In the Media Derby, Viacom Is on the Pole


By David Shook On May 22, The WB will air its 100th and final episode of Buffy the Vampire Slayer. The season finale pits bombshell Buffy in the fight of her life against a demon named Glory. The network calls it "the biggest event" of its crucial May sweeps. But Buffy isn't about to die. Viacom has poached the Fox-produced hit show from The WB and plans to air it next fall on its own network, WB rival UPN.

Chalk up a small but telling victory for Viacom (VIA), which in addition to UPN owns CBS, Paramount Studios, MTV, Nickelodeon, and Infinity Broadcasting. Viacom is one media giant poised to enjoy a spring full of opportunity after a dreadful first quarter for media stocks. The company beat Wall Street's first-quarter estimates on Apr. 24, reporting earnings before interest, taxes, depreciation, and amortization (EBIDTA) of $1.15 billion on sales of $5.7 billion. That translated into a break-even performance on a per-share basis. The Street had anticipated that the company would lose 8 cents per share.

Not bad, considering that during the first three months of the year, Viacom watched its stock price tumble from a high of $60 to a low of $38. Along with the rest of the media sector, Viacom got hammered as investors fretted about an advertising slowdown busting holes in profits. But Viacom's stock has recovered much of the lost ground, closing Apr. 24 at $52 a share. In fact, Viacom could do even better later this year, despite the ad decline that has wrought havoc on so many stocks.

ALL'S MEL. This is a sharp departure from the conventional wisdom about most media stocks. Some analysts believe Viacom looks risky because it derives the lion's share of its revenues from radio, television, and outdoor advertising. That makes it more heavily exposed than, say, AOL Time Warner, which gets only 25% of sales from ads.

But observers say Viacom appears to be handling the ad decline much better than such rivals as Disney and Fox. The reason, according to analysts, is Viacom's strong relationships with big advertisers. "This is a company with a very solid management team that begins and ends with [Chief Operating Officer] Mel Karmazin," says Jim Goss of Barrington Research Associates.

"Advertising is alive and well at Viacom," Karmazin declared during an Apr. 24 conference call with analysts. Even the threatened strikes by writers and actors would shave just 5% off its full-year earnings, the company says. And despite lingering concerns about the revenue outlook for the media sector, Viacom may be better positioned than others. "We may see the ad cycle turn more positive in the second half of the year. If that happens, well-managed companies such as Viacom can turn the quickest," says Gordon Hodge of Thomas Wiesel Partners.

MORE DIVERSIFIED. The thinking goes like this: Give the ad market another quarter to turn brighter, then hope the continued success of the Survivor franchise along with a host of new shows in the fall can lift Viacom above its rivals. That may sound like a big leap of faith, but Viacom shareholders have the success of some recent deals to pin their hopes on.

Indeed, Karmazin's recent activities make Viacom more diversified than just about any other major media stock. One example is the BET deal: Viacom shelled out $2 billion for Black Entertainment Television at the end of 2000. Viacom hopes it can use its own strong ties to cable advertisers to squeeze more value from the African-American programming channel. "BET could have tremendous upside in Viacom's hands," predicts analyst Jim Goss. With such successes as MTV and Nickelodeon already under its belt, Viacom knows cable programming as well as any company.

Then there's Viacom's television station unit, which controls more than 750 stations. Merrill Lynch's Jessica Reif Cohen said in a recent research note that Viacom and News Corp., which owns Fox, "are poised to rule the most profitable segments of the television industry" -- the stations, production, and syndication. That's because the two companies are planning station swaps that would give each more control in several major markets.

STERN STEPMOTHER. The two companies' willingness to work together extends to the network side, too. Fox is said to be interested in buying a piece of UPN. That helps explain why Fox was willing to pull Buffy from The WB and slate it for UPN next fall. It's exactly the kind of programming UPN needs to survive.

Call UPN the misguided adolescent of the company -- and Paramount Pictures the stern stepmother. ABN AMRO analyst David Londoner says Paramount is "the most tightly managed studio in Hollywood." This summer, it's banking on the action-thriller Tomb Raider to carry its box-office sales.

CBS, meanwhile, is the company grandfather -- the stodgy, stubborn division that has seemed set in its ways. But this old man recently discovered the fountain of youth. As Viacom's flagship property, CBS is slowly shaking its reputation as the network for older viewers. And it's basking in continued high ratings for the Survivor franchise, the king of reality TV, as well as a strong first quarter driven by the Super Bowl, where millions of viewers tuned in hoping for a repeat of last year's thriller. They didn't get it, but CBS scored big anyway.

CONFIDENT. With so many divisions underlying Viacom's performance, analysts boil the 2001 targets down to just one number: $6.2 billion in projected EBITDA this year. That's a 20% increase over 2000, but with Viacom projecting much of that growth in the second half of 2001, the risk remains that the ad market won't recover and the stock could take another beating. Of course, there's the view that consumers will continue to watch TV no matter how bad the economy gets. Even so, it's far from certain that advertising will recover later in 2001.

Still, Karmazin was brimming with confidence at the Apr. 24 analysts' meeting. And the company did pleasantly surprise Wall Street at a time when disappointments are still the more common occurrence. At $52 a share, Viacom is trading at only 13 times 2001 earnings. That's pretty conservative for an entertainment company that projects $2.7 billion in combined free cash flow this year from more than 10 separate divisions. If the ad market picks up again in the fall, look for Viacom to lead the charge. Shook covers financial markets for BW Online in New York


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