Assessing the mogul's Viacom split five years later

The deal was dubbed “The Great Divide” by Wall Street, and it was both surprising and perplexing.

that he would retain supreme control as the dominant shareholder in both companies.

“Both companies are doing extraordinarily well,” he insists, pointing out that the stocks are healthy and that CBS is especially well positioned to capitalize on the projected economic recovery.

Redstone is known to be singularly attentive to the stock market and the share prices for his companies; it was his frustration with Viacom’s lack of price movement that spurred the split in the first place. At the time the split was announced, Viacom shares were trading at around $34. In recent months, the new Viacom has hovered around $28 to $30 a share, while CBS has bounced back after a beating earlier this year to around $11-$13 a share.

Yet some insiders suggest that, in creating the Great Divide, both companies have had to spend vast amounts to remedy problems caused by the split. CBS has started a movie company in competition with Paramount, and Viacom is trying to get into Showtime’s territory with the launch of a pay TV channel, Epix, in partnership with Lionsgate and the beleaguered MGM.

Industry observers see Epix as the poster child for the dysfunction among Redstone’s fiefdoms. It was born out of the conflict between the newly separated Showtime and Paramount. When it came time for Par to renew its movie output deal with Showtime, the cabler informed Par that it would pay far less (as much as 50% less) for those movies than it had under the previous contract.

With Lionsgate and MGM getting the same message from Showtime, the trio decided to throw their lot in together on a channel that would ideally give them more freedom to market their movies via video-on-demand and online as well as the traditional pay TV window.

But Epix has had an uphill climb in securing vital distribution deals with major cable operators and satellite providers — raising serious questions about how much of a revenue hit Viacom, Lionsgate and MGM will take over the long term from the loss of pay TV coin. Epix’s owners say they’re staying the course and are in the midst of negotiating deals that will broaden its reach. (Sat-TV provider Dish Network is said to be close to a pact with Epix.)

Meanwhile, Showtime is in need of movies to fill its pipeline for 2011 and beyond

as called for in its contracts with cable operators. For sure, the feevee service has put more emphasis on original programming in recent years — with enough notable successes to finally get it out of the long shadow of HBO — but a pay TV channel still needs some B.O. sizzle to command $12 a month from subscribers.

That’s where the fledgling CBS Films comes in. But of course the odds are long that the Eye will strike B.O. gold with its early efforts. Moonves is proceeding cautiously with a plan to release three pictures next year with a budget lid of $35 million. Showtime insiders are also quick to note that they made a savvy deal with Summit for the “Twilight” franchise and other pics, and a deal with the Weinsteins that will net “Inglourious Basterds” and “Nine,” among other titles. It’s also understood that Showtime is in talks to pick up pics from the reconstituted DreamWorks.

Hence a true assessment of the Great Divide could be made with much greater clarity in the coming year as Epix and CBS Films take root. Further, a savvy evaluation of CBS’ $1.8 billion buyout of CNET, purveyor of news and lifestyle oriented websites, will be possible in the coming months as CBS continues to challenge its image as a stolid company.

Yet the skeptics remain.

“The separation has not created value,” argues Rich Greenfield of Pali Research, who points out that Paramount lost a key distribution engine when Showtime became part of CBS.

“The split has created an angry atmosphere of competition between Paramount and CBS,” observes one producer. “What has resulted is the opposite of synergy — it’s a sort of anarchy.”

From the outset, The Great Divide has produced the unexpected. Eight months after the split Redstone revealed that he was “firing” Paramount’s No. 1 star, Tom Cruise, in part to demonstrate his opposition to the sort of first-dollar gross deals that Cruise had obtained from the studio.

Two weeks later, Redstone caused even a bigger stir on Wall Street by ousting Tom Freston, the longtime MTV Networks boss and CEO of the new Viacom (company shares quickly tumbled 11%) and handing the reins to his longtime attorney, Philippe Dauman, who’d served in top exec posts at Viacom in the 1990s. The Freston beheading was the result of News Corp. outbidding Viacom for MySpace — a Murdoch acquisition which, from the perspective of today, didn’t turn out to be such a great idea.

When the Viacom-CBS separation was first revealed, some bankers interpreted it as a signal that Redstone would be shedding some of his assets. That forecast proved incorrect, although Redstone did find himself in a corner when the stock-market declines for Viacom and CBS shares raised previously unforeseen debt problems for the mogul.

But true to form, the wily 86-year-old maneuvered out of his tight spot by selling about $1 billion in Viacom and CBS stock to pay off about $1.4 billion in debt held by Redstone’s National Amusements holding company. He didn’t loosen his iron grip on either company, nor did he have to sell off his theater chains, as had been anticipated at the height of Redstone’s debt crisis amid the market swoon last winter.

Redstone’s master plan, of course, has had to be modified as a result of the economic downturn. “Both CBS and Viacom needed to significantly diversify in order to justify the split,” says one banker. “That didn’t happen in a down economy.”

Redstone has described Viacom as potentially a growth company but CBS as a more stolid performer. In fact, CBS presently is the more buoyant of the two companies in terms of stock performance.

Redstone praises CBS boss Leslie Moonves for being the steady hand that has kept CBS defying broadcast TV gravity and growing in its primetime ratings. That means the Eye is first in line to capitalize on the budding recovery in the ad market.

“We see the signs that advertising is picking up and that recovery is starting,” Redstone declares.

To be sure, the Great Divide has positioned Viacom and CBS to be more competitive (and competitive with each other) at a time when the bigger-is-better theory seems to be falling out of favor on Wall Street — witness the Street’s tepid reaction to the proposed Comcast-NBC Universal tie-up.

The bigger question hanging over both companies is how they will fare when the inevitable happens, despite Redstone’s infectious confidence that he will live forever. Dauman is believed to hold a lot of cards in that scenario as the presumed executor of Redstone’s estate.

For now, Redstone is happy to see his corporate progeny battle it out in the marketplace, because he’s assured of winning no matter what.

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