Viacom's Hunt for Partner Foreshadows Big Media's Tough Choices

Move Shows How Far Viacom Has Fallen

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After buying the parent of Paramount Pictures in an epic $10 billion takeover battle in 1994, Sumner Redstone said he wanted to own that business "forever."

Last week, his successor as chairman of Viacom Inc., Chief Executive Officer Philippe Dauman, said he's looking to sell a slice of the storied studio, a crown jewel of the movie industry that produced "The Godfather" and "Raiders of the Lost Ark."

The move shows how far Viacom has fallen. Both of its businesses, TV and movies, are in turnaround mode, and Mr. Redstone, the company's 92-year-old controlling shareholder, is in frail health and facing questions about his mental competence.

Those problems have been exacerbated by the same pressures the whole media industry is experiencing. Viacom's main business -- cable TV networks -- has withered in a changing climate marked by shrinking ad sales, viewer losses and potent online rivals like Netflix Inc. Other media companies are also vulnerable to those changes and may have to consider their own drastic measures in the coming months.

"What does Viacom need? They need some money," said Mario Gabelli, whose Gamco Investors Inc. is the second-largest holder of Viacom's voting shares behind billionaire Mr. Redstone. "Philippe has to do something."

Just a couple years ago, media shares were surging as the industry appeared to have successfully navigated the transition to digital distribution while protecting its lucrative pay-TV revenue. Walt Disney Co. upended that view in August with the revelation that even must-have cable channels like ESPN are losing subscribers. That led to a 15% drop in the Standard & Poor's 500 Media Index, which includes Disney, Comcast Corp. and Viacom.

Viacom, with 78% of its revenue coming from cable networks like Nickelodeon and MTV, has fallen hardest. Its Class B shares are down 34% since August.

"The content stocks have been slaughtered, particularly Viacom, which is the poster boy of a bad media stock," said Barton Crockett, an analyst at FBR Capital Markets.

Mr. Gabelli, a longtime media investor, said others in the business, including AMC Networks Inc., Sony Corp. and Lions Gate Entertainment Corp., may be forced to find partners to navigate these choppy waters. Some are predicting a shakeup where smaller players are forced to sell out, and larger players turn to technology companies or foreign investors as a source of cash or strategic help.

Starz, the premium cable network controlled by cable billionaire John Malone, has been seeking a tie-up with another media company since 2014. A year ago, Mr. Malone swapped some of his Starz shares for a stake in Lions Gate, the independent film and TV studio. Lions Gate, with a 14.5% voting stake in Starz, said in February it plans to resume talks on a merger. Some analysts also say the studio would fit with Paramount.

In addition, two of Mr. Malone's companies, Discovery Communications Inc. and Liberty Global Plc, have shareholdings in Lions Gate as well. As part of that arrangement, the studio will create scripted shows for Discovery, which has focused in the past on unscripted fare for its namesake channel and networks including Animal Planet.

Viacom isn't the only big media company facing pressure. Time Warner Inc., which fought off a hostile takeover from 21st Century Fox Inc. two years ago, should consider spinning off its HBO premium channel, according to longtime media analyst Porter Bibb of Mediatech Capital Partners. HBO has a programming archive that's a "treasure trove" and could trade at a higher value as a separate company, Mr. Bibb said.

Chief Executive Officer Jeff Bewkes said on a recent earnings call "the combined scale of our businesses is critical" to taking advantage of the growing demand for video programming. In addition, some of Time Warner's debt is guaranteed by HBO, complicating a potential spinoff. Keith Cocozza, a Time Warner spokesman, declined to comment.

Some of Viacom's troubles are self-inflicted. Over the past five years, the company has spent $15 billion buying back shares, more than its profit over that span, while long-term debt has risen two-thirds to $12.3 billion. Film releases at Paramount dwindled to nine in 2013 before recovering, and the company was last among the majors in domestic box-office sales in 2015 after leading four years earlier. Last month, Viacom reported fiscal first-quarter sales slid 6%, as ad sales continued to slump. Net income was down 10%.

Viacom is also undergoing a leadership transition. Longtime controlling shareholder Mr. Redstone is 92 and in failing health. He stepped down as chairman last month, with CEO Mr. Dauman taking the job in a board vote contested by Mr. Redstone's daughter Shari. Mr. Redstone, who also controls CBS Corp., is also heading to trial over an ex-girlfriend's claims that he's mentally incompetent, a case that could affect who oversees his empire.

Mr. Dauman has said Viacom is headed in the right direction, investing in new TV shows and movies, audience tracking tools for advertisers and international channels. At a Jefferies Group LLC conference last week, he said the decision to sell part of Paramount has given him a window on the studio's international and digital growth opportunities.

"I've gotten a glimpse of what some of that can be based on discussions that I've had," he said. "And we would like to be able to pursue some of those discussions to bring not just financial benefit but strategic benefit to help drive the growth of Paramount as we go forward, and of course it will have a benefit for Viacom as a whole."

Selling a piece of Paramount to a Chinese company or a major tech company "could be really eye-opening," said Mr. Crockett, the analyst.

Depending on valuation, a sale could benefit Viacom shares and those of other studios thought of as potential take-out targets, like DreamWorks Animation SKG Inc. and Lions Gate, he said. A sale could also push Viacom to sell stakes in other parts of its business. The company's international cable networks are solid.

"If you get a smart strategic buyer of a big stake in a studio then you could get people thinking more about consolidation," Mr. Crockett said.

~~ Bloomberg News

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