Why Viacom's U.K. TV Deal Is Underwhelming

NEW YORK (TheStreet) -- Viacom (VIAB), the owner of MTV and Comedy Channel,which generally uses its cash to buyback its own shares, said Thursday that it spent roughly $761 million to buy U.K. broadcaster Ch. 5 in a deal aimed at extending its international reach.

Going international has been a major trend of large entertainment companies for some years now. As pay-TV networks internationally expand and mature, the demand for higher quality U.S. programming makes such deals attractive.

Nonetheless, Viacom shares are down on the news, a reaction which is likely to irritate CEO Philippe Dauman, the button-downed executive who oversees the lives of Dora the Explorer and Sponge Bob Square Pants.

Viacom was losing 2.2% to $83.13 in mid-day trading, extending its 2014 decline to 4.8%.

The underwhelming response to the deal may be better understood when compared to AMC Networks' (AMCX) October acquisition of Chellomedia, the international division of John Malone's Liberty Global (LBTYA) in a transaction valued at 750 million Euros or about $1.035 billion, said BernsteinResearch analyst Todd Juenger, in an investor note.

Afterall, Juenger points out, AMC acquired a group of "niche pay-TV networks" in more than 200 countries with revenue that generated 85% from affiliate fees. In other words, advertising is gravy. Viacom, meanwhile, paid around $750 million for one advertising-driven, broadcast network in the U.K., hardly a high-growth market.

Not much of a comparison. And this comes after doubts about whether AMC's Chello deal was even a smart use of the company's cash.

"The signal of Viacom's willingness to do a deal and focus on international is encouraging," Juenger said. "We have been critical of the company's singular focus on buybacks. The question is whether this will be a one-off, or if it signals a major change of strategy for Viacom. This one network, however, isn't a game  changer, and we remain skeptical of the long-term prospects for its network portfolio in the U.S."

For its part, Viacom said its using cash generated from abroad, which wasn't earmarked for share repurchases. The deal will immediately increase earnings, the company said.

Juenger has a 12-month price target on Viacom of $86, a tiny premium based on its current trading level around $83.

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