ViaSlow vs. ViaGrow

As Viacom divvies up its assets into two companies, a single piece has turned up as foster child: Showtime Networks Inc.

Why is Viacom CEO Sumner Redstone taking billion-dollar cable network Showtime from cable czar Tom Freston and handing it over to Les Moonves, whose broadcast and radio operations don't have very much to do with the pay-movie network's?

The answer reveals a lot about Viacom's grand plan to split into two and the challenge Moonves faces as Redstone loads him up with the slowest-growing parts of the company.

In the next several weeks, Viacom's board is scheduled to finalize the details of the split, which calls for spinning off the company's relatively spry divisions—cable and movies—in order to free the new entity from its sluggish siblings, namely broadcast TV, radio and outdoor advertising.

One analyst dubs the two companies “ViaSlow” and “ViaGrow.”

Redstone hopes that two stocks are better than one. Some investors are interested in companies that are growing quickly; other investors are interested in “value” companies, which grow slowly but pay dividends.

Neither investor has been particularly interested in Viacom lately. So the split will supposedly lift the overall value by giving investors the kind of company they want.

When Viacom revealed the split plan in March, company executives said it would be along the lines set a year ago after frustrated President Mel Karmazin left and Redstone anointed two co-presidents: longtime MTV Chairman Freston and CBS Chairman Moonves. Both have worked minor miracles in their respective divisions.

When Viacom initially disclosed the split, Freston's side of the company was to keep all the cable networks and Paramount; Moonves would run the CBS and UPN broadcast networks and stations, Infinity radio and outdoor advertising, and Paramount's TV production and syndication units. The one exception up in the air was book publisher Simon & Schuster, which currently reports to Freston.

The deal is shaping up much, much differently. As Viacom is “modeling” the new company today, Freston will keep only Viacom's basic-cable networks and the DVD-fueled Paramount Pictures. Moonves is getting all the slow movers, which include books, Paramount's theme parks (which are for sale) and Showtime.

Sounds crazy, right? You'd think that, as a pay-cable network, Showtime would remain tied to cable powerhouse MTV and certainly to its major supplier of theatrical movies, Paramount. But that would be an attempt at synergy, that quaint notion that companies make more money when different divisions collaborate.

The folks at NBC Universal believe in it, but Viacom seems to have made synergy less of a priority. This split is almost entirely a financial move. The 10 pieces of Moonves Inc. are slow growers, generally expected to post revenue and operating-cash-flow gains ranging from just 2% to 7% next year.

Showtime, which has long trailed pay-movie giant HBO, had some decent years of growth as DBS services expanded the number of homes taking cable networks. But, according to the conventional industry wisdom, that has played out, and its $1.2 billion in 2004 revenue is expected to grow only 3% in 2006.

Viacom executives note that success in the pay-network game depends mostly on original productions, not theatricals. So it makes sense to team Showtime with CBS and Paramount Television, which are experts in developing hour-long series.

Perhaps. But the bottom line is that anything growing at Showtime's pace would slow Freston's new company down. The whole deal aims to shelter it from any drag on operating cash flow and, hence, its stock price. Freston is left free to expand and acquire new businesses.

The positioning of the deal annoys Moonves and his team, according to Viacom insiders. They hate investors' description of Moonves Inc. as a “value” stock, which makes it sound like a utility business, not showbiz.

Moonves has reason to be sore: not much growth at the divisions that are on track. Infinity's billboard business might be bouncing back, but the radio business is in a terrible slump. Even CBS isn't growing all that quickly. Despite the network's power in toppling NBC this season, Morgan Stanley estimates that CBS' revenues will grow just 3% to $4.3 billion this year. CBS O&O stations are expected to be down 2% this year (no election spending) but up just 6% next year. Average: 4%. Yawn.

But un-sexy does not necessarily mean unexciting from a stock-market standpoint. Moonves' company will take on more debt than Freston's, with the aim of using that cash to pay a relatively rich dividend and regularly buy back stock. NBC Universal Chairman Bob Wright argues that the primary beneficiary of a big dividend is Viacom's biggest shareholder, the Redstone family.

But “returning capital to shareholders” is a cliché on Wall Street these days. And when things go right, leverage dramatically amplifies a company's return on capital. So Moonves' personal stock options may be more valuable under the new structure than under the current one.

“Slow growth doesn't imply that the 'Les side' is going to be a dog stock,” says Merrill Lynch media analyst Jessica Reif Cohen. “It should pay a reasonably high dividend, which is rare in media.”

One development to watch is whether Freston's and Moonves' groups really become separate companies or they act as Redstone companies. For example, Moonves' Showtime is dependent on Freston's Paramount for theatrical releases. But that deal expires in 2007. Will Paramount truly seek competitive bids from Showtime's rivals, HBO and Starz, or will those movies remain in the Redstone family?

Of course, Freston's units could encounter unexpected troubles and make Moonves' side the better stock. Sometimes slow and steady wins the race.

E-mail comments to jhiggins@reedbusiness.com