Redstone's $1Billion Sell-Off

Viacom and CBS chairman Sumner Redstone broke a year-old promise to investors last week when his National Amusements Inc. said it would sell nearly $1 billion of its Viacom and CBS shares, but at the same time removed an albatross that has been hanging on both stocks for some time.

Privately held NAI, the Boston-based theater chain that houses his Viacom and CBS shares, said last Wednesday it would sell shares in both media giants worth $945 million to satisfy NAI debt. NAI and Redstone would continue to hold a controlling interest in both CBS and Viacom.

Pali Research media analyst Richard Greenfield, who has been critical of Redstone and Viacom in the past, summed up the implications of the deal succinctly.

“The lesson learned: Sumner Redstone builds assets and does not part with them easily,” Greenfield wrote.

The deal includes the sale of about $345 million in CBS stock (26 million shares) and about $600 million worth of Viacom stock (about 19 million shares). According to a prepared statement, NAI will retain in excess of 75% voting control in CBS and Viacom and said that the sales would allow it to pay its creditors in full. CBS also reiterated its full-year 2009 outlook, anticipating cash flow in the range of $1.725 billion and $1.925 billion.

Basically, NAI is conducting a secondary offering of the Viacom and CBS stock — last Thursday, Viacom priced its shares at $28.25 each (a slight discount to its closing price of $30.58 on Oct. 14) and CBS slapped a $12 price tag on its shares (a slight discount to its Oct. 14 close of $12.52 each). In separate statements, NAI said it expects to raise about $312.5 million from the CBS stock sales, $343.7 million if underwriters' over-allotments are exercised. The Viacom sale will net the theater chain $547.6 million and could rise to $602.3 million if the over-allotment is exercised.

Citigroup is acting as sole book-runner and joint lead manager for the offering, with J.P. Morgan serving as joint lead manager.

“As a result of our actions, National Amusements will be out of debt with its existing creditors and will still control its most important assets,” Redstone said in a statement. “We believe in the significant long-term value of Viacom and CBS Corporation, both of which are well-positioned for growth in this improving economic environment. Similarly, with leadership positions in key domestic and international markets, National Amusements theaters have outstanding near and long-term prospects.”

The sale appears to end what has been a cloud of uncertainty surrounding Redstone's holdings in both media giants. Last October, he created a bit of a firestorm after NAI said it would sell about $233 million worth of Viacom and CBS stock to satisfy debt covenants. Fears that Redstone would be forced to sell even more shares hurt both stock prices — Viacom shares fell 17% and CBS shares dipped 20% on Oct. 10, 2008. This year, the stocks are actually on the rise — CBS shares have gained 36% since the beginning of the year and Viacom stock is up 42%.

That rise in the value of the shares may have given Redstone some breathing room with regard to NAI. Redstone was forced to sell his CBS and Viacom stock last year, mainly because of its precipitous fall in value (Viacom shares had fallen more than 50% and CBS was down more than 60% between January and October 2008). With a healthier stock portfolio, NAI isn't forced into a fire sale of its assets.

With roughly $1 billion in proceeds coming from the stock sales, NAI will easily make its most-pressing loan payment, a $500 million obligation due next month. And coupled with a planned sale of some of 35 of its non-core theaters, mostly in the Midwest, the company will be able to shave a considerable amount off the remaining $1.1 billion of long-term debt.

After the dust clears, Greenfield estimated, NAI would have about $300 million in long-term debt post-stock deal (even less after the non-core theaters are sold) and about $2 billion in assets, including $1.3 billion in Viacom and CBS stock.

In May, NAI announced that it had agreed to restructure its debt with its lenders, and had hinted it would sell some of its theater properties to satisfy the obligations.

Despite what Redstone had characterized as strong interest in the properties, no deal came to be. One likely reason: the logical buyers — Regal Cinemas, AMC Theaters and Cinemark Holdings — are having their own debt problems.

While the sale appears to contradict Redstone's own statements last year when he pledged to not sell a single share of either company, the deal does remove a big overhang on the stocks. And investors appeared to take the moves as good news, a stark contrast to a year ago. Both stocks finished last Wednesday in the black, with CBS up 37 cents (3%) to $12.52 and Viacom up 49 cents (1.6%) to $30.58 per share.

Miller Tabak media analyst David Joyce said the most recent deal shouldn't spook investors like last October's moves did, and added that it appeared that given the economic climate, Redstone had little choice.

“This NAI debt restructuring has been on Viacom and CBS shareholder radar screens since [last October], but with Redstone vowing no “intention” to sell shares, and with no buyer for his movie theater chain, capitulation to sell, while still retaining a 75% stake (through retention of his super-voting Viacom and CBS shares) was the only option.”

Sumner Redstone's National Amusements said it would sell nearly $1 billion of Viacom and CBS stock to help pay off its outstanding debt: