The latest shakeup at Viacom offers strong evidence that controlling shareholder Shari Redstone is focused on engineering a reunification of the troubled owner of Paramount and MTV Networks with CBS Corp. But getting there won’t be easy, or quick.
The fact that Viacom’s newly constituted board did not have a successor for interim CEO Tom Dooley ready to be announced when word of his departure surfaced Wednesday suggests that the exit came together quickly. The decision follows an extensive budget review held last week that exposed that the media company was facing financial problems that were far more severe and systemic than first thought.
Sources close to the situation said the board is leaning toward internal candidates to replace Dooley. Viacom International Media Networks CEO Bob Bakish, a 20-year company veteran who runs the international TV channels, is believed to be at the top of that list.
The focus on internal candidates likely reflects the harsh reality that Viacom is a tough sell to seasoned media executives with the experience needed for the job. The task of turning around a company with big trouble spots among its major assets — Paramount and its cable networks — is daunting enough to make the job unattractive to those best suited to running a media conglomerate. Among the execs that controlling shareholder Redstone is known to have met with in recent weeks is former Disney COO Tom Staggs.
An internal candidate would be read as a placeholder move to give Redstone, Viacom’s vice chairman, the time to craft a deal that would make a Viacom-CBS Corp. reunion palatable to the CBS board (of which she is also vice chairman) and to chairman-CEO Leslie Moonves. CBS has made no secret of its wariness of absorbing the Viacom assets in their distressed state, even as some Wall Street analysts talk up a union.
“We continue to believe that the most logical next step is to put the pieces back together,” said Rich Greenfield, an analyst with BTIG. “Scale matters a lot.”
Michael Nathanson of MoffettNathanson observed in a research note: “If the internal path is chosen (for CEO), we believe this would add more credibility to the eventual CBS-Viacom re-merger.”
Beyond the specific problems at Viacom, the dynamics of the TV industry have changed dramatically in the decade since the two companies were split up by Sumner Redstone, Shari’s father. The issues at Viacom are so systemic — ratings slides, a lack of compelling programming, a talent drain, a film studio at Paramount that lacks franchises and is projected to lose as much as $450 million this year — that fixing them will require a massive amount of time, effort, and luck.
“There is no easy turnaround for Viacom,” said Tony Wible, an analyst with Drexel Hamilton. “The quickest path would be to dispose of assets or be acquired.”
Should the Redstone clan decide to retain the company and merge it with CBS, there are a number of risks. CBS would lose some of its sizzle on Wall Street and its leverage with the largest pay TV distributors if it had to negotiate carriage agreements for the Viacom cable companies — MTV, VH1, Nickelodeon, Comedy Central, BET, Spike and CMT among them — along with securing retransmission consent deals for its O&O stations. CBS at present has maximum leverage with distributors because the network has must-have sports programming — the NFL — and because it doesn’t have to horse trade with MVPDs for nets other than Showtime. Adding a weakened MTV or Comedy into the mix would further dilute that muscle.
“Les Moonves is in a strong position,” said veteran media analyst Hal Vogel. “He may not want to take on the added burden and distraction.”
Then there are the headaches associated with internal politics. Orchestrating a harmonious marriage requires making room for some sizable egos and big personalities.
“Organizational combinations are difficult,” said Vogel. “The companies are cousins, but in some families, the cousins don’t get along.”
The 93-year-old media mogul Sumner Redstone has ironclad control of Viacom and CBS through ownership of preferred shares that give him 80% of the voting power in both companies. The events of the past six months have made it clear that as Sumner Redstone’s health declines, Shari Redstone is taking up the mantle for leading his companies. She was the force behind the management changes at Viacom this year, including the ouster of CEO Philippe Dauman and the appointment of five new board members. (In August, Dooley was named interim CEO through Sept. 30.)
But Moonves brings his own formidable clout to the table. With Viacom in rebuilding mode, Shari Redstone cannot afford to alienate the CEO that has deftly guided CBS to impressive returns in a fast-changing business landscape. She has been publicly solicitous of his counsel and friendship, making a point of driving with him to dinner, for instance, at last summer’s Allen & Company media conference in Sun Valley, Idaho. At an investor conference last week he stressed that there have been no “active discussions” about bringing the companies together.
When CBS and Viacom split up in 2006, CBS was loaded up with debt from the transaction and was deemed the slow-growth option for investors while Viacom had the heat of cable networks with international exposure. But the trajectories of the companies, particularly in the past few years, have been opposite of those initial forecasts.
CBS has adapted with savvy and nimbleness to the shift to digital distribution and multi-platform viewing options for consumers. The company has a strong balance sheet and relatively little debt. Viacom on Thursday was forced to cut its dividend to help raise cash to help tame a debt load of about $12 billion.
Sources close to Viacom said that the presentation made by senior Viacom execs to the new board during the budget review last week made it clear that the company’s financial outlook is worse than previously projected. Industry insiders speculated that this may have hastened Dooley’s departure. Dooley served as Dauman’s top lieutenant during the past 10 years, making him a major player in a regime criticized for a lack of investment in content, overspending on stock buybacks when the shares were trading high and allowing the leverage ratio to balloon to nearly four times earnings.
Dooley will receive a $4.37 million retention payment to stick with Viacom through Nov. 15. He is also entitled to a payout of about $63 million, per the terms of the new contract Dooley struck back in March, before the heat was turned up on Dauman. Those terms called for him to receive the payout if he was not offered the CEO spot if Dauman left. Serving as interim CEO did not change the terms of the exit package.
Shari Redstone is believed to be focused on enlisting Moonves to take a hand in managing the Viacom assets on a macro level — however that might be worked out. For Viacom staffers, the latest CEO transition promises to bring another period of uncertainty amid calls from outside the company for wholesale management changes. Brad Grey’s position as chairman of Paramount Pictures has to be in question with Wednesday’s news that the studio would take a $115 million writedown on a movie to be released in January, “Monster Trucks.” That loss came on the heels of a number of the studio’s other box office flops that included “Ben-Hur,” “Teenage Mutant Ninja Turtles: Out of the Shadows,” “Zoolander 2” and “Whiskey Tango Foxtrot.” Even “Star Trek Beyond” disappointed.
But not everyone is thrilled with the possibility of Viacom promoting from within or merging the media conglomerate with CBS. Some observers were most intrigued by the thought of Shari Redstone reaching out into the next generation of CEOs who have a better grasp of digital media.
“It would be great to bring in a younger digital media type,” said Matthew Harrigan, an analyst with Wunderlich Securities.”Someone who is like 35 to 45.”