Stephen’s Posterous

A Los Angeles Times Blog reported that Sumner Redstone and his privately held company, National Amusements Inc., has negotiated its debt restructuring.

However, it was revealed in a regulatory filing on May 5, 2009, that both Viacom and CBS are used to secure Mr. Redstone's $1.46 billion in debt. Mark your calendar as the debt must be repaid by December 31, 2010. National Amusements is still working on selling its 1,500 plus movie theaters, but this may not be enough to retire the debt.

If Viacom and CBS stock rise in value, Mr. Redstone will be in a better position to pay off his debt rather than liquadate is entire holdings.

On May 1, 2009, the Wall Street Journal said that Viacom reported a 34% slide in their first-quarter net income to $177 million as it's cable-television advertising sales took a hit. It counts on advtertising for 30% of its annual revenues.

International home entertainment revenue dropped 26% or $60 million leading the company to warn in an SEC filing that this weak market may continue through 2009 and affect its home entertainment revenue. The article pointed out that Viacom stated that it is seeing signs of stabilization in the current market after a sharp decline in the first quarter.

On May 6, 2009, Viacom was trading between $21.93 and $22.80. The 52-week high is $40.26, and the 52-week low is $13.00. CBS was trading between $7.35 and $7.92 with a 52-week high of $25.00 and a 52-week low of $3.06.

Caris & Co. is upgrading shares of CBS (ticker: CBS) from Average to Above Average, not only because the stock has fallen materially away from our price target, but because at current levels, the equity is reflecting a free call option on a future advertising recovery.

Stated simply, and based on a slightly revised sum/parts analysis, Caris & Co. believes CBS' equity now reflects terminal value for Showtime only. All other assets, the syndication business, the interactive business, and the Outdoor business, plus old media assets like spot TV and Radio, investors now have the chance to own for free.

To review, Caris & Co. downgraded CBS to a Below Average rating last October when overall business conditions at the time made it completely apparent that CBS was not going to make its fiscal 2008 guidance. Upon slashing its dividend 81% in tandem with its fiscal fourth-quarter earnings just four weeks ago, Caris & Co. upgraded CBS to an Average rating for the simple reason that the stock had achieved our price target of $5 and was fairly valued.

Now, with the stock at $3.83, deep-value investors have the opportunity to pick up a liquid media name with an equity value reflecting only the Showtime asset, which continues to grow its sub-base annually in the mid-single-digit range on the afterglow of a string of hits, which include Weeds, Dexter, The Tudors and Californication. Amazingly, Californication is commanding $1 million per episode in foreign syndication.

The easy rebuttal to the argument will be that the majority of CBS' ad-supported business are under secular siege. That's true for CBS' TV station and Radio station businesses, but is certainly not true for Outdoor, which is not going away, and Interactive, the latter of which grew revenue 218% in the fiscal fourth quarter. Suffice it to say, with Showtime now worth $3.88 per share in the latest iteration of our sum-of-the-parts analysis, the market is valuing all other assets effectively at zero, which Caris & Co. believes is near-term inefficient.

In tandem with still tough overall macro conditions, Caris & Co.has been steadily ratcheting fiscal 2009 projections down throughout the bottom half of 2008, and into fiscal 2009, and are doing so yet again today, though this time due to foreign-exchange adjustments as a result of CBS' Outdoor advertising exposure to the London Tube [subway system].

Caris & Co.'s fiscal 2009 revenue estimate moves from $13.2 billion to $13.1 billion, and as a result, Caris & Co.'s fiscal 2009 earnings-per-share estimate moves from $1.00 to 90 cents. Consensus at this point is 85 cents with a range on the Thomson Reuters grid between 69 cents and $1.10.

