Viacom (VIAB) Sliced as Citi Takes Out the Ax

Viacom (NASDAQ: VIAB) is down sharply Wednesday (-6.3%) after Citi analyst Jason Bazinet took an ax to the stock - downgrading it from Buy to Sell and cut his price target from $88 to $62.

Bazinet ascribes a 50%probability that Dish drops Viacom’s channels offset by two M&A options: Viacom acquires CBS (which he views as neutral for Viacom) plus a 10% likelihood that another media firm acquires Viacom (which he said would provide 20% upside to Viacom).

Bazinet said given that Viacom was dropped by two small pay TV firms (Cable One and Suddenlink) in 2014 and in the same year Dish has had numerous disputes with programmers (including CBS, Turner and an on-going blackout of Fox News), he thinks the Viacom / Dish carriage renewal – likely slated for 2015 – is apt to be particularly contentious.

On Cable One, Bazinet said his data suggests that while the small pay TV firm did lose subscribers it also benefited financially from the decision. "... EBITDA losses from subscriber defections were smaller than the savings from lower programming fees," he said about Cable One. "Modest sub losses at Cable One will likely cause Dish to negotiate more aggressively with Viacom. And, Viacom’s Most Favored Nation (MFN) clauses may limit Viacom’s pricing flexibility with Dish without triggering lower affiliate fees from other (larger) pay TV firms. This may make Viacom less willing to lower its Dish fees."

On M&A, the analyst notes while Viacom may seek to sell itself prior to the Dish renewal, many large media firms may be less interested in Viacom’s niche programming assets. Meanwhile, many smaller firms do not have the financial firepower to acquire Viacom. Bazinet said Discovery (NASDAQ: DISCA) may be the only firm that might entertain a Viacom acquisition. He ascribes a 10% likelihood to this scenario with a customary 20% premium. Viacom’s other strategic path to reduce the Dish risks is to acquire CBS. However, this step is unlikely to be materially positive for Viacom’s shares, he said.

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