Why Citigroup Thinks Dish Might Drop Viacom

Jason Bazinet commented in a note on Tuesday that Dish Network Corp DISH is likely to drop Viacom, Inc.'s VIA channels.

Bazinet explains that in 2014, Viacom was dropped by two small pay TV firms (Cable One and Suddenlink) while at the same time, Dish has had numerous ongoing disputes with programmers. The analyst notes that as such the Viacom and Dish carriage renewal deal which is slated for 2015 may not be renewed.

Shares of Viacom were downgraded to Sell from Buy with a price target lowered to $62 from a previous $88.

Bazinet notes that when Vable One dropped Viacom programming, the firm did not lose subscribers. In fact, Cable One benefited financially from the decision as EBITDA losses from subscriber defections were smaller than the savings from lower programming fees.

The analyst also adds that Viacom's Most Favored Nation (MFN) clauses may limit its pricing flexibility with Dish without triggering lower affiliate fees from other larger pay TV firms. As such, Viacom may be less willing to lower its Dish fees.

Bottom line, Viacom could seek a sale of itself with Discovery Communications Inc. DISCA being the only firm to entertain an offer.

On the other hand, the analyst suggests that Viacom's other strategic path would be to acquire CBS Corporation CBS and reduce the impact from Dish. However, Bazinet believes that an acquisition of CBS is unlikely to be materially positive for its shares.