Viacom Research report:
VIACOM INC. (CLASS B) (VIA B/NYSE)
"Sum" Really Good "Karma" (Part 1 of 2)
BUY*
Long Term
BUY
Reason for Report: Viacom-CBS Closing
Symbol / Exchange: VIA B / NYSE
Options: Chicago
Institutional Ownership-Spectrum: 64.6%
Investment Highlights:
o The merger of Viacom and CBS will be consummated today. The new Viacom is now armed with all of the key elements critical to competing -- and succeeding
-- as a global, vertically integrated media powerhouse.
o The FCC is conducting a review of the dual network rule. It is possible that the rule will be revised by year-end, allowing the dual ownership of CBS and UPN.
o The company has tremendous sales momentum, with visibility well into 2001. Viacom has already achieved 13%-15% gains in pricing in the syndication upfront marketplace for the 2000/01 television season. We believe that Street
estimates, including our own, for Viacom are too low, given ongoing top-line momentum
o We strongly reiterate our Buy rating, with a 12-month price objective of $75, up 35% from current levels.
New And Improved Viacom
The merger of Viacom and CBS will be consummated today. Led by a superlative management team, the new Viacom is now armed with all of the key elements critical to competing and succeeding as a global, vertically integrated media
powerhouse. The company has leading positions in program production and distribution in entertainment, news and sports, covering the big screen of film and the small screens of broadcast, cable and internet, with programs appealing to every demographic from youngsters to oldsters. Brand equity is titanic, led by MTV, Nickelodeon, VH1, CBS Entertainment, CBS News, CBS Sports, Infinity Broadcasting and Outdoor, Paramount Pictures, TNN, Blockbuster, Showtime, and Simon & Schuster, among others. The company is the globe's leading advertising vehicle, with tentacles in-home and out-of-home. And, it has that rare capacity of being able to create massive hit programming -- Mission Impossible to Frasier to Rugrats to 60 Minutes.
Under the FCC's final order, the company will have 12 months to meet the television-station national ownership cap, six months to conform to the radio- television cross ownership rules and 12 months to comply with the dual network rule. Pursuant to the national ownership cap, the company will need to divest television stations to reduce its national household reach from 41% to 35%. We expect the company to retain all of its television duopoly markets, while divesting certain smaller markets and swapping stations to create new duopoly markets. The company will also need to divest radio stations in five markets, where it exceeds the FCC's maximum of eight broadcast properties (FCC limits of two TV/six radio stations or one TV/seven radio) in Los Angeles, Chicago,
Dallas, Baltimore and Sacramento. The company will either sell stations, most likely to minority-group owners, or swap stations, with a likely neutral cash flow impact. Finally, the dual network rule prevents a major television
network, CBS, from owning a second broadcast network, UPN. However, the FCC is now conducting a review of the dual network rule and, webelieve, it is possible that the rule will be revised by year-end, allowing the dual ownership
of certain broadcast networks, including CBS and UPN.
High-Growth Cable and Out-of-Home Assets - The new Viacom will be the No. 1 advertising vehicle in the U.S., with $12+ billion in ad spots across a wide variety of measured media in national, regional and local configurations. More
than two-thirds of its EBITDA will be generated from the fastest growing segments of the media industry, cable television and radio/outdoor advertising, which are also the segments with the industry's highest free cash flow growth rates. Cross selling of ad inventory and cross promotion of channels is fast becoming the prevailing practice. The new Viacom has one of the strongest
arrays of brands of any of its domestic counterparts.
Near-term Catalyst: A Booming Upfront. The company has tremendous sales momentum, with visibility well into 2001. Viacom has already achieved 13%-15% gains in pricing in the syndication upfront marketplace for the 2000/01 television season (ending in September 2001). Moreover, we fully expect increases of 20+% for its cable networks, 10+% for its CBS broadcast network and 20+% for its UPN network in their respective upfront markets. In addition, Infinity's major-market radio and outdoor properties continue to register robust growth, with revenues rising by 20+% in 2000's second and third quarters. We believe that Street estimates, including our own, for Viacom are too low, given ongoing top-line momentum.
Areas of Instant Growth. On CBS, Nickelodeon will take over the Saturday morning kids time block, which should instantly raise ratings and revenues.
Repurposed programming, that is, double runs (of music specials and made-for-TV films) on broadcast and then cable, should raise ratings and revenues; expanded
programming, that is, airing the entire NCAA Men's Basketball Tournament on CBS and UPN, or airing an MTV Super Bowl halftime show, should raise ratings and revenues. The combined broadcasting properties create an excellent fit, with TV station coverage in 18 of the Top 20 markets, including each of the Top 10 markets. Importantly, the company will own two television stations in six markets, offering cost savings approaching an estimated $100 million. The UPN network, we believe, can be taken from losses of $180 million to a breakeven
within two years. We also believe that the company's new clout has already been demonstrated in its ability to wrestle away the WWF from USA Networks by offering cross-media exposure on broadcast and cable television, as well as
radio and outdoor.
Copyright 2000 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S).
All rights reserved.
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