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Media: A house redivided

Proposed Viacom split turning heads in age of synergy

NEW YORK — Financial philosophies come and go. Right now, media consolidation is very out, and breaking up very in.

But wasn’t synergy supposed to be the be-all, end-all?

Indeed, just five years ago Viacom bought up CBS, ushering in the Great Age of Media Mergers.

So Hollywood can’t be blamed for casting a suspicious eye on Viacom’s proposed split and a host of other media spinoff possibilities (the list grows all the time). It’s hard to forget the mantra of bigger-is-better just like that.

But thanks to sluggish media stock prices, the very same fee-happy Wall Street investment bankers that once advocated mergers are now convincing the likes of Viacom chair-CEO Sumner Redstone and Time Warner chair-CEO Richard Parsons they can “unlock value” and boost their stock value by spinning off certain divisions.

“I think the bottom line is that this group has been terrible from a stock performance for a protracted period of time,” says veteran media analyst Richard Greenfield of Fulcrum Global Partners. “Synergy hasn’t materialized and they are looking for value.” Viacom’s plan, which will spin off high-growth cable nets and Paramount from the broadcast and radio side, is the most dramatic.

“Viacom has two very different groups of assets,” says Greenfield. “Cable is strong enough to stand on its own, so you are creating a pristine asset that people are going to want to own, whereas radio and TV have bigger, long-term question marks.”

For now, Time Warner only plans on spinning off its cable company, but it has reserved the option of doing the same with AOL.

Clear Channel will move to spin off its sluggish live-entertainment biz and 10% of its outdoor ad biz in an IPO, while John Malone’s Liberty Media is spinning off the Discovery empire.

A 1999 McKinsey & Co. study, which is still widely cited, revealed that spinoffs substantially outperformed the market over a two-year period, with a total shareholder return on average of 27%, vs. the 17% offered by the S&P 500.

AT&T saw strong results when it spun off Lucent in 1996, since Lucent was then free to do biz with AT&T rivals. And Ralston Purina’s decision to spin off its Everready battery biz from its unrelated petfood biz in 2000 made perfect sense.

Al Cardilli, an analyst with Chicago-based Spin-Off Advisors, whose group advises institutional investors, says consolidation wasn’t a mistake, but that spinoffs now offer media congloms a chance to reclaim value and distinguish their assets.

“Their business is now under attack from the newer forms of media,” says Cardilli, citing the decline in broadcast and print advertising due to the Internet.

“Ultimately, what they are attempting to do is clear the dust from the battlefield and give investors the opportunity to apply a different methodology to that part of the business that grows faster.”

But some Wall Streeters say Redstone could be playing a dicey game. What happens, for instance, if cable’s growth spurt ends? Analysts worry Viacom could lose clout, and they fret about the associated overhead of having two boards — and two exec suites.

Certainly, the belief in synergy lives on at NBC Universal, News Corp. and the Walt Disney Co.

No one expects these congloms to break up — at least for the time being.

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