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Factiva RTF Display Format • Viacom 's Latest Cable Hit: "The Big Payout" • Time Warner Cable Partners With Viacom to Make TV Channels Available Online • Media: Viacom Loads More Ads on Channels --- As Viewership Falls at Some Networks, Firm Increases Air Time for Commercials to Maintain Revenue • UPDATE 2- Viacom profit misses, hurt by weak US cable advertising • Viacom , DirecTV reach 7-year deal GE expects big earnings growth • WSJ UPDATE: DirecTV , Viacom Reach Agreement to Restore Channels • Viacom , DirecTV in Epix tug-of-war • Viacom sees red Cable ratings bloodbath from DirecTV blackout • Viacom -DirecTV cost dispute highlights concern over pay-TV's future • DirecTV , Viacom take fight to Web • DirecTV - Viacom Dispute Turns Into Blackout Reality • WSJ BLOG/Deal Journal: News Corp . Split, the Viacom Way • Viacom to Offer $400 Million in Debt • Viacom and Time Warner Cable Reach Deal on App for Streaming Programs • Viacom Signs A New Lease To Expand In Times Sq. Page 1 © 2012 Factiva, Inc. All rights reserved. Viacom's Latest Cable Hit: "The Big Payout" By Leslie P. Norton 1,625 words 8 October 2012 Barron's B 21 English (c) 2012 Dow Jones & Company, Inc. Dark skies were hurling down rain outside Viacom's Times Square headquarters on a recent morning, but the atmosphere inside was bright. A smiling employee was handing soaked visitors copies of the masks made famous by the Teenage Mutant Ninja Turtles, the superheroes whose cartoons are being lavishly relaunched by the entertainment company. One worker was even humming the series theme song in the bustling lobby. Fifty-two floors above, Viacom's dapper chief, PhilippeDauman, was equally upbeat about his company's ability to weather its own run of storms. The entertainment outfit's crown jewel, the popular children's TV network Nickelodeon, has revamped nearly its entire fall lineup to try to reclaim the No. 1 ranking it ceded to Disney this year. Seemingly endless reruns of once-big money spinners like SpongeBob SquarePants are being cut back to make way for newer fare. An aggressive overseas expansion is under way and Comedy Central hits like The Colbert Report and The Daily Show have hit a sweet spot with the elections in full swing. Even if they missed the Ninja Turtles' debut in late September, investors should be tuning into the stock, which has some other powerful forces on its side. Most important, Viacom generates lots of cash flow -- an estimated $4.2 billion in the recently concluded fiscal year -- that has allowed it to return money to shareholders at a prodigious rate. In 2012, it bought back $2.8 billion of stock, or a tenth of its market value. It also paid out $550 million in dividends, giving the shares a 2% yield. Dauman reckons the two payouts accounted for a 14% return to shareholders in fiscal 2012. In effect, Viacom gradually is taking itself private. Late last year, Dauman told an investor conference that he intended to return $20 billion of capital to shareholders over five years; the company was convinced that big acquisitions destroyed value and wanted to focus on organic growth. On a hypothetical basis, if you assume that Viacom (ticker: VIAB) spends three-quarters of those funds on buybacks, that would come to $15 billion. Its equity market value is just $28 billion. Granting -- again, this is theoretical -- that the stock price didn't change, the buyback would reduce Viacom's float by 53%, to $13 billion. At last week's valuation, the remaining shares would be worth more than twice their recent $54, or about $115 a share. In reality, the buyback's likely to push the shares higher, meaning fewer will be retired. Analysts agree a price of $60 to $75 would be reasonable over the next 12 months. Dauman insists Viacom will keep gobbling up stock. "Either there will continue to be shares available for us to buy, or we'll be fighting with somebody for that last share," he says. Buying back shares It has no plans to stop. "We are committed to our buyback program . [it] "is accretive at higher price points than where our stock is right now, and our multiple is relatively low," says the former Shearman & Sterling partner and Viacom general counsel, who's known as a savvy deal maker. With interest rates so low -- Viacom recently issued $100 million of three-year notes with a coupon of 1.25% -- the buyback makes even greater sense. "It's close to free money. If I retire a share of stock at which I'm paying 2% [dividend] and paying 1.25% [to borrow], we come out ahead. And your earnings per share Page 2 of 31 © 2012 Factiva, Inc. All rights reserved. go up" as the number of shares is reduced, notes