viacom stahl report

8/3/2019 Viacom Stahl Report

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THE STAHL REPORTJanuary 21, 2011

Exclusive Marketers ofThe Stahl Report

PCS Research Services125 Maiden Lane, 6th FloorNew York, NY 10038(212) 233-0100www.pcsresearchservices.com

H o r i z o n R e s e a r c h G r o u p

Murray Stahl Steven Bregman

Thrse Byars Derek Devens Peter Doyle

Michael Gallant Matthew Houk David Leibowitz

Eric Sites Fredrik Tjernstrom Steven Tuen

This report is based on information available to the public; no representation is made with regard to its accuracy or completeness. This document is neither an offer nor a solicitation to buy orsell securities. All expressions of opinion reflect judgment at this date and are subject to change. Horizon ResearchGroup and others associated with it may have positions in securities ofcompanies mentioned. Reproduction of this report is strictly prohibited. Horizon Asset Management, Inc. 2011.

Viacom Inc.

(BUY)

Price: $42.04 Ticker: VIA-B

52-W eek Range: $27.89-$42.63 Dividend: $0.60Shares Ou tstanding: 604.5m Yield: 1.4%Market Capitalization: $25,724m

Data as of 1/21/2011The market capitalization is comprised of 51.972m class A shares outstanding a t a price of $47.98, and552.6m class B shares outstanding a t a price of $42.04. Valuations within the text are based on a class B shareprice of $42.25.


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Horizon Asset Manag ement, Inc. 2011

Investment Thesis

Viacom is an asset-rich media company. In its second iteration as a publicly-tradedcompany, after having been originally spun off from CBS in 1971, the current business iscomprised of cable network channels and a filmed entertainment production company.Historically, the large conglomerate-focused media companies have engaged in a variety ofcorporate transactions, such as spin-offs, tracking stocks, and acquisitions, in an effort toisolate or maximize the value of certain assets that had been amassed through years ofwhat many would consider empire building. Perhaps the most noteworthy financialengineer of this industry has been John Malone of Liberty Media, who has performed someof the more complex, yet possibly value-enhancing transactions on record.

Viacom, of course, is controlled by Sumner Redstone, who at the age of 86 has undertaken

his fair share of transactions as well, the most recent being the separation of Viacom fromCBS in 2005. The motive was to create a separately traded company (again) whose stablenetwork channels could be distinguished from the more challenged industries of radiobroadcasting, outdoor advertising, and print publication. In the transaction sense, theobjective was achieved, but the valuation benefits for Viacom shareholders have not yetbeen fully realized.

The companys cable network channels such as MTV, Nickelodeon, and Comedy Centralare assets with a wide viewer base, stable cash flows, and high operating margins. Whilemuch attention from the financial media has been placed on the strenuous relationshipbetween the content and distribution companies, the content companies appear, by and

large, to have the advantage in these negotiations. For instance, these so-called affiliatefees paid to Viacom by the cable and satellite providers have increased withoutinterruption at a rate of 12.3% per annum since 2003.

While the advantage over cable providers can be demonstrated, an even more favorabledevelopment for media content companies is transpiring at a rapid pace. That is, content isbecoming increasingly available via the internet on mobile devices such as smart phones,or on tablet computers such as the Apple iPad. It is reasonable to believe that the cost ofdistributing this content through mobile platforms is far less than through cable systems,the latter being a demonstrably capital intensive business. In this way, Viacom could be ina position to negotiate more favorable distribution contracts with mobile or internet

providers for its content, and in effect begin to bypass the cable companies, which retain alarge part of the revenue derived from the content assets to fund their own infrastructuremaintenance. Thus, by way of technological advancement, Viacom appears to havemargin expansion opportunities for many years into the future.

The problematic asset of Viacom is its Paramount filmed entertainment division. Movieproduction is an inherently volatile business, as the cost of production can be enormous,and the success rate, as measured by box office revenues, is entirely unpredictable.


