Telsey Advisory Group analyst Tom Eagan expects the pending Viacom-Charter carriage deal will translate to lower domestic affiliate revenue for the programmer.
As Charter Communications and Viacom continue to negotiate their carriage renewal agreement – the programmer granted the operator a short extension Sunday night (Oct. 15) – Eagan warned that any price cuts could trigger similar arrangements with other distributors.
“By early this week, we expect the contract will be renewed,” Eagan wrote in a note to clients Monday (Oct. 16). “But, we also expect it will be renewed at lower rates and for fewer channels. We expect this deal will translate to lower domestic affiliate revenue and a lower value for Viacom equity holders.”
Viacom’s carriage deal with Charter, representing about 16.6 million customers across the country, including New York and Los Angeles, was set to expire on Oct. 15 at 7 p.m. While there was much chest thumping leading up to the deadline on both sides, Viacom issued a statement Sunday night that it had granted a short extension to the deal that would keep its programming on Charter systems while it worked toward a conclusion.
But whatever agreement is eventually worked out, it will likely be for a lower affiliate fee than what Viacom had been receiving in the past – Viacom has said in statements that it offered lower rates to Charter but was rejected – and possibly for fewer networks. Viacom has about two dozen channels, but in February said it would focus on six core networks – MTV, BET, Nickelodeon, Nick Jr., Comedy Central and Spike TV (to be renamed Paramount Network).
In the note to clients, Eagan wrote that he expects Viacom’s new Charter rate to be about 15% below what the MSO had paid in the past and for fewer channels. At the lower rate and for just six channels, Charter would see the affiliate fees it pays Viacom reduced by about 24%, Eagan added.
But Charter is the third largest multichannel video programming distributor in the country – behind AT&T-DirecTV and Comcast, which likely have MFNs that guarantee other smaller providers don’t have better deals.
Eagan estimated that Comcast is likely paying about 3% less than Charter, and coupled with a reduction in the number of networks they would have to carry, could translate to 14% less in affiliate fees paid by Comcast. Also assuming that AT&T-DirecTV is paying about the same as the new Charter rate, having to carry fewer networks would translate into an 11% reduction in the telco's affiliate fees.
Viacom stock took a beating early last week – it reached a seven-year low on Oct. 9 after Citigroup media analyst Jason Bazinet slapped a “sell” rating on shares and speculated that Charter would drop one or all of the Viacom networks. The stock has since begun a climb back – it was up 2% (54 cents each) to $26.54 per share in early trading Monday. But Eagan warned the lower affiliate fees could also result in a $2.10 per share reduction in Viacom’s overall valuation.
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