Something seems like it has to give.
Now that Viacom is no longer hindered by speculation about whether the media conglomerate will be acquired by CBS (CBS - Get Report) , new CEO Bob Bakish must decide whether Viacom's network portfolio should remain as is or, more likely, to close or combine many of them.
Still in need of cash to finance long-term debt that stood at $11.9 billion as of Sept. 30, Viacom in 2017 could "sell off between one and eight of its fully distributed linear networks," Loop Capital Markets media analyst David Miller said in an investor note Friday.
A Viacom spokesman said the company had no comment on whether it planned to sell, combine or close any of its networks. Shares of the New York company, which have fallen nearly 14% this year, were up 0.4% Friday morning to $35.41. Miller, who could not immediately be reached for further comment on potential sales or buyers, has a $37 target on the share price.
Yet the need to consolidate Viacom's networks has become increasingly apparent as subscriptions to pay-TV continue to decline, though at a relatively slow pace of 1.7% per year, according to Nielsen. Pay-TV operators also are looking to cut costs while offering users smaller, so-called skinny packages that offer quality over quantity and at price points more attractive to younger millennials.
The future of Viacom's networks is one of many important decisions Bakish must confront in the coming months as he seeks to stabilize a company that has been buffeted for months, if not years, by a succession of high-level executive departures and questions about its future as an independent company.
For Bakish, the decision earlier this month by Shari Redstone, Viacom's controlling shareholder, that she would no longer pursue a merger with CBS, which the Redstone family also controls, has freed the company's new management team to pursue its own strategies.
Under previous CEO Philippe Dauman, Viacom created new networks designed to appeal to a variety of demographic groups, given that the company neither owned a major broadcast network nor a premium/pay network other than its 42.8% stake in Epix. (That stake also raises M&A questions in the wake of Lions Gate's (LGF) acquisition of Starz. Lions Gate and MGM are Viacom's partners in Epix.)
That Viacom's six largest networks -- MTV, Nickelodeon, Nick Jr., Comedy Central, BET and SpikeTV -- supply between 80% and 85% of the operating income at the company's media networks group has put increasing pressure on its remaining networks to justify their continued existence.
By comparison, Time Warner (TWX) operates 11 networks not including HBO, Disney (DIS - Get Report) oversees 14, 21st Century Fox (FOXA) owns 11 networks, AMC Networks (AMCX - Get Report) operates four and CBS has just one, Smithsonian, not including the premium Showtime.
To be sure, the company's September decision to cut its quarterly dividend in half eliminated any short-term liquidity issues.
Selling Viacom's smaller networks such as Logo; Colors, a joint venture with PrismTV; TMF; CMT; TV Land; Viva; or even VH-1, though, could raise as much as $4.8 billion in cash on a pretax basis, Miller said. That would allow the company to invest in new programming at MTV, an effort that Bakish already has identified as a high priority, while paying down debt, which Miller said stood at 3.97 times earnings before interest, taxes, depreciation and amortization for the trailing 12 months.
As for the company's Paramount Pictures, Miller argued Bakish should make clear to investors that Dauman's effort to sell part or all of the studio is officially off the table. Owning a Hollywood studio, no matter how poorly it has operated in recent years, is a smart long-term strategy.
"For Viacom to see notable gains in its stock price, fixing Paramount is actually -- well, paramount," Miller wrote, "as film nowadays is seeing an ever-longer tail due to the explosion of exhibitor screen overseas, and due to multiple over-the-top mechanisms that simply didn't exist 3-5 years ago."
Bakish enters the new year without the overhang of a CBS merger yet with many of the same challenges that have flustered the company in recent years: declining ad sales at its cable TV networks and an inability to offer content that appeals to millennials far more enamored with Vice, Facebook (FB - Get Report) and Alphabet's (GOOGL - Get Report) YouTube than Viacom's traditional networks.