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Compounding this fundamental deficiency is the very low operating margin of Paramount,even in years when it produces successful films. For instance, prior to 2009, the EBIT

margin of this business was 1.5% - 3%. Following restructuring efforts of the last fewyears, the more recent operating margin was 4.9%. However, this still compares quiteunfavorably to the margins realized by the filmed entertainment businesses of other mediacompanies such as News Corp. or Time Warner, which manifest 7%-18% operatingprofitability.

While Paramount is actively engaging other studios in distribution alliances to reducesome of the inherent volatility, and also taking measures to eliminate operating costs, theinvestment community still views this asset with skepticism. In fact, as described below, itis assigned no value in the current Viacom share price.

An appropriate way to value Viacom is to isolate its network and film franchises. Thecable networks will likely generate $8.4 billion of revenues in the 2011 fiscal year (endingSeptember 30th). By applying the average 4x enterprise value-to-sales multiple of otherpure network companies such as Scripps Interactive and Discovery Communications, onearrives at a $33.4 billion value for Viacom Networks. The subtraction of $6 billion of netdebt and minority interests results in a net asset value of $45.32 per share. The currentViacom class B share price is $42.251

, suggesting that one can currently acquire theParamount assets, which generate nearly $6 billion of annual revenue, at no cost.However, Paramount is almost certainly not worthless. Irrespective of future filmproductions, its valuable film library continues to generate DVD and licensing revenuewith virtually no associated cost to the company.

Paramount actually acquired the live-action film studio DreamWorks LLC (not to beconfused with DreamWorks Animation that is publicly-traded) in 2006. It paid $1.53billion for this business, which produced about $1.36 billion of revenues, suggesting arevenue multiple of slightly over 1x. DreamWorks Animation, although a qualitativelydifferent film studio, currently trades at 2.7x revenues. Despite a lack of comparativevaluations, one might reasonably apply a 1x multiple to the Paramount revenues. Thiswould create a $5.8 billion value, and raise the net asset value of Viacom to $54.92 pershare, which is a 30% premium to the current share price. Such a valuation for Paramountis further supported later in this report by a simulated leveraged buyout scenario.Therefore, while given little consideration at the moment, Paramount represents a free call

option that should have some future value.

1 The Class B shares carry no voting rights, while the Class A shares, which trade at $48.34, are entitled tovoting privileges. Despite the voting premium, the Class A shares are majority-owned by Sumner Redstone,such that one who desires voting rights, and further is willing to pay a premium for this perceived benefit,would ultimately be disappointed, as the 79.9% voting control held by Mr. Redstone would negate anyminority voting position gained through Class A share purchase.


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Knowing that media companies can trade at discounts to NAV for considerable periods oftime, it is important to understand the current opportunity cost situation. Based on the

2011 consensus earnings estimate of $3.32 per share, Viacom trades at a 12.7x multiple.Using this estimate, the company will likely produce, after the payment of dividends, $1.8billion of free cash flow. This represents a 7% free cash flow yield relative to the $26billion market capitalization. Including the 1.4% dividend yield, one would earn an 8.4%after-tax economic yield during the holding period that may be required to unlock thecompanys embedded asset value. This rate of return would expand if the Viacom cableassets continue to grow even at the present rate.

Additionally, if permitted to do so, the application of a modest amount of leverage to thisposition, even 20% (i.e. 1.2x leveraged), would create a double digit annual yield. Giventhe degree to which the companys assets appear to be undervalued, and a sufficiently

attractive after-tax yield to compensate one for the holding period risk, the shares arerecommended for purchase.

Company Description

Viacom was officially formed as a public company in 1971 following its first spin-off fromCBS. The companys initial quest to acquire media properties began with the purchase ofa 66% interest in MTV Networks in 1985. In the following year, Viacom acquired the

remaining 44% of MTV Networks for merely $185,000, as the youth-oriented cablechannel was still in the experimental stage at that point. Only five years later, in an effortto expand internationally, a 50% interest in MTV Europe was purchased by Viacom for$65 million. Importantly, it was during this early period of the companys history thatSumner Redstone acquired majority control through his National Amusements, Inc.vehicle. National Amusements is one of the larger operators of movie theaters in the U.S.and Europe, and acquired an 83% interest in Viacom in 1987.

