Former Viacom (VIAB) CEO Tom Freston made extended remarks on CNBC's "Fast Money" last night that were critical about his old company and his successor. Among his critiques, Freston argued that there should be:
- A change in leadership at the company, not only in the CEO post but in other key management positions
- A refresh of the board of directors
- A new focus on digital initiatives
- More effort on the creative aspects of the company, leading to more hit shows
All these points by Freston are on the mark and mesh with what we've previously said in our 99-page report on Viacom issued last January.
There was another point Freston made that resonated: "You can't lawyer your way into creating a great company."
It's time for Viacom to turn the page on this most troubled recent chapter.
Here are the next steps we would like to see Sumner Redstone take to help turnaround this still great company:
- Time for "Dauman Walking" to go. It seems to be unanimous among investors, the Redstones, employees and the press that Philippe Dauman should be replaced as CEO. He lacks the authority to lead the company anymore. If he's not replaced, more senior talent will start to leave the company.
- The next CEO of Viacom shouldn't be from current management. In our view, the next CEO shouldn't be someone such as current COO Tom Dooley whose career has been tied at the hip to Dauman. It should be someone outside the company with media and digital credibility as well as success developing hit shows or franchises. The names that seem to be mentioned most as possible next CEOs are Leslie Moonves of CBS (CBS) -- if Viacom were to merge with CBS -- or Jeff Katzenberg. Both men meet the criteria laid out above.
- A focus on new hit shows. At the moment, all of Viacom's $4.1 billion in annual EBITDA comes from its U.S. cable operations, including MTV, Comedy Central, BET, VH1 and Nickelodeon. The EBITDA from these operations is valued by Wall Street at a 7x multiple. Yet, CBS -- with more hits and more competent management -- gets an 11.5x multiple for its EBITDA from Wall Street. If new Viacom management can produce even one new hit show for each of its main networks over the next year, it's likely it can close the gap in EBITDA multiples with CBS. If it did, that alone could add another $45a share in value to the price of Viacom's stock.
- Provide more transparency about Viacom's International operations. Recently, Viacom management committed to a 2020 operating income target of $1 billion for its international operations. The new management team needs to do more to break out the growing value of its international operations and get Wall Street to properly value them. With that type of profitability and valued at an 11x multiple, that's another $25 a share in value that Viacom should be rewarded for in its stock price.
- Paramount. Is this going to stay as part of Viacom or be sold? There needs to be clarity for investors. National Amusements was reported to have recently talked to Alibaba's (BABA) Jack Ma about selling the studio. Current Viacom management has implied that investors value the studio around $10 billion (pre-tax) without a control premium built in. That is something that should be worth another $25 a share in value.
- Call out the value of Viacom's EPIX stake. At the moment, Viacom doesn't break out the financials of its stake in EPIX. It should. However, this likely would add only another $1 a share in value at present, though it is still a good growth opportunity.
- Articulate how the company is going to be smart about M&A vs. value-destroying leveraged buybacks. It's been conventional wisdom for some time that Wall Street investors prefer buybacks over investing an incremental dollar in the business. Yet Viacom has become the poster child of how that approach mortgages a company's long-term future. New management needs to clarify its capital return strategy going forward and how it will optimize more investments in digital and the future of Viacom instead of just more buybacks. Having a creative CEO would give them the credibility to do this.
The bottom line here is that doing all the things laid out above is a recipe to getting Viacom's stock quickly back to more than $70 a share, even with its current debt. To get that full valuation, it will need a new CEO and new board that can drive this vision and be capable of achieving it.