he stock of entertainment giant Viacom is finally attracting investor support again. It has jumped more than 20% to around 41 in the past two months alone, a far cry from the mid-20s level to which it had sunk last spring.
First, word came out of the PaineWebber Media conference in December that Viacom was contemplating selling or spinning off in the near future its Simon & Schuster publishing operation. The company has denied it's imminent. A more advantageous time for such a divestiture might be 1999, according to PaineWebber media analyst Christopher Dixon, because the five-year holding period would have expired then (Simon & Schuster was part of Viacom's 1994 acquisition of Paramount) thus reducing the tax consequences.
But no matter. Wall Street, enamored of the idea of a Simon & Schuster divestiture, began assigning hefty asset values of $4 billion or more to the unit. Particularly attractive are Simon & Schuster's education publishing operation, which supplies some 60% of the unit's operating income.
Even more important, the long day's journey into night for Viacom's Blockbuster video unit appears to be ending at last. At least that's what Viacom Chairman and CEO Sumner Redstone says. "I have a growing sense that we'll turn Blockbuster around, and if that's the case, the stock should really fly," observed the 74-year-old executive and major Viacom shareholder.
Among other things, he cites results in the fourth quarter of 1997, the first to see a jump in year-over-year video-rental revenues since the second quarter of 1996. Moreover, that volume strength is carrying over into this year. But instead of producing annual cash flow of $1 billion or more as Barron's had predicted ("Box Office Hit," July 17, 1995), it was less than half that in 1997, even before a $323 million charge Viacom took on Blockbuster in last year's second quarter. So the cash cow has produced much less milk than expected.
On the plus side, however, Redstone cites a number of factors that bode well for Blockbuster. The chain has renewed its focus on video rentals ("a wonderful, high-margin business") instead of pushing other items, like popcorn and soft drinks, videogames and compact discs.
The chain also has started entering into innovative revenue-sharing agreements with the major film studios, which will afford Blockbuster twice the number of copies of hit films and cheaper prices on films that studios are also retailing directly to the public -- the so-called sell-through market. "It's a win-win for us and the studios," claimed Redstone. "We'll have more product, get the public the tapes it wants when it wants them and generate more revenues both for us and the studios."
Meanwhile, other businesses are hitting on all cylinders. Titanic, which Paramount co-produced with Fox, has proven a huge hit. Viacom cable networks MTV and Nickelodeon and its late-night persona Nick At Nite are producing dramatic increases in cash flow.
According to Chris Dixon, Viacom stock should be at 47-50 based on asset values alone. Should Simon & Schuster bring the price he thinks it might, that asset value might be even $10 a share higher.
-Jonathan R. Laing
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