Viacom Fans Eagerly Eye the Future
George Mannes
06/21/04 - 10:51 AM EDT
Viacom's (VIA.B Quote) fans are hoping that
Blockbuster (BBI Quote) is the last stumbling block to the stock's recovery.
Viacom's
impending deal to unload its Blockbuster stock -- which follows a parade of bad news about the radio business and the departure of President Mel Karmazin -- could be the catalyst that will spark a rise in Viacom's stock, fans say.
Though initially dilutive, the Blockbuster spinout, according to this scenario, could help end the slide in Viacom's stock. The shares, which surpassed $70 in 2000, have lost more than 20% over the past year and closed at $37.03 on Friday.
If Viacom successfully completes the transaction, writes CIBC World Markets analyst Michael Gallant, investors will return to Viacom stock. He cites his belief that the company will buy back as much as $5 billion worth of stock. "Just as important," he writes, "we believe all the bad news of the past nine months will be perceived to be on the table."
Gallant has a sector outperformer rating on Viacom and a 12-18 month price target of $50 on the stock; his firm hasn't done any recent banking for the company.
Sitting on Hands
His optimistic view is shared by a Viacom shareholder, who says the stock has been hobbled over the past few months by investors' waiting around to see if Viacom would follow through on its announced plan to spin off the low-growth Blockbuster business. That filing arrived Friday afternoon, when Viacom and Blockbuster filed initial terms of the deal at the
Securities and Exchange Commission, and Blockbuster said it would make a $5-per-share special payout to stockholders.
"The filing itself is the catalyst," says the buy-sider, speaking on condition of anonymity.
As the buy-sider sees it, the Blockbuster deal is one of several hurdles that have dragged Viacom down over the past year.
Another, he says, was the uncertainty over the fate of Karmazin, who announced his resignation this month in the wake of longstanding chatter that he was clashing with CEO Sumner Redstone.
"I'm not thrilled that he left," said the investor, "but the fact that he might leave was an overhang on the stock."
Also hurting Viacom has been the performance of the radio business, says the investor, both at Viacom and industrywide.
Last week, a wave of sell-side analysts
cut estimates, price targets and ratings in the radio sector, citing various signs of weakness.
Insulated?
The investor himself says he thinks things will get worse among radio stocks before they get better. But, he says, further damage to Viacom -- parent of the Infinity radio chain -- is limited because radio is only one aspect of Viacom's operations, one whose weakness is being offset by success in television, cable and outdoor advertising.
"Now that everybody has capitulated on the radio numbers, what else is there?" says the investor. "There are no more reasons to keep someone from buying the stock."
Another positive catalyst, says the investor, is Redstone's previously stated plans to buy back stock once the Blockbuster deal is completed.
But the investor acknowledges there are threats to his positive outlook.
Radio is still "an overhang," he acknowledges, "but it's a known entity," and it's more than offset by strength in Viacom's other business units. The overall advertising market might take a hit.
There's also, he says, the perennial risk that Viacom might open up its wallet for a major purchase. "The big fear is the sizable acquisition," he says. "And every now and then, the rumor comes out."
But, he says, Viacom isn't likely to do a big deal until its stock trades higher.
