It was announced late Wednesday that Sumner Redstone would step down as chairman of CBS (CBS, Financial). Redstone, who currently serves as chairman of Viacom (VIA, Financial)(VIAB, Financial), is expected to step down from Viacom as well. These developments are not surprising since he is 92 years old, and there have been many questions about his health. In addition, Viacom cut his pay by 85% due to his lessened responsibilities earlier this year.
Shareholders have been clamoring for drastic changes since Viacom’s stock has been underperforming versus the Standard & Poor's 500. With Redstone’s imminent resignation as chairman, what should the company do next? A presentation by Springowl Asset Management LLC makes a compelling case for a number of steps in a presentation titled “How Many Photo Ops Does It Take to Cut A Stock In Half? Bringing Viacom Back.”
From Springowl’s presentation, the graph below shows Viacom’s underperformance relative to the S&P 500.
Springowl outlines its ideas to unlock shareholder value from Viacom’s assets.
Last year, I wrote an article outlining the investment case for Viacom. I briefly mentioned how management overpaid for stock buybacks. Management’s performance was something that I should have examined more closely.
The Springowl slide deck really drove home the point how poorly this management team has executed. It starts with the board of directors. The compensation for the board and the CEO has been excessive relative to its peers. You can see in the graph below that, over the last five years, Viacom’s market cap only increased by 3%, drastically underperforming its peers, yet the median compensation for the board (excluding Redstone) was second only to CBS.
Likewise, the CEO’s pay is also disproportionately large considering the stock's underperformance. The CEO’s expected pay for 2015 to 2018 will be over 60% paid in cash.
Under this CEO’s watch, the company has made a number of poor shortsighted decisions. Starting in 2011, the company sold children’s content including Spongebob Squarepants to Netflix (NFLX, Financial), aiding one of its major competitors. The company has assumed debt to overpay for share buybacks. Viacom spent $14.5 billion buying back stock since 2011. The average price paid per share was $64, and the stock has recently traded in the mid-$40 range. As a result, Viacom’s Total Debt to EBITDA ratio is 3. The debt limits its ability to buy content, stock or other assets. If they borrow more money, then their credit rating could be affected.
Under the current CEO, ratings have declined, and there has been a dearth of new hits. The CEO started in 2006. The slide below lists some of the shows he inherited. In recent years, Viacom stuck with reality shows even though that trend faded. The ratings decline has prompted 60 rural cable operators to drop Viacom from their programming in 2014. Springowl believes that Viacom’s stock would trade at a multiple more comparable to its peers if new management was brought in. Viacom trades at about a 6.8 multiple for EV/EBITDA while its peers trade at a multiple closer to 10.
Springowl’s other ideas include a mix of practical and speculative solutions. Their suggestions to take inventory of Viacom’s assets, reduce operating expenses and make a push into digital distribution are sensible. The company has spectrum assets that can be sold. Selling the Paramount movie studio may make sense as well. Viacom’s SG&A expenses are higher as a percentage of revenue than its peers. Springowl believes that $400 million can be saved annually with SG&A reduction. Viacom has not executed well on digital distribution. While other companies are investing in Hulu or offering their own subscription services, Viacom only offers a service aimed at young children.
Some of Springowl’s more speculative ideas include merging with AMC, the network of the popular show “The Walking Dead,” and entering into partnerships with Alibaba (BABA, Financial) or Amazon (AMZN, Financial). The reasoning behind an AMC merger is that AMC has a stronger programming lineup, and its CEO has demonstrated an ability to develop hit shows. AMC is a smaller company so Viacom would be able to offer its greater domestic and international distribution scale.
The reasoning behind partnering with Alibaba is for the company’s familiarity with Chinese speaking markets. Partnering with Amazon would make sense because Viacom would benefit from Amazon’s innovation and technical expertise. Ultimately, Springowl believes Viacom could reach a price of $95.90 per share if the company executes. The catalyst is a shakeup of the board and management. With Redstone likely stepping down, will the other pieces fall into place?
You can view their presentation here.
Disclosure: Long Viacom
