To divide and conquer

One Viacom company for Moonves, one for Freston

NEW YORK — Viacom, which launched the era of the modern media megamerger five years ago, is moving into reverse as chairman-CEO Sumner Redstone said he’s considering splitting the company back into two.

In a shocker of a press release Wednesday afternoon, Viacom’s controlling shareholder said he had authorized the board to explore a division creating two separate publicly traded companies.

One, run by Leslie Moonves, would include CBS, radio and outdoor advertising. The other, topped by Tom Freston, would house MTV Networks, Paramount Pictures and most of the other assets grouped under the entertainment banner.

Redstone would be chairman of and control both companies — meaning any takeover of the smaller pieces by a larger rival would be nearly impossible without his nod.

“No, I do not regret the merger,” Redstone told Daily Variety. “I think we’ll have more investors than ever before.”

Viacom’s $36 billion all-stock acquisition of CBS, announced in September 1999, was the largest media marriage in U.S. history at the time. It was followed in short order by AOL-Time Warner and Vivendi-Universal.

The Vivendi-Universal crackup, while spectacular, was blamed mostly on a misguided and megalomaniacal CEO — ditto AOL-TW.

Viacom’s split, a more mundane nod to a shifting economic climate and a torpid stock, is the most telling admission that collecting a stable of media and entertainment assets under one roof doesn’t provide the strategic or financial boon promised.

At the time, Viacom-CBS made sense, said one Wall Streeter.

“Radio and outdoor were growing very fast, CBS was in turnaround mode, and having more broadcasting assets made sense, more exposure to advertising made sense,” he said. Now, radio and outdoor are having a prolonged rocky patch and advertising is spotty.

The split, which the company said it will discuss more publicly in the second quarter, would be an extreme solution to Viacom’s stock doldrums.

It’s not only Viacom’s problem. Shares of most big media congloms have been stagnant or worse over the past year, with growth slowing and no particular catalysts on the horizon to pique interest.

Redstone said the split also makes strategic sense. Viacom’s businesses have “inherently different growth characteristics and investment attributes” that appeal to different types of investors.

Viacom is hoping shares of the faster-growing showbiz piece led by MTV will flower if detached from the slower-growing network/radio/outdoor assets. That would give Freston’s company a sexy, high-priced stock for acquisitions.

The other company would throw off lots of cash, buy back stock and raise dividends.

In Wall Street speak, they’d be creating a “growth” company and a “value” company.

While the news came as a surprise, the concept has been floated widely, most recently Wednesday morning — well before Viacom’s release — by two Wall Street analysts, Merrill Lynch’s Jessica Reif Cohen and CS First Boston’s Bill Drewry.

“Management was frustrated, employees were frustrated, and investors were frustrated” with the tepid stock. “They had to do something,” Reif Cohen said.

“New theme in big media: Divide to conquer. Are Viacom and Time Warner the first to split?” asked Drewry.

Speculation drove Viacom stock higher Wednesday. It surged almost 8% to $37 and was up nearly 7% in after-hours trading.

Drewry predicted bigger restructuring among the media companies in search of higher growth rates. He said “isolating higher growth assets in a company is a path to higher multiples.”

TW has been flirting with a split-off of its cable business as it pursues Adelphia. Management has also visited and revisited the idea of cutting America Online loose.

Earlier this week, Liberty Media announced plans to spin off Discovery into a separately traded public company.

Redstone said he’d been mulling the possibility since the summer, when chief operating officer Mel Karmazin ankled and Freston and Moonves split Viacom’s assets as co-chief operating officers. He met with the board to talk over the possibility last week. And he called every director Wednesday before the release went out.

Possibly spurring discussions was the $18 billion fourth-quarter loss Viacom reported several weeks ago due to a writedown of the value of the radio and outdoor advertising biz.

Redstone called the move “gutsy” and “bold.” But it’s not risk-free.

“You’re basically undoing the CBS merger. You’re taking away whatever you did with CBS and taking it back to the market. If you are going to do that, are you sure you’re going to unlock value?” asked one Wall Streeter.

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