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Viacom Shakeup: 5 Problems Wall Street Wants the Board to Address

Wall Street’s dismay at Viacom’s long-term prospects was one of the biggest catalysts for the management overhaul that begins in earnest this week with the exit of Philippe Dauman as chairman-CEO.

As the newly constituted Viacom board meets this week for a top-to-bottom budget review, prominent media analysts have offered plenty of suggestions about the most pressing issues for directors and interim CEO Thomas Dooley to tackle. The situation they face is dire, according to Nomura media analyst Anthony DiClemente.

“You’ve got ratings at MTV Networks going down, affiliate fee growth is negative and the trend for Paramount remains negative,” DiClemente told Variety. “The trajectory of the financials will probably continue to remain quite poor.”

MoffettNathanson’s Michael Nathanson noted in a recent note that the company has endured “a perfect negative storm” in the past year. “It’s hard to imagine that Viacom’s (2016 earnings per share) will wind up almost 40% lower than our forecast from last summer,” Nathanson wrote.

Here are five key problems that Wall Street wants to see addressed at Viacom:

Debt refinancing: Viacom ended its fiscal third quarter in June with $12.4 billion in debt, up from $8.1 billion in 2012.

Much of that debt came from spending on share buyback programs when Viacom shares were flying high above $70. Today the stock is hovering around $37. Analysts say Viacom needs to cut its historically generous dividend and dive into a big debt-refinancing program to get its leverage ratio under control. In August, the Moody’s credit ratings service warned that the company was in danger of a downgrade on its debt, which will only make it more costly for Viacom to access the credit markets.

Viacom shares will almost certainly take a hit if the dividend is cut but Bernstein Research’s Todd Juenger sees it as an important reality check for the new management team. Juenger notes that the strain from the debt load gives Viacom little room to invest big in content or pounce on an attractive acquisition target.

“We believe the new board should proactively reduce the dividend. It would demonstrate fiscal responsibility and give them flexibility (even in an asset sale scenario),” Juenger wrote in a research note this month. “There comes a time when management bravado and an imprudent dividend policy lose their power as a positive signaling device and instead become a negative signal (that management is out of touch with reality).”

Finding a new CEO: Dauman’s longtime deputy Dooley was tapped for the interim role through Sept. 30. That deal was forged in the midst of the legal battle between Dauman and Viacom controlling shareholder Sumner Redstone. There’s little hope that Dooley can make meaningful changes inside of three weeks, so it is widely expected that the board will extend his tenure on an interim basis. Dooley is respected on Wall Street and well-liked by many internally at Viacom, so his interim posting is seen as an on-the-job audition.

But over the long haul, some feel the company would be best served by new blood to re-energize the businesses. Names like former DreamWorks Animation CEO Jeffrey Katzenberg, former Disney COO Thomas Staggs and former News Corp. COO Peter Chernin have been floating around. But Viacom’s recruiting process may be hampered by the fact that the company faces such an uphill climb.

“With media executives who have been quite successful and made a lot of money — you have to ask if they have the energy and inclination to embark on a multi-year turnaround (plan) at an unstable company,” said DiClemente. “It’s a big task.”

A plan for Paramount: The studio’s declining fortunes were another big factor in Dauman’s ouster. Nathanson projects that Paramount will lose an eye-popping $350 million in fiscal 2016. Dauman had embarked on a plan to raise cash by selling a 49% stake in the studio — under pressure from investors. But some believe Viacom would be better off shedding the entire asset.

“The problem at Paramount is truly shocking. the best Tom Dooley can do is sell 100% of Paramount to the highest bidder,” Nathanson wrote. “We are shocked that the board or the Redstone family doesn’t see the obvious need to deliver Viacom cash ahead of its looming debt refinancing cycle.”

But the Redstone family, which has an iron grip on Viacom, has made it clear that a sale of Paramount is likely not in the cards. Given that reality, the best approach is to be careful not to let the problems at Paramount get in the way of addressing other problems like options for the cable networks that provide the bulk of Viacom’s earnings. Rumors that Viacom has put a lofty $10 billion valuation on the studio could scare away potential suitors for the company, such as some combination of John Malone and Lionsgate.

“Paramount’s a really big swing factor,” DiClemente said. “If I’m advising the Viacom board I would say let’s not let the perceived price tag for Paramount let them get in the way of a potential strategic plan that is good for the cable networks.”

Fixing the cable networks: Viacom’s flagship cable networks — MTV, Nickelodeon, Comedy Central and BET — have been hit hard by the swings in the broader market because they catered to the younger viewers that have been migrating to non-linear platforms. At the same time, Viacom failed to invest or innovate as much as its industry rivals in programming, which hurt the company at a time when competition was exploding. The benefits of bringing in new leadership can be seen at MTV, which has shown renewed signs of life under president Sean Atkins, while VH1 has been on a roll under the direction of Chris McCarthy.

Nathanson suggests that more new faces are needed.

“The company needs to hire a cable networks CEO to oversee the entire network division,” he wrote. “That person should have proven success as a cable programmer and be aggressive in seeking to change the culture.”

A reunion with CBS Corp.?: Some see the reunification of the companies that merged in 2000 and divorced in 2006 as the best hope for Viacom. Nathanson wrote that the decision to cleave the Redstone media empire a decade ago was “an illogical idea that was made worse by poor execution and the changing dynamics of the media ecosystem. The right fix for National Amusements is to combine Viacom and CBS in stock-for-stock merger which creates massive cost synergies and puts a real programmer in charge of the business.”

However, the rub is that CBS Corp. management has no strategic reason to take on Viacom, which can only be seen as an albatross in the short term. That means a deal has to be creatively structured as to benefit CBS shareholders and most importantly not alienate CBS Corp. chairman-CEO Leslie Moonves and his team that has to date deftly navigated the Eye through the stormy industry transition.

“CBS management has long dismissed the value (Viacom) brings to their strategy and will need to be re-incentivized to do this,” Nathanson wrote.

Because of the hurdles to a deal with CBS and a sale of Paramount, Juenger has stressed that the new board needs to take a realistic look at their immediate options and plot the best course with the resources on hand.

“We believe ‘Plan A’ for any Board is to manage the business as if it is going to continue to exist as-is — don’t count on M&A,” Juenger wrote. “We don’t see M&A (at least, specifically, a sale/merger with CBS) as holding upside for (Viacom) shareholders because we don’t believe they’d be paid a premium.”

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