Viacom: An Epic Reality TV Show

| About: Viacom Inc. (VIAB)

Summary

VIAB's recent board shakeup and internal rivalry is certainly a negative to the share price.

CBS-VIAB merger is unlikely given that the downside risk outweighs the positives.

Paramount sales to BABA is a possibility given BABA's interest in scaling up Ali Pictures and prior collaboration with Chinese studios on several Paramount titles.

Viacom's (NASDAQ:VIAB) recent event can be considered for a reality TV series given that it's borderline ridiculous. However, it could potentially help VIAB in counting the ad dollar shift from its specialty channels due to the degree of drama (sarcasm intended).

Last week, National Amusement, the controlling shareholder of VIAB and CBS, kicked VIAB Chairman Philippe Dauman off the VIAB board. Oddly, Dauman will remain as the CEO but I doubt this will last long given the prior management shift. The potential of management changes and/or renewed talk on merging with CBS again is aligned with Shari Redstone's wish and that of the investors who have clearly lose faith and patience with Dauman running the company. However, the drama needs to end before this situation exacerbates and impact the company's operations and the share price. What investors can expect is that the legal proceeding can drag out into the future as Dauman and the board members battle for control of the company. This internal conflict essentially leaves no one with a significant degree of control.

Two things for investors to consider: CBS re-merger may not materialize and the Paramount sale could be a possibility.

On CBS re-merger, VIAB is unlikely to receive a premium if CBS were to take over VIAB again given the deteriorating outlook on the US specialty channels. A merger between CBS and VIAB only makes sense from a cost cutting perspective rather than revenue generation. Overlaps will be taken out and there is the possibility of shutting down some of VIAB's less popular TV networks. In addition, the integration risk involved with CBS and VIAB is high and no management team (particularly that of CBS) wants to take on the job of integration broken asset, reinvest in VIAB's networks and deal with the reinvestment or sales of Paramount Pictures. In short, CBS likes where they are and it is unlikely for them to take on extra baggage where there is more downside risk than upside potential. The only positive I can think of would be to gain some leverage on re-transmission deals with VIAB's cable networks but such a task is not as easy as it seems.

Given the current drama, there is also the question of whether a sale of Paramount stake or outright sale is a possibility. In my view, there is a high chance that Paramount could be sold. Recent media speculates that Redstone has engaged with Alibaba (NYSE:BABA) for a potential sale and I think there is a certain interest from BABA to acquire Paramount. When we look at Paramount's portfolio of movies, we see several hit title such as Transformers, Mission Impossible and Kung Fu Panda that have a distinct Chinese angle or were created in partnership with Chinese studios. Given that media content will be a key differentiator for BABA's media assets such as Youku (online distribution and OTT) and Ali Pictures (BABA's studios arm), Paramount could be an important addition for BABA to alleviate Ali Pictures to become a competitive studio on a global basis.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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