Now that it’s official, and Viacom Chairman/CEO Philippe Dauman is out, replaced on an interim based by Tom Dooley, MoffettNathanson LLC Senior Analyst Michael Nathanson took on the question of “What will happen now?” and what to do with his ratings on VIA shares.
In short, he doesn’t expect any huge changes to happen swiftly.
But, he does implore Dooley to sell 100% of Paramount Pictures to the highest bidder.
“While new management might look to fix all that is wrong at Viacom, we find it hard to believe that anything will be solved until the CBS-Viacom pieces are put back together again,” Nathanson says.
For most of Dauman’s tenure, MoffettNathanson maintained a “Buy” rating on Viacom.
“We were overly focused on the cheapness of the stock, the surprisingly robust affiliate fee growth and consistent share buybacks, which protected earnings-per-share (EPS) growth,” he says. “Over the years, the stock would get beat up over worries about Nickelodeon and MTV ratings, which were often seen as victims of structural decline. Often those fears would be mollified by an improvement in ratings trends as those networks lapped viewership challenges.”
But in summer 2014, Viacom’s ratings “fell to unfathomable levels,” Nathanson says. “We preached patience and a return to the old playbook, but it took much longer than any of us expected to improve.”
While Nickelodeon and other key networks are seeing ratings rebounds, MTV and Comedy Central have “bled viewers longer and deeper than anyone could have ever expect,” he notes.
Realizing “the enormity” of the company’s fiscal 2016 negative earnings revisions led MoffettNathanson in early 2016 to downgrade Viacom shares from “Buy” to “Neutral.”
“As we have previously written, if it could go wrong at Viacom, it did,” Nathanson says.
Nathanson finds it hard to imagine that Viacom’s fiscal 2016 EPS will wind up nearly 40% lower than his forecast from summer 2015. “The combination of no buybacks, the end of the [subscription video on demand] gravy train, cuts in affiliate fee growth, make-good issues and poor film releases produced a perfect negative storm,” he says.
Yet, while his firm focused on Viacom’s cable networks, the problem at Paramount “is truly shocking,” Nathanson says. Paramount saw profits fall in fiscal 2016 by close to a half-billion dollars. Its fiscal 2017 loss could be upward of $350 million.
“Short of firing the entire Paramount leadership team, there is little a new CEO could do quickly to improve its film pipeline,” Nathanson believes. “As such, the best Tom Dooley can do is sell 100% of Paramount to the highest bidder … As Hollywood has become more and more of a global, tent-pole business, Paramount doesn’t have the franchises to compete with Disney, Universal or Warner Bros. Viacom needs to sell its studio now to either a strategic buyer who can take out massive costs, or find some ‘easy’ money, which always seems to be available.”
Nathanson also believes Dooley should start to “reassess” Viacom’s programming talent.
“This is where Viacom has failed the most,” he says. “The Company needs to hire a cable networks CEO to oversee the entire network division. That person should have proven success as a cable programmer and be aggressive in seeking to change the culture. However, it might be impossible to recruit anyone good to take that job given the instability at the top.”
The cancellation of Comedy Central late-night satirical political offering The Nightly Show, hosted by Larry Whitmore, was the latest blow for Comedy Central. The program’s last episode aired August 18, failing to last through the end of the 2016 presidential election.
“While a new CEO might look to fix all that is wrong at Viacom, we find it hard to believe that anything will be solved until the CBS-Viacom pieces are put back together again,” Nathanson concludes. “Even then, the combined assets would not be that much of a bargain relative to its peers.”
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