History

While enjoying the success achieved with its rapidly-growing MTV franchise, Viacomundertook a merger with Paramount Communications in 1994, in a transaction that valuedthe combined company at $9.9 billion. Now an established media company with

considerable product distribution scale, Viacom continued to build upon its properties overthe course of the next five years. Then, at the height of the Technology Boom in 2000, itmerged with its former parent CBS. Several smaller network acquisitions followed, suchas the purchase of BET Holdings in 2001, Noggin in 2002, and the remaining 50% interestin Comedy Central in 2003.

The motive of this remarriage of assets was to utilize the considerable distributioncapabilities of CBS to promote and advertise the network and filmed entertainment


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products of Viacom. CBS owns various distribution outlets, such as television and radiobroadcasting channels, outdoor advertising assets, and print media publisher Simon &

Schuster. However, many of the CBS assets have been under considerable pressure sincethe merger. The rise of the internet as a media distribution channel has disrupted thebusinesses of traditional media companies, which mostly rely on advertising revenue. Aredistribution of advertising revenue from the print or radio industries to the internetpresents a serious challenge for a company such as CBS. Thus, merely five years after theViacom/CBS merger, Viacom was again separated via a spin-off in 2005.

Using MTV and Nickelodeon as the foundation of its cable network franchise, this timearound Viacom appears to be placing some focus on its filmed entertainment business.Paramount acquired DreamWorks LLC (leaving DreamWorks Animation as a separatepublicly-traded company) in 2006. This brought the talent of famed movie director Steven

Spielberg to the Paramount franchise, who is contracted to produce a certain number ofmovie titles per year. Then, in 2008, Paramount formed a joint venture with Lionsgateand MGM known as EPIX to distribute each respective studios movie titles via both acable premium pay channel and the internet (in downloadable format). This coincides withParamounts previous distribution arrangements with Marvel and DreamWorks, whichrequire Paramount to fund the distribution and marketing costs of certain titles in exchangefor a revenue share agreement with the original production studio. These attempts topartner with rival movie studios appear to be a cooperative effort by the industry to sharein the production and marketing costs of Hollywood films, and are clearly designed toreduce the volatile earnings of this business.

The Viacom Media Networks segment comprises the companys primary cable networkchannels. MTV Networks reaches over 635 million households worldwide through 170different channels. The more notable channels include MTV, MTV2, VH1, CMT,Nickelodeon, Nick at Nite, Nick Jr., Nicktoons, Comedy Central, Spike TV, and TV Land.

Business Segments

The companys BET Networks owns channels such as BET, CENTRIC, and BETInternational.

While these programming channels are known to most U.S. media consumers, it isimportant to understand the global reach that Viacom has achieved through itsinternational expansion strategy. In fact, the companys network programs generally reach

more international viewers than in the U.S. The table below demonstrates the degree towhich Viacom has established its programming with the international audience.Importantly, though, it will be noted that the U.S. market still dominates the companysrevenue base, as 72% of overall 2009 sales were generated domestically. This is notnecessarily an accurate expression of the companys international reach; rather, it is morelikely evidence, given the wide international distribution reach, that revenue opportunitieshave not yet been fully realized in many international or emerging markets.


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Table 1: U.S. vs. International Household Viewers

Cable Networks Subscribers (as of 9/30/10)

MTV VH1

U.S. 99.4 U.S. 99.0

International 497.5 International

Total

85.6

596.9 Total 184.6

Nickelodeon Comedy Central

U.S. 100.5 U.S. 98.9

International 245.2 International

Total

71.0

345.7 Total 169.9

(in millions)

Network revenues are generated from three main sources: advertising, affiliate fees, andancillary. During the shortened 2010 fiscal year

2

, advertising represented 54% of totalNetwork sales, affiliate fees 39%, and ancillary 7%, respectively. As one would expect,advertising revenues are cyclical. On the other hand, the affiliate fees paid by cableoperators to distribute the Viacom programming have historically been remarkably stable.This will be discussed in the subsequent section.

