Viacom (NASDAQ: VIAB) is one of the major players in the media space. It owns TV networks likes MTV and Nickelodeon, and also owns Paramount Picture movie studios. Now, Viacom activists are spotlighting the obvious issues at Viacom that have led to a lagging stock price and one of the cheapest media stocks in the industry.
Viacom is off 38% over the last 12 months while the likes of 21st Century Fox (NASDAQ: FOXA), CBS (NYSE: CBS) and Time Warner (NYSE: TWX) are down between 10% and 25% for the year.
Meanwhile, Viacom’s management team has misstepped in terms of shifting to digital media. However, there’s also the issue of the 92-year-old Executive Chairman Sumner Redstone’s health. Redstone controls both Viacom and CBS as the No. 1 holder of voting shares for both companies.
Mario Gabelli’s Gamco Investors first started raising issues over Sumner Redstone’s health in December. Gabelli owns approximately 10% of the voting shares at Viacom. Gabelli’s core thesis was that Viacom needed to supply more info about Redstone’s health. The issue arose after Redstone’s girlfriend filed a lawsuit suggesting he was impaired. In addition, the activist investors note that Redstone regularly misses shareholder meetings and earnings calls, and the company has no real succession plan for Redstone.
New Viacom Activists Swing Into Action
The stock has now caught the attention of additional activist investors. SpringOwl Asset Management is calling for not just Sumner Redstone to step down, but also Viacom CEO Philippe Dauman. It’s worth noting that after Redstone’s girlfriend was thrown out of his mansion last year, Dauman was appointed as Redstone’s designated health agent.
SpringOwl’s 99-page presentation on Viacom lays out ways to turn Viacom around, including new management and a new focus on digital content. The Viacom activists’ document is much like the 99-page presentation it released on Yahoo (NASDAQ: YHOO) earlier this month.
Key Strategies for Change
SpringOwl, much like what Gabelli, would like to see Viacom take an investment from Alibaba Group (NASDAQ: BABA) or Amazon.com (NASDAQ: AMZN) to help build up its Paramount Pictures brand. A deal with Alibaba would also give Viacom a presence in China.
Then there’s the fact that Viacom could be a dealmaker, either buying up AMC Networks (NASDAQ: AMCX) or re-merging with CBS. The analysis suggests the key would be replacing Viacom CEO’s with someone who has more experience in digital media.
Shares should trade higher if Viacom can shake the corporate governance discount. Some of its bigger corporate governance issues include the fact that only about a quarter of its board is truly independent, and with 11 board members, it has one of the largest boards in the media space.
Viacom also has some solid international assets and is a major TV network. Going forward, Viacom needs to focus on more creatively created shows. It also needs a presence in the over-the-top, streaming and digital platforms.
However, Viacom does have a dual-class structure, which means it will be tough for Viacom activists to force management out and achieve meaningful change. But the stock is so cheap that it might be worth a closer look.
Shares of Viacom are trading at close to 6 times next year’s earnings estimates – while all the other media company companies are trading at double-digit ratios. Viacom also has a 16% return on invested capital, which tops many of its peers. Even without new management, just a solid focus on cost-cutting and international expansion with digital content could lead to solid upside.
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