Dauman. The buyback plan obviously isn't new, but Viacom's valuation, with the supply of shares dropping steadily, remains compelling. The stock has risen 19% so far this year (it's up 30% since becoming a public entity in its current form in 2006). But the 2012 performance is dramatically less than Viacom's peers' average rise of 31%. At 54 last week, it trades at just 11.2 times forward earnings, well below the market's 13.5 multiple and a discount to the media group's 14. That's cheap, particularly in light of its 12.5 historical multiple and the possibility for new revenue streams. It wouldn't be the first time that Viacom was taken private -- that's what media mogul Sumner Redstone, now 90, did when he bought the company in 1987, with Dauman as his lawyer. The original company was split into Viacom and CBS in 2006. Redstone, Viacom's chairman, controls the majority of the voting A shares (only the B shares are being bought back), which means he is the biggest beneficiary of the dividends. As supply outstanding falls, his economic interest in the company rises; the higher earnings per share should also bolster the value of his holdings. Reducing the supply of stock and paying a healthy dividend are great for shareholders, but the resuscitation of Nickelodeon is a needed catalyst. About 43% of all cable viewers watch Nick each month, and it's said to account for as much as a third of Viacom's cash flow, or earnings before interest, taxes, depreciation, and am-ortization (Ebitda). That's why the last year was so disappointing. Ratings fell by nearly a third as kids' viewing staples like iCarly and Victorious began to show their age at about the same time children decided they couldn't absorb any more SpongeBob repeats. Revenue fell an estimated 6.2% in fiscal 2012, to $14 billion; earnings are projected to be $4.19 a share, up 11% from last year. The turnaround is an important test for Dauman, too, who's been viewed mostly as a cost- cutter and deal maker, rather than a nurturer of creative talent like his predecessor Tom Freston. This quarter -- a critical one -- there will be a 70% increase in original shows coming on air. "That reinvigorates the brand at Nick," says Brett Harriss, who follows Viacom for shareholder Gabelli & Co. Ratings have stabilized a bit and, if they improve, advertising should follow. Advertising accounts for half of Viacom's cable-network revenue. Other Viacom networks haven't had the same problems. Though the hugely successful run of Jersey Shore comes to an end this year, its producer, MTV, has lots of promising reality and scripted shows, including the teen comedy Awkward and the new sitcom The Inbetweeners. Comedy Central continues to ride the success of Jon Stewart and Steven Colbert. Affiliate fees, a big chunk of revenue that comes from local cable companies, show no sign of weakening. After a high-profile battle last summer that resulted in a blackout of Viacom channels, DirecTV agreed to pay fees that were initially 20% higher than previously. Says Dauman: "We've given the guidance of high single-digit or low double-digit growth [in affiliate fees]. If you go back over the six years since I've been CEO, we've in fact had compound growth of 11%. I look forward to a good year." At Paramount Studios, which accounts for 35% of Viacom's revenue, the film slate includes the sequel G.I. Joe: Retaliation, and a new franchise, entitled Jack Reacher, that opens in December, with Tom Cruise. Viacom still has loads of room to grow outside the U.S. Despite weakness in Europe, Dauman is optimistic about viewership and advertising. The newly launched, ad-supported Paramount Channel is expected to be profitable this year. Nickelodeon and Nick Jr. are hugely popular. Expect new versions of Jersey Shore, including one catering to French viewers that rolls out this year. Geordie Shore, Britain's own adaptation, is one of the most popular cable shows in that country. The DirecTV deal also gives Viacom exposure in Latin Page 3 of 31 © 2012 Factiva, Inc. All rights reserved. America. And solid cash flow should continue to help investors. Estimates put Ebitda at $4.3 billion, up from $4.2 billion, as profit climbs 14%, to $4.78 a share in 2013. As a result, there's a "ridiculously high probability" that Viacom will extend its generous dividend and buyback programs, says analyst Brian Wieser of Pivotal Research. One big fan is Jerry Senser, CEO of Institutional Capital: "That double-digit cash return is extremely attractive to shareholders compared to what you can get in the fixed-income market." Warren Buffett, who took a stake this year, is also on board.
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