The Filmed Entertainment segment produces motion pictures under the ParamountPictures, Paramount Vantage, Paramount Classics, MTV Films, and Nickelodeon Moviesbrands. Viacom also has agreements in place to distribute and market certain titles fromother production companies such as DreamWorks Animation and Marvel. Sucharrangements entail the absorption of distribution and marketing costs by Viacom in returnfor a percentage of the movie titles overall revenue.

On average, Paramount releases 14-16 films per year, including those distributed on behalfof DreamWorks Animation and Marvel. Noteworthy releases during 2010 includedIron Man 2, Shrek Forever After, Megamind, and The Last Airbender. In addition, the

Paramount library of past films is extensive. Titles include Titanic, Forrest Gump, TheTen Commandments, Breakfast at Tiffanys, Indiana Jones, and The Godfather. Theseassets continue to provide revenues well past their actual release date in the form of home

2 Viacom changed its fiscal year-end to September 30, effective September 30, 2010. Thus, the 2010 fiscalyear represents the January September 2010 nine-month period, while the 2011 fiscal year will reflect theOctober 1st September 30th full 12-month period.


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entertainment (DVD rental) and licensing (consumer products and TV licensing rights)revenues.

In the 2010 fiscal year, the Filmed Entertainment segment produced revenues from thefollowing sources: theatrical release (38%), home entertainment (28%), licensing (28%),and ancillary (6%). While theatrical release revenues provide initial insight as to thesuccess of a movie title, it is evident that well over half of a titles revenues are generatedafter release in a theater. For example, home entertainment (DVD rental) and licensingrevenues (distribution by cable, satellite, internet, television, etc.) are recorded aftertheatrical release. This recurring revenue stream is the most profitable component of filmproduction, since the substantial advertising and distribution costs are expensed asincurred, thereby causing most films to be unprofitable directly after release. However, ifviewed over the life of a film title, the recognition of revenues in the fullness of time

provides a more accurate representation of profitability.

A Profitability Comparison of Network Programming Versus Film Production

In 2009, Media Networks generated 59% of the total Viacom revenues, and 93% of totaloperating income. Over the last five years, the companys experience has been roughlysimilar, demonstrating that the cable program channels are the primary component of thecorporate earnings as a whole. On average, the EBIT margin of this business since 2003

has been in a consistent range of 37%-40%, as depicted below.

Media Networks

Table 2: Viacom Media Networks EBIT Margin, 2003-2009

Year

Operating

Margin

2009 40.2%

2008 39.6%

2007 37.6%

2006 40.1%

2005 38.6%2004 39.4%

2003 40.4%


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As noted, the cable networks are dependent on advertising, and fees paid by cable orsatellite providers for distribution to consumers. Since 2003, these affiliate fees have

increased at a rate of 12.3% per annum without interruption. This has been a very stablesource of revenue for the company.

As an owner of the content, it appears that Viacom, which has other distribution options,has considerable bargaining power over the incumbent cable providers. This allows thecompany to increase content fees at a double digit rate annually. This could be anadvantage that widens over time as well. The introduction of wireless devices capable ofstreaming video content presents not only a challenge for cable companies, but anopportunity for Viacom to retain more of its content revenues. Historically, cableoperators were able to demand a fairly large percentage of these sales as a way to build andmaintain more expansive network infrastructure. The rise of satellite television providers

began to end this near monopoly. Now, wireless and internet providers, which typicallyhave lower capital expenditure requirements, can distribute media programming via theirnetworks. While at a very early stage, it might be asserted that Viacom could negotiatemore favorable distribution terms with these providers in an effort to expand its margins.

