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The battle for control of
Rahul started his Marketocracy fund in August, 2012. For the past 1 and 3 year periods, he has outperformed the average U.S. Equity mutual fund manager. Before taking anyone’s investment advice, you should always check out their track record. Here's Rahul’s.
Ken Kam: Now that the battle for control of Viacom is over, what happens next?
Rahul Garg: Recently, Philippe Dauman stepped down. Thomas Dooley, previous COO under Mr. Dauman, is the interim CEO until September 30. All the lawsuits are pretty much settled, and the new board has been meeting to evaluate the business.
Kam: What do you think is going to happen to Viacom now?
Garg: In my mind, there are four possibilities or some combination of the four.
- Viacom’s new board decides to go ahead with the current assets and pursues no M&A options. That is likely the least beneficial option at this time due to changes in media business and poor performance of Paramount. This will also give Viacom least flexibility to pursue entities like Buzzfeed or maintain its dividend at current levels. But if they do decide to cut the dividend, I would use some part of the cut to do opportune buybacks since the company’s stock is undervalued and priced as a distressed asset. Certain segments of the company are distressed as media model is changing, but others like Nickelodeon are #1 in their segment.
- The Board pursues the sale of all or 49% (or lesser %) of Paramount. Paramount has been drag to the business as it has been unable to produce any decent hits. Dalian Wanda Group is reportedly interested in making a deal for Paramount. Rumored offers range from $10 billion ($25/share) for all of Paramount to $4 billion ($10/share) for 49% Paramount. Either deal would unlock shareholder value for Viacom and provide adequate capital to invest in new programming as well as pay upcoming debt payments in the next few years.
- A Merger with
CBS has been rumored. Though this could lead to fair amount of synergies and be mutually beneficial, there is the possibility of shareholder lawsuits and negative publicity for Ms. Shari Redstone and the new board. CBS shareholders may not want to disturb a well-functioning business, while Viacom shareholders may not want to be “taken under” as share prices has dropped over 50% in the last two years. Moreover, in this scenario, the Redstone family does not get a chance to diversify their media holdings. But for long term investors, I still think a 1:1 combination of CBS and VIAB would likely be extremely beneficial for both parties. Yesterday, however, Les Moonves, Chairman and CEO of CBS, basically denied any conversations of combining the two. Hence, this is likely not going to happen. - Sale of all of Viacom as a whole or in pieces.
Apple had been rumored to considerTime Warner in the recent past, and it could swallow all of Viacom at a much lower price tag and get a movie studio with it. Amazon may be interested as well. John Malone, billionaire media guru, recently called Viacom’s media assets “substantially undervalued due to turmoil” in a recent interview, and maybe combination of its media assets with Discovery orAMC Networks is in the cards. Some rumors ofAT&T andComcast have been mentioned as well.
Kam: Do you have confidence in the new Board members?
Garg: The new board members are:
- Kenneth Lerer, Chairman of Buzzfeed
- Judith McHale, Former CEO of
Discovery Communications - Ronald Nelson, Chairman and CEO of
Avis Budget Group - Nicole Seligman, Former President of
Sony Entertainment - Thomas May, Chairman of
Eversource Energy
Along with the previous board members, this is a phenomenal team that is currently evaluating to see what the best course of action is. I believe that they will find a good solution. To me, a turnaround on its own is possible but hard to accomplish. Viacom remains enormously profitable making over $4/share, but growth seems to be hard to come by. I think some sort of M&A would be needed to fix the balance sheet to move forward.
Almost the entire debt of Viacom can be paid off by a Paramount sale, but I am not sure if Viacom needs to sell all of it at present. The key player here is Shari Redstone. Question is if she wishes to diversify media holdings at decent prices by selling Paramount as well as media assets to varied interested parties or take the harder road of Viacom recovery with or without combination with CBS.
Kam: Are you still worried about the shareholder classes and the price difference between VIA (voting) and VIAB (non-voting) shares?
Garg: It is hard to say. On one hand, statements from National Amusements do not suggest any malintention to differentiate between the economic value between the two shareholder classes. On the other, the difference remains more than 11%. This suggests that the market does not believe that the final outcome would be favorable to non-voting shareholders.
The other possibility is that the difference could be due to lack of supply of voting shares (80% are owned by National Amusement and about 10% by clients of Mario Gabelli).
I just hope that market is not right as it would certainly make me question the independence of the new directors as well as the new board. They should do what is best for all shareholders, not for “some shareholders.” Hopefully Shari Redstone will further enhance her father’s legacy with a fair equitable solution.
Kam: How about Shari Redstone - do you have confidence in her?
Garg: I agreed with Shari’s opinion that Philippe Dauman had not done a good job as CEO of Viacom. Any sale of Paramount without long term plans regarding Viacom would have only prolonged his tenure, which had seen him earns hundreds of millions of dollars while the shareholders suffered. She did a masterful job to oust Mr. Dauman.
I believe that Shari now has to utilize the knowledge of the board members to come up the best course of action for Viacom’s value realization. If she is unsuccessful after such public drama or if she does not treat all shareholders equally, she would give Mr. Dauman an opportunity to say,” I told you so.”
He sold more than a million shares of VIAB at around $42/share voicing his opinion regarding change of leadership. Hopefully Ms. Redstone will prove his decision to sell wrong. Moreover, as a daughter, despite her father’s weaknesses, she would want to uphold the value of a company and a movie studio that Mr. Redstone held so dearly.
Clearly I am still a shareholder and have not sold any shares of Viacom thru any of the turmoil, but continue to add when can. So I believe in her and Viacom’s economic moat. Time will tell if I am right.
Kam: What do you think Viacom is worth?
Garg: I estimated Viacom to be worth between $60 to 90/share. I still think similar values can be obtained especially now that the power struggle overhang is gone.
Richard Greenfield of BTIG Media suggested $80 ($55/share for Viacom’s media assets without Paramount) in a recent article in Barron’s.
Eric Jackson of SpringOwl Asset Management has suggested values between $70 to $90. A combination with CBS should be at least 1:1 stock combination, and Viacom (VIAB) is about $42 while CBS is about $52.
I still believe Viacom is substantially undervalued. John Malone agrees with me. The question is whether the new board can help realize that value or destroy it like previous leadership.
My Take: One way to interpret the widening gap in price between viacom’s voting and non-voting shares is that the market is worried that the non-voting shares will not be treated fairly.
However, now that the battle for control is settled, the most important use of the right to vote has been exercised, so the premium for the voting shares should get smaller.
In the meantime, the non-voting shareholders should still receive a 4% dividend while waiting for a catalyst to trigger a revaluation of Viacom’s assets.
To explore whether Rahul’s portfolio makes sense for you, click here to schedule a One-on-One with Ken Kam.
Disclosure: I am the portfolio manager for a mutual fund advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.
