That grinding noise you hear? That’s Sumner Redstone and other Viacom investors mashing their teeth into a pulp. In January 2006, Sumner split his empire in half — CBS was supposed to be the value stock, and Viacom the go-go growth stock. But Pali Research’s Rich Greenfield notes that at $32.85, VIAB is actually down 2% from where it was two years ago.
What’s wrong with the company? Nothing in the numbers: Its cable channels are well-positioned against a recession, it is throwing off plenty of cash, and it should still be posting double-digit EPS for years to come. And don’t pay attention to the uproar over Steven Spielberg bolting for a new studio backed by Indian money — Philippe Dauman was absolutely correct when he noted that Spielberg’s departure would be “immaterial” to Viacom’s prospects. The problem, Rich argues, is the “increasingly broad investor distaste for Viacom’s management team and the lack of respect/confidence in the company’s earnings prospects.”
What to do? Rich thinks that Sumner should stop trying to please Wall Street altogether, and take Viacom private. He figures Sumner would need about to take on $21 billion in debt, which he realises isn’t going to happen anytime soon. His alternate suggestion — do it in steps:
With cap/ex as a percentage of revenues at just over 2%, we believe there is no reason why Viacom should not be looking to dramatically increase its leverage and essentially begin a creeping privatization (until the debt markets enable a more significant transaction).
We’ll trust Rich’s numbers here, but we don’t think Sumner will. Or more precisely, we don’t believe Sumner has the patience to take his company private incrementally. We think he’s more likely to consider a faster fix, like the last time his stock was stalled: Change CEOs. Careful, Phillipe.