In any case, affiliate fees are expanding at a consistent rate. There is, however, someexpected variability in advertising revenues, which are cyclical, but not severely so.Despite the magnitude of the 2008-2009 recession, advertising sales fell by only 6.7%during this period. Taken as a whole, cable programming proved to be fairly resistant torecession.

Table 3: Media Network Revenues by Source

Year Affiliate Advertising

2009 $2,901 $4,405

2008 $2,620 $4,722

2007 $2,339 $4,690

2006 $2,050 $4,346

2005 $1,825 $4,035

2004 $1,640 $3,410

2003 $1,448 $2,819

(in millions)

The profitability of Viacoms networks might be compared to the operating margins ofother media companies. While it is a competitive business, there tend to exist dominantchannels or franchises for each audience market segment. There are a number of programproviders such as Walt Disney, Time Warner, and Scripps Interactive, all of which havedeveloped networks for defined audiences. Once established, the capital requirements are


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low, and these franchises have historically been vehicles for stable free cash flow. In thetable below, the range of historical EBIT margins is roughly 25%-40%, suggesting that

Viacom is operating at near maximum profitability.

Table 4: Cable Network Industry Profitability (EBIT) Comparison

In the qualitative sense, the variability associated with movie production is self evident. Itis simply very difficult to anticipate the consumer response to a theatrical release with anydegree of precision. There is, however, a countervailing factor that provides a limited

degree of stability, this in the form of a studios film library. Given the extensive nature ofmost studios film libraries, past releases will generate revenues well into the future. Thisultimately serves to mitigate the near-term volatility, which is mostly created by theaccounting policies required of media companies. While some production costs can beamortized over the expected life of a movie title, advertising and distribution costs arematched to the timing of initial revenue recognition, or at theatrical release. Thus, a loss isoften recorded upon release, only to be recovered in future months or years. In this way, afilm library can be a quite valuable asset, and one that produces a high level of free cashflow given these accounting policies.

Filmed Entertainment

Paramount, though, appears to suffer from company-specific deficiencies, mostly related to

an inefficient cost structure, which is being addressed through a restructuring program.Since 2003, the operating margin of this segment has declined from 7.2% to a low of 1.7%,although most recently recovering to 4.5%. Paramount offers very little in the way ofearnings to Viacom despite contributing 36% of total company revenues.


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Table 5: Viacom Filmed Entertainment EBIT Margin, 2003-2009

Year

Operating

Margin

2009 4.5%

2008 1.7%

2007 1.9%

2006 3.1%

2005 2.1%

2004 6.1%

2003 7.2%

This can be measured against the profitability of other notable studio production firms. Aswith cable programming, the majority of studios are owned by the larger media companies.Direct comparisons to Paramount would be the filmed entertainment businesses of NewsCorp., Time Warner, or perhaps Walt Disney. Live-action films generally produce lowermargins than do animated films, since animation is computer-generated, and requires littleof the operating and production costs of live-action features. For instance, before beingacquired by Walt Disney, Pixar produced a 53% after-tax net margin. Moreover, as shownbelow, DreamWorks Animation has in the past been capable of realizing a 37.9%operating margin. The average for live-action studios appears to be in the range of 7%-18%. Given that there is very little difference between Paramount and say, for example,the studio of News Corp., there is certainly margin expansion potential from the current

level of 4.5%.

Table 6: Filmed Entertainment Industry Profitability (EBIT) Comparison

As a concluding remark, the diverse level of profitability inherent to different forms ofmedia is evident in the overall margins of the following conglomerated media companies.Very high margin businesses, such as cable network programming, are being masked byassets or operations that may be in a state of decline, or that manifest earnings variability.The consequence of operating this semi-related set of businesses is ultimately a lower

Summary Comment


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profit margin than could be achieved within a simplified or disaggregated corporatestructure. Interestingly, though, rather than placing value on each individual asset

segment, investors are simply assigning a multiple to the aggregated earnings, whichinevitably creates a discount-to-NAV situation. Perhaps this could provide a ripe area forfuture spin-offs if the undervaluation persists.

