In January, my firm -- SpringOwl Asset Management -- released a 99-page presentation on Viacom (VIAB) and why we believed it was significantly undervalued. We detailed a number of actions the company could take to raise its flagging stock price, including replacing its CEO, Philippe Dauman.
Dauman's reaction was to refer to us as "naysayers, publicity seekers and self-interested critics" on the next earnings call, while offering no credible turnaround plan.
On Feb. 18, I published an article here, titled: 3 Things Viacom Should Have Explained On its Earnings Call Last Week.
One of the areas I took Dauman to task on was India. Viacom has a number of interesting cable assets in India, which is one of the fastest-growing media markets in the world. However, Viacom had never given any specific guidance on how big these assets were compared to its peers. As a result, investors placed little value on them.
Here's what I said in that article:
In the current valuation of Viacom, the company is essentially getting no value for its international assets. Of all its international assets, the most intriguing are in India, where it owns a 50% interest in an Indian channel called Viacom 18 and a 50% interest in Prism TV. It's not clear from Viacom just how profitable these businesses are.
On the recent Twenty-First Century Fox (FOXA) earnings call, Fox's management team indicated that its Indian assets would do about $500 million in EBITDA in 2018. Meanwhile, there is another Indian broadcaster, Zee TV, that trades in India at 18x forward 2018 EBITDA. So, if Viacom's Indian assets are similar in terms of size and profitability, and you assume it gets a similar valuation to other Indian media assets, you're talking about a business potentially worth about $9 billion that is being valued at zero today.
But did Dauman explain this on the call, to help open Wall Street's eyes to the potential value? No.
Yesterday, Philippe Dauman spoke publicly, at the Gabelli Movie & Entertainment conference in New York, for the first time since Sumner Redstone removed him from the family trust. (Incidentally, does that make Redstone a naysayer or a publicity seeker?) Most of the press coverage of the talk focused on Dauman's comments that he wanted to proceed with his plan to sell almost half of Paramount -- and that he thought the sale would increase Viacom's share price by around $10.
It's worth noting that the stock has already gained $7 a share since Dauman was removed from the trust. Investors would likely bid it up further if he were to be removed as CEO, given the way the stock has acted over the past few weeks. If Dauman is trying to engineer the right moves to benefit value creation for all shareholders, he should perhaps weigh the benefits of stepping down vs. proceeding with the Paramount stake sale.
What wasn't heavily reported was that he revealed -- for the first time ever -- a profit target for Viacom's India operations. Dauman said Viacom's India assets would do $300 million in operating income by 2020. Furthermore, he said that all of Viacom's international assets would do $1 billion in operating income by 2020.
Zee TV now gets a 20x Enterprise Value to EBITDA multiple. Let's assume a 2020 operating income target gets an 11x multiple. That suggests that Viacom's India assets are worth $3.3 billion today, and that its entire international assets are worth $11 billion.
If we did additional sum-of-the-parts assessment, we'd note that Paramount seems to be worth about $6 billion from some of the whisper-bids we've heard. The U.S. Viacom assets do $4.1 billion in EBITDA and currently get an 8x multiple. That would suggest a valuation of $33 billion.
But CBS Corp. (CBS) gets an 11.5x EV/EBITDA ratio. That suggests that Viacom's U.S. assets could be worth as much as $47 billion -- if they were run by CBS CEO Les Moonves (or $14 billion more).
If you add the U.S. assets (using an 11.5x multiple), Paramount and the International assets, you get to a combined market cap of $64 billion. The current debt is $12.5 billion. This implies the Viacom equity should be worth $51.5 billion. This is well over $100 a share, but the current share price is around $52.
Even if Dauman stayed in charge of these assets and they kept trading at what I would call a "Dauman discount," the sum-of-the-parts analysis suggests that Viacom's share price should be at double the current levels.
Unfortunately, we, at SpringOwl, don't think the market will fully recognize the value embedded in Viacom's shares until Philippe Dauman and his other non-Redstone board members are removed.
We believe Sumner and Shari Redstone need to take swift and decisive action to remove the current leadership and board at Viacom -- and either replace them or merge Viacom back into CBS.