industry.”

Viacom's shares were trading at around $34 last week.

The company's proposed split didn't please everyone on Wall Street. In light of the move, Standard & Poor's lowered its corporate credit and senior unsecured debt ratings on Viacom and all its subsidiaries to BBB-plus from A-minus, and its subordinated debt ratings to BBB from BBB-plus.

“How the current debt burden will be allocated between the two companies to be formed is still unclear, and we do not know the priority that will be given to share repurchases, dividends and acquisitions,” Standard & Poor's analyst Heather Goodchild said in a report.

Reif Cohen said the current Viacom has exhausted its synergistic opportunities, such as its ablility to use retransmission consent for CBS owned-and-operated TV stations as leverage to obtain cable carriage for new MTVN services.

“We believe there are few remaining synergies between the two sides of the company,” Reif Cohen wrote. “The most important synergy was the ability of MTV to use CBS retransmission rights to obtain cable carriage for new networks.

“However, Viacom does not foresee future U.S. cable-network launches [particularly on the analog platform, where limited bandwidth made carriage more difficult] and therefore does not believe significant synergies in this area still exist.”

Greenfield wasn't quite as convinced that there's no downside to yielding leverage.

“While we believe the benefits of creating conglomerates such as Viacom have been few and far between, the impending split-up of Viacom could have a negative impact on earnings if the separate entities lose leverage with distributors [such as cable and satellite operators],” he wrote.

NEW LAUNCHES COMING

Such leverage would come in handy as MTVN tries to gain carriage for several new services, including gay-targeted Logo, which debuts June 30. The programmer is also rolling out a number of ethnic-oriented networks, like the Caribbean music-and-lifestyle channel Tempo, and needs to drum up distribution for them.

“The new Viacom [ad-supported cable networks and Paramount Pictures] will likely seek to leverage its strong brand presence in kids/teens/young adults across an array of new platforms, including video games, broadband Internet and mobile,” Greenfield wrote. “In addition, the smaller size of the new Viacom will make investments in new cable networks such as Logo far more relevant than they have previously been.”

Moonves has already been vocal about his plans to seek cash for carriage from cable operators in exchange for retransmission consent for CBS stations. CBS views retransmission consent as an attractive new revenue stream, he said.

September