Table 7: Total Company EBIT Comparison

Discovery 35.1%

Scripps 33.6%

DreamWorks Animation 26.6%

Viacom 23.0%

Walt Disney 17.7%Time Warner 17.6%

News Corp 12.1%

(Most recently completed fiscal year)

Valuation

As of October 31, 2010 there were 52 million Class A voting shares outstanding. At aprice of $48.34, these shares trade at a 14% premium to the non-voting Class B shares, ofwhich there are 553 million outstanding. Clearly the more liquid of the two classes, thefollowing valuation discussion will be based on the Class B share price, which is currently$42.25. Incidentally, the notion of any incremental value attached to the voting rights inthis situation is illusory. As a 79.9% owner of the Class A shares via his NationalAmusement, Inc. vehicle, Sumner Redstone remains the controlling shareholder ofViacom. The purchase of a Class A share would technically provide one with votingrights; however, the premium does not appear to justify the inevitable conclusion, which isthat Mr. Redstone maintains overwhelming majority voting power.

Share Class Structure

Viacom currently trades at 12.7x the 2011 consensus earnings estimate of $3.32 per share.The short public history dating back to only 2005 prevents one from making anymeaningful or insightful historical comparisons. However, it may be noted that thecompanys p/e ratio has contracted virtually every year since, beginning from a 24xmultiple in 2005.

A Basic P/E Comparison


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By comparison, News Corp. and Time Warner trade at forward p/e ratios of 12.7x and12.5x, respectively. Disney actually trades at a substantial premium, or at 16.1x forward

earnings, primarily because of the superior quality of its assets, and an expected cyclicalrecovery in the companys theme park business. Another interesting comparison might bemade to Scripps Interactive or Discovery Communications. The p/e ratios here are 18xand 16x. The premium is obviously due to a lack of exposure to old media assets suchprint publications, and a focus on cable programming properties. Given this set ofcomparable companies, Viacom trades within the 12x-13x p/e range that has beenestablished for the diversified media companies.

Assuming for the moment that Viacom trades at a price that is representative of the valueof its underlying assets, let us consider a basic return scenario, given the current 12.7x p/e

ratio. Using the consensus earnings forecast of $3.32 per share in 2011, Viacom wouldproduce $2.007 billion of net income. The companys non-cash depreciation andamortization expense of $296 million exceeds run-rate capital expenditures of $140million, such that free cash flow would be $2.163 billion. Thus, the conversion rate ofearnings to free cash flow is well over 100%, reflecting the low reinvestment requirementsof its media business.

The Consequence of a Low Valuation

Viacom recently instituted a $0.60 per share annual dividend, which amounts to $363million per annum. Subtracting this from the cash earnings figure calculated above resultsin net free cash flow of $1.8 billion. In relation to the $26 billion market capitalization, theshares currently trade at 14.4x free cash flow, the inverse of which is a 7% yield. The

latter, added to the 1.4% dividend yield, provides an initial 8.4% after-tax yield.

Viacom is currently amid a fairly substantial share repurchase program that wastemporarily halted during the Credit Crisis. In fact, the company has been an aggressiveacquirer of its shares by repurchasing roughly 15.5% of the total outstanding since 2006.

In addition to share repurchases, Viacom could also use its substantial free cash flow toretire debt, of which there is $5.9 billion (net of cash) outstanding. It is noted that Viacomhas no tangible equity, due to $11.5 billion of goodwill relative to $9.3 billion of statedshareholders equity. Nevertheless, Viacom does not appear to be a dangerously leveragedcompany, in that current interest coverage is 6.9x, and was 5.3x during the depths of the

Credit Crisis in 2008.

Whether through share repurchases or debt retirement, the earnings accretive nature ofeither provides one with the prospect of a return of over 8%, assuming the p/e ratioremains constant. Since it is likely that the Viacom earnings will grow, if even consideringthe 13% consensus estimated growth rate into 2012, the going-in expectation might be areturn of over 10% per annum. The optionality beyond this base case is described below.


