Redstone's next move
Pushed to the back of the media stock pack, Sumner Redstone must be itching to do something. But his options are limited.
LOS ANGELES (Fortune) -- The drama around the possible defection from Paramount of the cinematic powerhouses behind DreamWorks is headline-grabbing - but it's only a distraction from what must really be driving Sumner Redstone crazy: In tough times for media giants, Viacom and CBS are doing even worse than their peers.
Year to date (as of Friday's close), Viacom (VIA) was down nearly 30%, CBS (CBS, Fortune 500) 27%. Among its nearest rivals, News Corp. (NWS, Fortune 500) was off 25%, Time Warner (TWX, Fortune 500) 13% and Disney (DIS, Fortune 500) 2%, against a decline in the S&P 500 of nearly 13%.
Typically, this is not a state of affairs that Redstone abides for long. One thing that sets the octogenarian apart from other media billionaires is his single-minded focus on his companies' share prices as well as a willingness to make jarring moves when he feels things are moving against his iron will.
So it must be of particular consternation to the sometimes cantankerous Redstone - whose home office in Beverly Hills is outfitted with a stock quotation machine - that his companies' shares have continued to slump since the split of Viacom into two separate public entities at the beginning of 2006. In the latest report critical of the split, Sanford Bernstein analyst Michael Nathanson recently estimated that the implied share value of the old Viacom -- that is, if it had stayed intact - is around $26 today. The stock was $32 the day before the split was announced in June 2005, already well below historic highs.
The big question hanging over the empire: How long can Redstone continue to gaze at the numbers flashing in red across the screen in his study before deciding it's time to make another big, Redstonian move? The way I see it - and based on his past playbook - he has a few options.
From buying Viacom to Paramount to Blockbuster and CBS, Redstone thrived on big media deals. But as Viacom's split underscored, big, bold media consolidation is no longer in vogue. Viacom CEO Phillippe Dauman has said that his company is not looking to do any big deals, while at CBS CEO Leslie Moonves just bought CNET Networks - an unusual diversification into a tech-based online news service, but nothing on the scale that the Sumner of old used to pursue. Viacom has also made some interesting add-ons, but certainly nothing along the lines of MySpace, which Viacom famously missed out on to News Corp. Ergo, this is not likely the ticket.
Like IAC/Interactive (IACI, Fortune 500), run by rival Barry Diller - who Redstone outgunned to buy Paramount - it's possible that Viacom and CBS could deconstruct even further, and select pieces could be sold or swapped. Some expected that CBS in particular would have divested its radio business - the nation's second largest - by now, or perhaps the Simon and Schuster book publisher. Among his many criticisms of how the split was done, Nathanson questioned why Paramount remained with Viacom - whose other main business are the MTV Networks cable channels and BET - rather than with the CBS television business and Showtime pay-TV channel. In particular, Nathanson expressed bewilderment at Showtime's decision to not renew its output deal with Viacom-owned Paramount, resulting in Paramount's announcement of a plan to set up a competing channel with partners MGM and Lionsgate.
Rich Greenfield of Pali Capital recently laid out a compelling case for Redstone to take Viacom private, but that seems unlikely. Two years ago, in happier capital market days, this might have made more sense. But taking on the necessary debt to go private goes against the grain for Redstone. (Of course, so does a sagging stock price.) It's also hard to envision that Redstone would be able to take Viacom private on terms that would allow him to retain his ironclad control, a 71% stake that he maintains through a class of super-voting shares. CBS may not be as close to Redstone's heart - but how fun would the quote machine be if either of his babies were private?
This is, shall we say, a classic Redstone technique. Moonves ascended into his role after the rocky tenure of Mel Karmazin as Viacom's president, and Dauman received his nod when Tom Freston, the longtime MTV executive, was fired from the newly-split Viacom two years ago. The suzerain has expressed nothing but confidence in both current CEOs, but the kingdom is always rife with rumors of intrigue. If anyone's place is secure, it would appear to be Dauman - he is not only Redstone's longtime confidante, strategic adviser and lawyer, but one of four trustees of his estate. Then again, didn't Redstone already move him out of the company's executive suite once - after the CBS merger - to make way for Karmazin...
Carl Folta, a spokesman for Viacom and Redstone, said no one is watching the stocks of CBS and Viacom more closely than Redstone and that he is confident that the corporate structures, strategies and people in place will create value over time.
Redstone can certainly find some solace in the view that media stocks generally are out of favor and this year there is the extra uncertainty of the economy and financial markets and their impact on advertising spending (not to mention all the wariness over media's digital future). As one wag put it to me, Bear Stearns advised Viacom on its split into two companies, and who could have predicted that Bear Stearns wouldn't be around two years later? Both Viacom and CBS, like the bosses of Time Warner (which owns Fortune and CNNMoney.com), have argued that the market has yawned while its businesses have been performing well and mostly meeting their financial targets. Perhaps the greatest irony of all is that Redstone's declaration that media conglomeration is over appears to be prescient. Time Warner is in the midst of morphing into something that looks similar in configuration to Viacom, getting out of cable and maybe more. Several other, smaller media companies have also pursued splits.
And yet, even if you conceded that Redstone was right strategically, you'd have cause to wonder if he got the timing or execution wrong. (As Redstone knows better than most, the market can't only be right when you are winning.) You'd also wonder how much of a cloud episodes like the intense scrutiny of Dreamworks' future cast over Redstone's empire, perhaps overshadowing other bright spots such as the improved year Paramount is having overall.
Staying the course is, for now, the declared strategy at both Viacom and CBS . And, indeed, that may prove the prudent course. After all, Redstone, who turned 85 last month, has said he plans to live forever.