Following Dividend Cut, Viacom Reaches A Fork In The Road

Following are the three scenarios suggested by Miller:

1. "VIAB levers up through its NAI structure and acquires CBS."
2. "CBS acquires VIAB at no premium to the market price of the stock, perhaps even a discount."
3. "CBS CEO Les Moonves decides that any re-combination is not worth the headache and both companies continue on their separate paths, which would infuse a massive relief rally in CBS shares."

"Assuming path #3 takes hold, VIAB would likely look to sell off its 43.1 percent stake in pay channel EPIX, and promote from within for its next CEO, as it doesn't appear, at least right now, that any noteworthy outside candidate is interested in the job," Miller wrote in a note.

Related Link: Controlling Holder In CBS, Viacom Pushing For Merger

Miller slashed the price target to $39 from $41 after the company announced its fourth quarter earnings will come in between $0.55–$0.60, well below his $0.85 estimate and consensus of $0.89. The cut was mainly driven by the failure of "Ben-Hur" and brutal $115 million charge related to an unreleased film. Excluding severance charges, non-GAAP EPS is expected to be $0.65–$0.70.

Importantly, Miller said the dividend cut would not help improve the rating of Moody's, which lowered Viacom's debt to Junk.

"While this is, of course, a notable improvement over the $636.8 million in FCF that the previous dividend was occupying, we don't think it goes far enough in improving the liquidity situation within the company, and clearly Moody's to Baa3, one notch above junk status," Miller added.

At the time of writing, shares of Viacom were down 0.79 percent to $35.19, but by time of publication following news of a controlling holder's push toward a CBS merger, the stock rebounded by over 2 percent to $36.22.

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