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The cable network assets are of great strategic importance to Viacom. Their value might

be compared to the current trading price of Discovery Communications or ScrippsInteractive. Discovery Communications owns the flagship Discovery Channel, as well asAnimal Planet, TLC, and the Science Channel. Scripps is the operator of The FoodNetwork, HGTV, and the recently-acquired Travel Channel. On an enterprise value-to-revenue basis, the multiples are 4.5x and 4.2x, respectively. One might also refer to thetransaction price of the Travel Channel acquisition completed in November 2009. Itappears that Scripps paid roughly 3.9x one year-forward revenues, based on a $975 milliontotal transaction value. On a somewhat conservative basis, then, the revenues of theViacom cable assets might be valued at a 4x multiple. The comparable valuations arepresented below. Merely for illustrative purposes, the current valuations of the mediaconglomerates are also provided, in an effort to demonstrate the premium at which the pure

cable programming companies trade.

Sum of the Parts Approach

Table 8: Comparable Media Company Valuations

2011 Est.

EV/Sales P/E

Discovery Communications (1) 4.5x 16.0x

Scripps Network Interactive 4.2x 18.0x

DreamWorks Animation 2.7x 13.7x

Viacom 2.2x 12.7x

Walt Disney 2.1x 16.1xTime Warner 1.8x 12.5x

News Corp (2) 1.3x 12.7x

(1) The company's non-voting Class C shares are used to calculate the P/E ratio;

market capitalization is calculated on a fully diluted basis consisting of the Class

A, B, & C common shares along with the preferred shares attached to each class.

(2) The company's non-voting Class A shares are used to calculate the P/E ratio

The 2011 consensus revenue estimate for Viacom is $14.16 billion. The Media Networkssegment produced 59.1% of the total company revenues in 2009, such that one mightreasonably apply this same attribution level to the consensus estimate. This would result in$8.354 billion of cable network revenues in 2011, which is 5.4% higher than the $7.9billion actually recorded in 2009. At a 4x multiple, these assets would be worth $33.416billion.

As to the Filmed Entertainment segment, it generated 40.9% of the total Viacom revenuesin 2009. Again, based on the current year consensus estimate of $14.16 billion, the 2011


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Table 9: Viacom Sum-of-the-Parts Analysis

Media Networks 2011E Revenues $ 8,354

Peer Multiple

Est. Value

4x

$ 33,416

Filmed Entertainment 2011E Revenues $ 5,806

Peer Multiple

Est. Value

1x

$ 5,806

Total Sum-of-Parts Value $ 39,222

Less: Net Debt $ 5,915

Less: Non-controlling interests

Net Asset Value

$ 107

$ 33,200

Shares Outstanding 604.5

Net Asset Value per share $54.92

Current Class B Share Price $42.25

Discount to NAV -23.1%

Appreciation to NAV 30.0%

Investment Summary

Viacom operates two media businesses with distinctly different margin characteristics. Itscable media programming assets are highly profitable and have provided a consistentsource of cash flow to the company for several years. However, the filmed entertainmentbusiness that is operated under the Paramount umbrella has historically been a problematicasset due to the inherent variability of its results. Given the negative sentiment towardsParamount, the Viacom shares currently trade at a discount of over 20% to a reasonablyestimated net asset value. If one is intrigued at the possibility of buying the Viacom assetsat less than fair value, and is equipped with the patience required to hold these shares

during the potential value realization period, the investor could be rewarded in the interimwith an after-tax economic yield (free cash flow yield + dividend) of 8% or more perannum. Accordingly, the shares are recommended for purchase.