Caris & Co.'s 12-month price target of $5 continues to be supported by a target enterprise value/earnings before interest, taxes, depreciation and amortization [Ebitda] multiple of five times, but also an updated sum-of-the-parts analysis, which supports $5 in value, with Showtime worth $3.88 out of the $5. In addition, given management's recent cost-cutting announcements, we now have CBS trading at a levered free-cash-flow yield of 9.06%, a full 650 basis points ahead of 10-year Treasuries.

The moniker of CBS being the "most-watched" network is no lie. In terms of total viewers, CBS is the most-watched English-language broadcast network of the six currently measured by Nielsen, providing viewers with some of the nation's highest-quality entertainment, news and sports programming.

Popular shows include CSI: Crime Scene Investigation, CSI: Miami, CSI: NY, NCIS, Cold Case, Two and a Half Men, Survivor, The Late Show with David Letterman, 60 Minutes and the AFC Football package.

CBS takes an efficient game-theory approach to prime-time programming, meaning a balanced mix of company-owned shows, e.g., CSI, licensed shows, e.g., Two and a Half Men, and shows that are sold to other networks, e.g., Medium. Placing too many company-owned shows on a prime-time schedule can be very risky and can amount to substantial losses if the shows are canceled.

While bears on CBS will argue that CBS' prime-time schedule is sound, its daytime schedule is suffering in the ratings. That said, 50% of revenue within the core TV business is derived from prime time, 8pm-11pm. The balance is split evenly between daytime and "early fringe," 5pm-8pm.

Unlike its peers such as Disney (DIS), News Corp. (NWSA), Time Warner (TWX) and Viacom (VIAB), CBS derives substantial revenue and cash flow from an envious asset base of Outdoor signage, domestically and internationally. Unless some sort of technology arises that makes automobiles an obsolete technology, the case for the validity of Outdoor advertising is a strong one.

Source.

The top 10 stocks of the Yacktman Focused Fund (YAFFX) comprise nearly 70% of total assets. "We feel like we ought to focus our money on our best ideas," Yacktman says, rather than take "a Noah's Ark approach with two of every kind."

That approach has helped consistently put the fund at the top of its category. Based on annual returns, the fund ranks among the top five large value funds for the most recent one, three and 10-year periods, according to Morningstar.

Over the last 10 years, Yacktman's fund has produced an annualized total return of 2.5%, six points better than the Standard & Poor's 500.

The current climate now has Yacktman putting any leftover cash to work in names you might not consider. The fund's top holding is AmeriCredit (ACF), an auto-financing company that now trades at a 64% discount to its book value. The fund manager has also made a big bet in media stocks, such as Viacom (VIAB) and Liberty Media (LINTA).

We recently asked Yacktman about his investing strategies:

Barrons.com: As a value investor, has your investment criteria changed in the current climate?

A: No. We've done the same thing for years. There may be slight nuances hopefully improving the process, but it's the same basic process. When the market is up we tend to start having a harder time finding things to buy. We end up owning fewer stocks, and you'll find there is a component of cash in there. Going into last year, I think we had close to 30% in cash.

Now my feeling is if you are a value investor and you're not fully invested, then there is a disconnect because there are plenty of things out there to justify buying in this environment at low prices.

Q: So is this something of a dream market for value investors?

A: Sure. These are the kind of times where you may say, I wish I waited a little longer. We tend to be early on average. But you feel very comfortable on a long-term basis. And we have a 10-year horizon time. So we just don't think in terms of 10 days or 10 weeks or 10 months. An investor who thinks in those terms is going to be frustrated and whipsawed potentially. But somebody who can have that long horizon time will have a high-comfort index in this market.

Q: How do you pick stocks in this environment?

A: You stick to objectivity, and you should look at the long term. When I hear somebody talk about 15% growth rates indefinitely, I think that's just not realistic. So you come up with some realistic normalized numbers. Most of the companies we have tend not to be wildly cyclical. Their earnings aren't as gyrating as say an auto company or an airline.

In the fourth quarter and the last few months we have honed in on sectors like media, health care and insurance. So that has some cyclicality but they're low capital requirements.

