The speed of changes at Viacom (VIAB) since last Friday has been breathtaking.
Sumner Redstone has reasserted control in a big way by replacing Philippe Dauman and George Abrams from the trust controlling National Amusements, which, in turn, controls 79.5% of both Viacom and CBS (CBS).
This suggests that daughter Shari Redstone and not Dauman will control both companies ultimately.
The reason why Viacom has been trading up this week on this news is because I believe Wall Street is pricing in the possibility that Dauman will soon be replaced as CEO and investors view this as a positive.
Why is Dauman's removal likely?
-- With the change in composition of the trust, it is clear that Shari Redstone and not Dauman will control the companies in the long run. I saw someone on Twitter referring to this reality now as "#DaumanWalking."
-- Can Dauman sue to get back in the trust and potentially gain control of CBS and Viacom? It seems highly unlikely since this is the will of the controlling shareholder. As was pointed out by Stephen Bainbridge in The New York Times yesterday, the more Dauman presses his case against Sumner Redstone, the more he opens himself up to a shareholder lawsuit that he is acting against the interests of the shareholders (including the controlling shareholder).
-- The legal team behind Redstone has done a masterful job so far in undercutting Dauman's protestations with his own words supporting Redstone's competency six months ago (around the time he received a $17 million bonus for agreeing to extend his employment contract by three years). They also have the benefit of the recent California decision throwing out the case of Sumner's ex-girlfriend, Manuela Herzer.
-- Redstone has made it clear he now doesn't want to sell a minority stake in Paramount. How can any buyer proceed with a purchase knowing this? A big piece of Dauman's strategy has now been thrown under the bus. He's effectively been neutered. Why would you keep him in the job under these circumstances?
So the question is now how quickly might his removal happen? At the rate things have been going since last Friday, it wouldn't surprise me if negotiations had already begun.
In our 99-page report on Viacom from last January, we pointed out that we believed no single action could help Viacom's stock price more than removing Dauman. We believe the stock would rise at least $10 a share in that scenario, and that may explain why the stock is up this week already.
Look at the multiple CBS gets for each dollar of EBITDA vs. Viacom with the same controlling shareholder as evidence of how good management gets valued higher than bad management.
Some Wall Street analysts have expressed displeasure about how Redstone wants to kill the minority stake sale. Jefferies has said its price target is predicated on such a sale because they want to see Viacom use the proceeds to reduce its debt levels.
Our view is that more investors would be excited about the ousting of Dauman than disappointed over the pause of the stake sale.
However, the natural question after that is what happens next to Viacom and who becomes the next leader?
Given that Redstone wants to maintain control, perhaps the most attractive option for him is to see Viacom merged back in with CBS and put CEO Les Moonves back in charge. That, of course, would require Moonves' willingness.
In such a scenario with a bigger company, the debt issues would likely get resolved as being part of a much larger company.
Would Viacom shareholders besides Sumner support such a deal? Of course, it would come down to price, but Moonves would definitely be more attractive as a CEO than Dauman.