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VIACOM INC.CONSOLIDATED STATEMENTS OF EARNINGS

Nine Months EndedSeptember 30, 2010

Year Ended December 31,(in millions, except per shareamounts) 2009 2008

Revenues $ 9,337 $ 13,257 $ 13,947Expenses:

Operating 4,883 7,191 8,167Selling, general and

administrative 2,025 2,642 2,824Depreciation and

amortization 222 379 394Total expenses 7,130 10,212 11,385

Operating income 2,207 3,045 2,562Interest expense, net (320) (430) (482)Equity in net losses of

investee companies (67) (77) (74)Loss on extinguishment of

debt - (84) -Other items, net (8) (37) (112)Earnings from continuing

operations beforeprovision for incometaxes 1,812 2,417 1,894

Provision for income taxes (627) (762) (620)Net earnings from continuing

operations 1,185 1,655 1,274Discontinued operations, net

of tax (321) (67) (6)Net earnings (Viacom and

noncontrolling interests) 864 1,588 1,268

Net losses (earnings)attributable tononcontrolling interests (10) 23 (17)

Net earnings attributable toViacom $ 854 $ 1,611 $ 1,251

Amounts attributable toViacom:

Net earnings fromcontinuingoperations $ 1,175 $ 1,678 $ 1,257

Discontinuedoperations, net oftax (321) (67) (6)

Net earningsattributable toViacom $ 854 $ 1,611 $ 1,251


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Basic earnings per shareattributable to Viacom:

Continuing operations $ 1.93 $ 2.76 $ 2.01Discontinuedoperations $ (0.53) $ (0.11) $ (0.01)

Net earnings $ 1.40 $ 2.65 $ 2.00

Diluted earnings per shareattributable to Viacom:

Continuing operations $ 1.92 $ 2.76 $ 2.01Discontinued

operations $ (0.52) $ (0.11) $ (0.01)Net earnings $ 1.40 $ 2.65 $ 2.00

Weighted average number ofcommon shares

outstanding:Basic 608.0 607.1 624.7Diluted 610.7 608.3 625.4

Dividends declared per shareof Class A and Class Bcommon stock $ 0.30 $ - $ -


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VIACOM INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except par value)September 30,

2010December 31,

2009

ASSETSCurrent assets:

Cash and cash equivalents $ 837 $ 298Receivables, net 2,417 2,876Inventory, net 861 767Deferred tax assets, net 77 108Prepaid and other assets 281 244Assets held for sale 76 137

Total current assets 4,549 4,430Property and equipment, net 1,102 1,175Inventory, net 4,145 3,731Goodwill 11,035 11,107Intangibles, net 467 554Deferred tax assets, net 156 -Other assets 568 589Assets held for sale 74 314Total assets $ 22,096 $ 21,900

LIABILITIES AND EQUITY

Current liabilities:Accounts payable $ 210 $ 247

Accrued expenses 1,000 1,148Participants share and residuals 1,059 1,063Program rights obligations 390 404Deferred revenue 256 286Current portion of debt 31 123Other liabilities 435 394Liabilities held for sale 117 86

Total current liabilities 3,498 3,751

Noncurrent portion of debt 6,721 6,650Participants' share and residuals 453 739Program rights obligations 691 523Deferred tax liabilities, net - 84Other liabilities 1,343 1,303Liabilities held for sale - 5Redeemable noncontrolling interest 131 168

Commitments and contingencies (Note 14)

Viacom stockholders equity:Class A Common stock, par value $0.001, 375.0

authorized; 52.0 and 52.4 outstanding,respectively - -

Class B Common stock, par value $0.001, 5,000.0authorized; 556.5 and 555.0 outstanding, 1 1


19/19

THE STAHL REPORT

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respectivelyAdditional paid-in capital 8,346 8,287

Treasury stock, 151.5 common shares held intreasury (5,725) (5,725)

Retained earnings 6,775 6,106Accumulated other comprehensive income (loss) (114) 35

Total Viacom stockholders equity 9,283 8,704Noncontrolling interests (24) (27)Total equity 9,259 8,677Total liabilities and equity $ 22,096 $ 21,900

viacom stahl report

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