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Redstone letter leaves Viacom investors seeing red

Prospective M&A has a tendency to get investors' hopes up. But when those hopes are dashed, so too are company stock prices.

Viacom Inc. shares dropped during the week of Dec. 12 after National Amusements Inc., the private holding company controlled by the Redstone family, withdrew its proposal to merge Viacom with CBS Corp. In a letter to the boards of the two media companies, Sumner and Shari Redstone said that after "careful assessment and meetings with the leadership of both companies, we have concluded that this is not the right time to merge the companies."

Given that the potential for a deal with CBS had buoyed Viacom's share price in recent months, it is perhaps not surprising that news of the Redstones' decision sent Viacom's shares sliding, with the stock closing at $34.99 on Dec. 12, down from a Dec. 9 close of $38.62. CBS Corp. mostly held steady, closing at $62.18 on Dec. 12, down from a Dec. 9 close of $62.56.

SNL Image

As BTIG LLC analyst Richard Greenfield noted in a research blog post, "Our upgrade of Viacom to BUY … with a $55 price target was undoubtedly a mistake, as it was driven by our conviction that Viacom and CBS would merge."

With a deal off the table, Greenfield maintained a "buy" rating on the stock but lowered his price parget to $47.50 from $55.00.

Greenfield explained that he kept his "buy" rating because he believes the stock is trading well below what the company is actually worth. Even if Paramount Pictures recovers only to "underwhelming levels," Greenfield said that recovery will have a "meaningful impact on earnings growth." And he also noted the company has "clear visibility" over its affiliate-revenue outlook going forward as it has no major carriage renewal negotiations coming up in fiscal 2017.

"Domestically, we believe 3% growth for full-year 2017 is achievable even with continued industry sub losses," the analyst said of the company's prospective affiliate revenue growth.

But what makes Greenfield most optimistic about the company's outlook going forward is the ouster earlier this year of former Viacom CEO Philippe Dauman.

"We believe former Viacom CEO Philippe Dauman was toxic — limiting interest in executive talent wanting to work at Viacom and creative talent for projects for Paramount, as well as Viacom's cable networks. Paramount was starved for cash, limiting its ability to compete," Greenfield said.

Greenfield said Viacom will likely become "more talent friendly" under Bob Bakish, who had been serving as acting Viacom president and CEO until Dec. 12, when he was given the role on a permanent basis.

But Brean Capital LLC analyst Alan Gould noted in a Dec. 12 research report that it will take far more than talent to restore Paramount, and ultimately Viacom. He noted that for the past 10 years, the studio has averaged only a 2.5% margin.

"Given this record, we do not believe it is as simple as Paramount simply having a cold streak over the past year or two. The studio has clearly been under-invested in relative to the competition, which implies it will likely need substantial time and capital to turn it around, barring a surprise hot streak," Gould said.

Assuming Viacom remains independent, Gould said the company will likely need "a strategic partner to help co-finance a larger and more expensive film slate."

Another company that saw its stock price stumble amid M&A concerns was Yahoo! Inc.

The Internet company said late on Dec. 14 that a new investigation had found an unauthorized party stole data associated with more than 1 billion user accounts in August 2013. Yahoo believes this incident is separate from a previously disclosed 2014 hack, where data linked with at least 500 million user accounts was stolen.

The news sent Yahoo's shares sliding on Dec. 15, as investors pondered what impact these new revelations might have on the company's pending $4.83 billion deal with Verizon Communications Inc. A number of industry observers believe the telco giant could seek a hefty discount on the deal, or perhaps walk away from the acquisition altogether.

Yahoo shares closed at $38.41 on Dec. 15, down from a prior-day close of $40.91, while Verizon shares closed at $51.81 on Dec. 15, up slightly from a close of $51.63 on Dec. 14.

Elsewhere in the media universe, Scholastic Corp. shares rose Dec. 15 after the company reported earnings for the period ended Nov. 30.

SNL Image
"Fantastic Beasts and Where to Find Them"
Source: Warner Bros.

The publisher said its trade revenues jumped 60% year over year, boosted by several Harry Potter titles, including the screenplay of the film "Fantastic Beasts and Where to Find Them."

"Long-standing and newer fans of the world of Harry Potter have responded with great global support of the new Fantastic Beasts franchise and we look forward to the rollout of the next installments in the years to come," Scholastic CEO Dick Robinson said on a Dec. 15 earnings conference call.

All in all, the company reported total revenue of $623.1 million, up from $601.8 million a year ago, and net income of $67.9 million, or $1.92 per share, up from $64.9 million, or $1.84 per share, in the year-ago period.

The S&P Capital IQ consensus EPS estimate for the just-ended quarter was $1.92 on both a normalized basis and GAAP basis.

Shares in Scholastic closed Dec. 15 at $48.13, up from a prior-day close of $46.00.

World Wrestling Entertainment Inc., meanwhile, saw its shares fall Dec. 13 after the company priced $200 million of convertible senior notes due 2023 in a private placement.

Barron's reported that the notes can be converted into WWE stock under certain conditions and WWE investors typically do not like those kinds of offerings as they can potentially dilute a stock owner's investment.