Viacom looks increasingly like CBS with rock stars

June 9, 2010

Viacom’s  youth looks to have been wasted on its investors. The owner of ever-hip MTV and kiddy king Nickelodeon was supposed to have been free to run when set loose from stodgy CBS, where Andy Rooney’s hangdog face still appears on a regular basis. But instead of growing, Viacom has simply aged. Showing a certain maturity, Viacom declared its first dividend. Sumner Redstone’s breakup logic has failed the test of time.

A conglomerate discount can be good reason for a carve-up. In the case of Viacom, the argument seemed at least superficially compelling. Let book publishing and broadcast TV trudge along separately from the more high-stepping cable networks and Paramount film studio. Business theory hasn’t turned into reality for Viacom, however. Since the divide, CBS shares, on a total-return basis including dividends, have tumbled 32 percent. Viacom’s haven’t fared much better — falling 20 percent.

Over the same span, shares of Disney — which owns a similar mix of businesses to a combined Viacom/CBS — have surged some 37 percent, and that’s before factoring in dividend payments. What’s more, Disney has managed to find growth-oriented acquisitions, including superhero maven Marvel and animation studio Pixar.

Viacom has generated cashflow but lacked for deals. That’s allowing it to fund its first dividend since the CBS separation. The payout — around $364 million annually — is a tiny fraction of its anticipated earnings per share, which will also get a boost, thanks to a restarted $4 billion stock buyback plan. But the 15-cent dividend is on a par with the average one CBS has paid while on its own, and probably will open the door to a fresh set of yield-seeking investors.

That hardly seemed the point of the breakup. Combining CBS and Viacom a decade ago failed to deliver the anticipated synergies and returns, and separating them again hasn’t unlocked much value either. That said, Viacom may yet deliver some measure of shareholder return. As a stand-alone cable networks operator, it should be easier for a rival like Time Warner to buy when Redstone eventually relinquishes control.

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