Q: What are some of your favorite stocks right now?

A: You look at the largest holdings in our top 10 and the top three would be Coca-Cola (KO), AmeriCredit and Viacom. But if you look at the top 10 you will notice there is Viacom, eBay (EBAY), News Corp. (NWSA) and Liberty Media (LINTA), [which includes the QVC retail channel. News Corp, (parent of Dow Jones, the publisher of Barrons.com) cracks the top 10 of Yacktman's flagship fund (YACKX) but wasn't a top holding in the focused fund, as of Dec. 31, 2008.]

So there's a lot of media in there and the theme is very similar in a lot of ways in that they tend to use TV or media; they're heavily TV oriented. What has killed them is the advertising has just dried up dramatically in this environment. Yet they are very good businesses, and, long term, I think they will make very nice returns.

Q: So on the media side, are you particularly interested in the TV business?

A: I just think they are good businesses, and they are cheap. If you look at the list of properties that Viacom has, it's things like MTV, Nickelodeon and Comedy Central, but the stock has been under pressure.

Q: Do you think the advertising on television will come back?

A: To some degree. One of the problems is virtually every consumer company is trying to find where they can get eyeballs. It's tougher and tougher. The media world is more diversified, and it is much more difficult to hit [consumers] than it was 10 or 20 years ago when you had just a few networks.

Q: That said, with 20% of your fund currently invested in media do you think these companies are the ones that will or can figure it out?

A: I think they are some of the best ones. Part of the problem with Viacom was they were under tremendous pressure because National Amusements owns a lot of their stock and had some leverage, and I think people were nervous about it.

Q: Are those the kind of events that scare a lot of investors that you are willing to look past in finding value?

A: We view the market as kind of a manic depressant. We are constantly looking at news events, and when companies hit the headlines with negative news, that is usually the time to start sifting through and looking at the numbers. We do our own research. We aren't relying on somebody else for making decisions. But what happens is a lot of the other research may accelerate our learning curve, so that's why we have it available to us. But I think that's what separates the men from the boys.

Q: What else is on your mind in picking stocks right now?

A: I really don't like to spend a lot of time on macro issues, because the reality is that it is the specific investment choices that really make the money. Fortunately there are plenty of good opportunities out there. But I would be very concerned about holding a lot of cash, and that's where people are moving toward. I think that's just the wrong place because when the economy does turn and things improve, it looks like there is going to be an awful lot of inflationary pressure.

Q: So do you guys have a position in gold?

A: No gold. I would rather have Coca-Cola than gold any day of the week. The ability [for them] to raise prices is like a machine that prints money.

Q: Thanks for your time.

Source. Subscribe to Barron's. Cabot Money Management.

This Epix tale might not be one the Hollywood studios were banking on. 

Ten months ago, three film studios, Viacom Inc.'s Paramount Pictures, Lions Gate Entertainment Corp. and Metro-Goldwyn-Mayer Inc., teamed up to create a next generation movie channel that would debut on the Internet and revolutionize the pay-television business.

So far, the studios have invested $35 million in the venture, dubbed it Epix and said that Lionsgate would produce the channel's first original TV series, a drama about a Nashville music family called "Tough Trade." That's not all that's tough. Epix, a pun on "epics," a term for the most ambitious films, has so far been unable to secure distribution with a cable or satellite TV company, a crucial step in the launch of any new network.

Industry titans Time Warner Cable Inc., Comcast Corp. and DirecTV Group Inc., the biggest cable and satellite operators in the country, all appear skittish about adding a pricey new movie channel during a recession, when they are fighting to hold the line on program expenses and retain subscribers.

"This is a really tough economy to be launching a new cable network, let alone a new premium pay channel," said Deana Myers, a TV analyst with consulting firm SNL Kagan. The partners are unfazed. Viacom Chief Executive Philippe Dauman assured Wall Street analysts recently that the venture was on track to launch a subscription-based Internet site in May and a television channel in October.

