Here's What Jefferies Expects From Viacom's Strategic Plan

Viacom, Inc. VIAB is likely have a strategic shift under Tom Dooley, the interim CEO who is expected to succeed Philippe Dauman on a full-time basis by the end of the month.

Jefferies examined various strategic options for Viacom and is not expecting any deal to come out of last week's strategic review announced by the media conglomerate.

Strategic Options

But, the firm acknowledged that a sale of a stake or the entire asset would be the "easiest solution" to Viacom's liquidity/leverage issue and to retain its investment grade Baa2 credit rating.

For context, Dauman had pushed for a sale of a minority stake in Paramount studios, a move that Jefferies estimates to have fetched $3 billion–$4 billion. But, Sumner and Shari Redstone have publicly opposed the deal for a variety of reasons, making the sale a long shot in the near term. However, the brokerage expects key personnel changes at Paramount.

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"We expect the studio would be worth $8 billion–10 billion, but believe the asset is under-earning by >$500 million in EBIT based on our F16 ests," analyst John Janedis wrote in a note.

As is widely known, Vicaom's primary concern is liquidity. Janedis noted that Viacom needs to cut down about $2.8 billion of debt to lower its gross leverage by 0.85x to 3.25x (from 4.1x – adj figures as determined by Moody's).

Meanwhile, Viacom management may cut dividend, as the current dividend yield of 4.3 percent is approximately double that of its closest peer. Janedis looks for a 50 percent cut, which is estimated to save $300 million a year.

"That said, cutting it completely would likely force some yield investors to sell, further pressuring the stock. In our view, the incremental $300M in annual cash savings isn't worth the incremental pressure on the stock," Janedis continued.

According to Janedis, Viacom could close the asset/market value gap by selling Viacom 18 and buying/consolidating LGF's stake in EPIX — a deal which also frees up dollars formerly being invested in India.

Further, the analyst still believes that a merger with CBS Corporation CBS is unlikely in the near term despite healthy EPS accretion in the range of 15–25 percent.

Rating And Justification

Janedis has a Buy rating and $49 price target on Viacom.

"Our current Buy rating is not predicated on one singular action or series of actions taken by the board, but value creation related to Paramount has been an important part of our thesis," Janedis added.

At the time of writing, shares of Viacom were up 0.30 percent to $37.11.

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