Why is Viacom (VIA) still a public company?

Pali Research analyst Richard Greenfield thinks Viacom Chairman Sumner Redstone ought to consider that question carefully. In a research piece this morning, Greenfield recalls that in July 2006 he wrote a report entitled “Dear Mr. Redstone: Take Viacom Private.” Since that time, he says, Viacom has installed a new CEO and CFO, topped EPS expectations in 2006 and 2007, showed improving cable ratings and bought back $3.3 billion of stock, or about 11% of the shares outstanding. But the stock in that period has dropped 2%, cutting its 1-year forward EPS multiple to 10.6X from 14.4X.

Greenfield thinks that “given increasingly broad investor distate for Viacom’s management team and the lack of respect/confidence in the company’s earnings prospects,” Redstone should “seriously revisit our go-private analysis.”

Greenfield write that he realizes the debt markets are unlikely to support Redstone taking on an additional $21 billion in debt to go private. But he notes that even paying a 17% premium from yesterday’s closing price of $32.85 and taking on $21 billion in debt, “Viacom could still generate nearly $600 million of free cash flow in year one.” He says Redstone could pay as much as $49 a share for the company and still be free cash flow break-even.

According to Greenfield, Viacom CEO Philippe Dauman has indicated that the company has no major acquisition plans. With cap/ex just 2% of revenues, he says “there is no reason why Viacom should not be looking to dramatically increase its leverage and essentially begin a creeping privatization (until the debt markets enable a more significant transaction.)”

And he adds that Viacom could also consider a buyout with the help of a private equity cash infusion to reduce the overall debt needed for a buyout.

“While Sumner Redstone clearly likes the glamor of running a public company, the public markets are not giving him and his management team proper value for Viacom’s assets,” he writes. “Mr. Redstone should take matters into his own hands to create value for himself and public shareholders. Take Viacom private or at least dramatically increase leverage.”

Viacom today (as of 11:15 AM EDT)  is down 41 cents, or 1.3%, to $32.49.

• Amazon.com Enters the Online Video Fray  »
• Get a Screenlife: Paramount Goes After New Digital Content  »
• New Developments from the Virtual Worlds Expo  »
• Alloy, Inc., Q2 2008 Earnings Call Transcript  »
• Lack of DISH Ruling Disappoints TiVo Holders  »

Eric Savitz

• Bio & more articles
• Visit Tech Trader Daily
• Visit Barron's Online