"We continue to feel very bullish about the prospects for Epix as we go forward," Dauman said. Executives involved in Epix contend that resistance by cable companies to committing to the new channel is nothing more than jawboning for better terms. They predict that Epix will win the backing of cable and satellite operators within a few months and be on the air by fall.

Epix Chief Executive Mark Greenberg said the plan to stream movies should lure cable, satellite and telephone companies because it could encourage customers to upgrade their Internet service to higher speeds that accommodate movie viewing. The dual offerings, an Internet movie feature and television channel, are the reason that Epix wants a hefty $1.50 monthly per-subscriber fee from distributors.

Epix may have other pathways into the home. One potential partner is Netflix Inc., the video rental company, which attributes its growth despite the recession to rising demand for online movie streams, suggesting that customers are warming to watching movies on their computer rather than on cable TV or DVD.

"We do have a number of traditional, nontraditional solid offers right now, which we hope certainly to close imminently," told analysts during the company's quarterly results call. Derek Chang, DirecTV's executive vice president for content strategies, said his company, which serves 17.6 million subscribers, was not ready to sign up.

"It's still preliminary," he said. "They are continuing to adjust their business strategy and we are continuing to have conversations with them." The stakes are high. Studios depend on licensing fees from pay-TV contracts with HBO, Starz and Showtime to help offset the costs of filmmaking.

The arrangements provide steady income, a tonic in a volatile business where millions of dollars are spent making and marketing a single movie, which might land with a thud in theaters. Even modest box-office performers generate millions in revenue from their runs on premium movie channels.

The desire to wring as much as possible from pay-TV contracts was the reason Epix was formed in the first place. Paramount, Lions Gate and MGM decided to launch their own pay-movie channel after negotiations with Showtime to extend their movie deals fell apart. Showtime, owned by CBS Corp., said it no longer was willing to pay the $350 million annually to the three studios for licensing their films.

"Movies are online, they are on video-on-demand services," Myers of SNL Kagan said. "They are just not as valuable as they were five years ago." The studio partners also believe that by cutting out the middleman, in this case Showtime, the venture will be able to offer movies on the Internet only nine months after their release in theaters and before they appear on cable.

Typically, there is a one-year lag before the movies appear on HBO or Starz. In many ways, however, the venture is gambling on the promise of the Internet for distribution.

"We think that making the films available on broadband, on-demand television and through their mobile phones allows the viewer to see the content the way that they want to," said Greenberg, a pay-TV veteran. "We can be adaptive to the marketplace, and from our view that's exciting. We are going to find our way."

However, making movies easily available on the Internet could backfire by alienating traditional cable companies that have long paid hefty fees for exclusivity. Cable executives are worried that viewers won't have a reason to watch their channels if studios make their shows and movies available for free on the Internet, through such sites as Hulu.

But, given that Showtime was unwilling to pay Paramount, Lions Gate and MGM what they were seeking for the rights to air their movies, the studios believe that they have little choice but to bet on new methods of distribution, said Dennis A. Miller, a partner of Spark Capital and a former Lions Gate executive.

"Showtime was offering less and less money for these movies," he said. "These studios are giving up some short-term revenue in return for a meaningful equity stake in something that has the potential to become a viable pay-TV and broadband business. That's the calculated risk this group is taking."

Source.

CBS's decision to cut its dividend by 80% is sure to send some income-oriented shareholders sprinting for the exits. It wouldn't be a surprise if Sumner Redstone ends up following them. Admittedly, the CBS chairman has vowed not to sell any more shares. But he can change his mind, particularly if there was a buyer available.

A sale would be the logical follow-up to his decision to split CBS from Viacom in 2005. It is understandable that he didn't sell right away. CBS's dividend surely helped service Mr. Redstone's personal debt.

