ViaSlow vs. ViaGrow

As Viacom divvies up its assets into two companies, a single piece has
turned up as foster child: Showtime Networks Inc.

Why is Viacom CEO Sumner Redstone taking billion-dollar cable network
Showtime from cable czar Tom Freston and handing it over to Les Moonves, whose
broadcast and radio operations don't have very much to do with the pay-movie

The answer reveals a lot about Viacom's grand plan to split into two
and the challenge Moonves faces as Redstone loads him up with the
slowest-growing parts of the company.

In the next several weeks, Viacom's board is scheduled to finalize the
details of the split, which calls for spinning off the company's relatively
spry divisions—cable and movies—in order to free the new entity from its
sluggish siblings, namely broadcast TV, radio and outdoor advertising.

One analyst dubs the two companies “ViaSlow” and “ViaGrow.”

Redstone hopes that two stocks are better than one. Some investors are
interested in companies that are growing quickly; other investors are
interested in “value” companies, which grow slowly but pay dividends.

Neither investor has been particularly interested in Viacom lately. So
the split will supposedly lift the overall value by giving investors the kind
of company they want.

When Viacom revealed the split plan in March, company executives said it
would be along the lines set a year ago after frustrated President Mel Karmazin
left and Redstone anointed two co-presidents: longtime MTV Chairman Freston and
CBS Chairman Moonves. Both have worked minor miracles in their respective

When Viacom initially disclosed the split, Freston's side of the
company was to keep all the cable networks and Paramount; Moonves would run the
CBS and UPN broadcast networks and stations, Infinity radio and outdoor
advertising, and Paramount's TV production and syndication units. The one
exception up in the air was book publisher Simon & Schuster, which
currently reports to Freston.

The deal is shaping up much, much differently. As Viacom is
“modeling” the new company today, Freston will keep only Viacom's
basic-cable networks and the DVD-fueled Paramount Pictures. Moonves is getting
all the slow movers, which include books, Paramount's theme parks (which are
for sale) and Showtime.

Sounds crazy, right? You'd think that, as a pay-cable network,
Showtime would remain tied to cable powerhouse MTV and certainly to its major
supplier of theatrical movies, Paramount. But that would be an attempt at
synergy, that quaint notion that companies make more money when different
divisions collaborate.

The folks at NBC Universal believe in it, but Viacom seems to have made
synergy less of a priority. This split is almost entirely a financial move. The
10 pieces of Moonves Inc. are slow growers, generally expected to post revenue
and operating-cash-flow gains ranging from just 2% to 7% next year.

Showtime, which has long trailed pay-movie giant HBO, had some decent
years of growth as DBS services expanded the number of homes taking cable
networks. But, according to the conventional industry wisdom, that has played
out, and its $1.2 billion in 2004 revenue is expected to grow only 3% in

Viacom executives note that success in the pay-network game depends
mostly on original productions, not theatricals. So it makes sense to team
Showtime with CBS and Paramount Television, which are experts in developing
hour-long series.

Perhaps. But the bottom line is that anything growing at Showtime's
pace would slow Freston's new company down. The whole deal aims to shelter it
from any drag on operating cash flow and, hence, its stock price. Freston is
left free to expand and acquire new businesses.

The positioning of the deal annoys Moonves and his team, according to
Viacom insiders. They hate investors' description of Moonves Inc. as a
“value” stock, which makes it sound like a utility business, not

Moonves has reason to be sore: not much growth at the divisions that are
on track. Infinity's billboard business might be bouncing back, but the radio
business is in a terrible slump. Even CBS isn't growing all that quickly.
Despite the network's power in toppling NBC this season, Morgan Stanley
estimates that CBS' revenues will grow just 3% to $4.3 billion this year. CBS
O&O stations are expected to be down 2% this year (no election spending)
but up just 6% next year. Average: 4%. Yawn.

But un-sexy does not necessarily mean unexciting from a stock-market
standpoint. Moonves' company will take on more debt than Freston's, with
the aim of using that cash to pay a relatively rich dividend and regularly buy
back stock. NBC Universal Chairman Bob Wright argues that the primary
beneficiary of a big dividend is Viacom's biggest shareholder, the Redstone

But “returning capital to shareholders” is a cliché on Wall
Street these days. And when things go right, leverage dramatically amplifies a
company's return on capital. So Moonves' personal stock options may be more
valuable under the new structure than under the current one.

“Slow growth doesn't imply that the 'Les side' is going to be a
dog stock,” says Merrill Lynch media analyst Jessica Reif Cohen. “It should
pay a reasonably high dividend, which is rare in media.”

One development to watch is whether Freston's and Moonves' groups
really become separate companies or they act as Redstone companies. For
example, Moonves' Showtime is dependent on Freston's Paramount for
theatrical releases. But that deal expires in 2007. Will Paramount truly seek
competitive bids from Showtime's rivals, HBO and Starz, or will those movies
remain in the Redstone family?

Of course, Freston's units could encounter unexpected troubles and
make Moonves' side the better stock. Sometimes slow and steady wins the race.

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