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A Worst-Case Scenario If Dish Drops Viacom

With its falling ad revenues, Viacom’s last earnings report made it something of a disappointment on Wall Street. But things could get worse for Sumner Redstone, Philippe Dauman, SpongeBob SquarePants, et al if it can’t work out a carriage renewal with Dish Network.

Analyst Todd Juenger of Sanford C. Bernstein, never a fan of Viacom, figures that the company’s stock will be an underperformer if the chances of being dropped by Dish are 20%. Juenger thinks the chances are higher. Basing his calculations on a 40% chance of getting dropped, Juenger sets a target price of $42 for Viacom shares, which closed Thursday at $45.75.

Once the Dish negotiations play out, the market reaction is simple to predict. If Dish renews, Viacom stock goes up. Juenger figures the upside case puts Viacom shares at $51. But if there isn’t a renewal they could plunge to $28. With Dish representing 14% of Viacom’s distribution, getting dropped by Dish would reduce viacom’s affiliate fees by 8%, according to Juenger, who says Dish currently pays lower than average rates. (Juenger reminds investors that Cablevision reached an agreement with Viacom, but got buyers remorse and sued the programmer.)

Reaching fewer households, Viacom’s ratings delivery would also drop, so he calculates ad revenues would drop 10% as well.

“We strongly believe that a Dish drop would likely allow, if not encourage, other smaller MVPDs to drop Viacom as well. In our estimates, Viacom will be renewing about 11% of its carriage agreements between Dish's drop and end of FY18," Juenger said. “In our downside model, we assumed that 50% of these agreements (5.5% of Viacom's total) will not be renewed.”

As a reaction, Viacom management would aim to cut costs to maintain earnings and the investment-grade ratings for its debt. Cuts could lead to a spiral downward, Juenger warns. “Cutting investments in programming and M&A will diminish Viacom's future earnings potential, which will necessitate further cuts that lead to a further shrinking of investment, and so on,” he says.

The situation appears far less ominous to some other analysts.

Kannan Venkateshwar recently upgraded Viacom stock because he thinks the risks the company faces have already been factored into its price. In a recent note Venkateshwar says that while concerns about distribution—and the negotiations with Dish in particular—are valid, “we do not expect any of the large distributors to drop Viacom."

And while Dish might be what Venkateshwar terms “a wild card” “we are skeptical that dish has anything to gain by shrinking the bundle and losing subs.”