But now his annual CBS dividend income will drop to $14 million from about $76 million. That could last a while. CBS said Thursday that given the uncertain credit markets, it wants to be able to "self fund" all of its debt maturities between 2010 and 2012, which total $3.2 billion. UBS estimates CBS's free cash flow through 2012 will total only $3.6 billion.

Even when the economy recovers, the secular shift of ad dollars from broadcasting to other media suggests CBS's earnings won't return to their past highs. Of course, it would have made more sense for Mr. Redstone to sell when CBS was trading near $35 in mid-2007, instead of its current price around $5. But if history is any guide, he won't let that stop him.

Consider: Mr. Redstone's Viacom said in late 1999 it wouldn't unload its majority stake in Blockbuster unless the video chain's shares, then trading around $15, rose above $20. Blockbuster shares hit $29 in 2002. But Viacom didn't decide to divest until February 2004, with the shares around $17. Still, he made the right call. Today's price: just over a buck.

Source.

Sumner Redstone, under pressure to restructure his family company's $1.6 billion in debt, said Thursday that "substantial progress" had been made in talks with banks.

"An agreement acceptable to all parties is now within reach," the 85-year-old Redstone said during a conference call to discuss Viacom Inc.'s quarterly earnings.

Sumner Redstone has sold his 87% controlling stake in videogame company Midway Games to private investor Mark Thomas, which represents a big loss on the media mogul's investment but secures a hefty tax benefit. Source. National Amusements is in negotiations with its banks to restructure its $1.6 billion debt pile after breaching one of its debt covenants. The restructuring includes selling some of its movie theaters and a holding in slot-machine company WMS Industries. The sale of the Midway stake marks the end of a tumultuous investment for Mr. Redstone. He poured hundreds of millions of dollars into Midway Games only to see his investment fizzle as the company failed to create new hit games and watch its stock collapsed. Source.

Is a voting share in Viacom more valuable than its more common nonvoting sibling? Investors appear to think so as the spread between the two stocks has grown. The spread between Viacom's A class voting shares and B class nonvoting shares has widened to roughly 10% since mid-October when news broke of financial pressures on Viacom's controlling shareholder Sumner Redstone. It may be that the spread is caused by funds selling the more plentiful B shares rather than the tightly held A's. But it may also be a bet by some traders that in any sale of Viacom, the company's A class shares--81.6% of which are owned by Mr. Redstone--will benefit more than the B's. Mr. Redstone only owns 3% of the B's. Viacom's A shares closed at $16.21 and the B shares closed at $15.08 on December 2, 2008.

It is a somewhat risky bet, but a buyer theoretically could get control of Viacom by buying Mr. Redstone's voting stake. As his Viacom A shares have a market value of about $750 million, compared with Viacom's total market capitalization of about $9 billion, buying his A's only would be far easier to finance. Are any hedge funds interested? Probably not in this environment. Such a deal would pose serious obstacles for most potential buyers. But with Mr. Redstone under serious pressure, and in a bear market as brutal as this, anything is possible. Source.

It is a not so Happy Thanksgiving for Mr. Redstone as he is looking at selling all of his 1,500 National Amusements cinema chain after receiving some interest from potential buyers. Breakingviews.com reported that publicly-traded Regal Entertainment and Cinemark have an enterprise value equivalent to about $400,000 per theatre screen so National Amusement’s 1,500 screens could be worth about $600 million. Mr. Redstone believes that he can get $1 billion from the sale. He owes $1.6 billion, of  which $800 million matures on December 19, 2008, but the deadline could be extended. Mr. Redstone may have to sell more CBS and Viacom stock. Breakingviews.com said that this is similar to the fate of several cash-strapped Russian oligarchs who leveraged their stock holdings only to lose everything when stock markets crashed. CBS is down 80% and Viacom is done about 67% for 2008. It appears Mr. Redstone may be interested in selling CBS stock, but would prefer not selling Viacom stock. This is a follow-up on a previous post. Source.