The Media Merger Hype Stops at Viacom’s Front Door : Debts, Lagging Stock Price Have Wall St. Nervous

To see how all the hype about media and entertainment mergers the past three years has evolved into cynicism, look no further than Viacom Inc.

Up to its ears in debt after spending $10 billion for Paramount Communications and another $8.5 billion for video rental giant Blockbuster Entertainment, Viacom has to date been largely a disappointment. Its Blockbuster numbers have been especially soft. There also have been bumpy periods for its Paramount studio, although it boasts Hollywood’s top film the past three weeks in “First Wives Club.”

Nowhere is that reflected more than in the company’s stock price, which, although it got off the deck the past month, remains down by about one-third from the level it was trading at a little more than a year ago.

Granted, Viacom isn’t thrashed every few weeks publicly the way Time Warner is for failing to live up to the promise of the touted 1989 merger of Time Inc. and Warner Communications Inc. But the downward revisions of Viacom’s financial targets has strained credibility with investors. Exacerbating the tensions was the January firing of Frank Biondi Jr.--popular on Wall Street--as chief executive by Viacom Chairman Sumner Redstone, who assumed Biondi’s duties himself. Biondi has since landed as CEO of rival MCA Inc.

“They have yet to really capture what they anticipated,” said Anita Brown, portfolio manager with Viacom shareholder Wells Fargo Investment Management.

Hoping to regain some of that goodwill, the company today launches what it hopes will be the start of a turnaround in perception as it tries to reassure investors that executives are “on the case,” to use a phrase Redstone is known to be using a lot these days.

For starters, it will for the first time trot out to Wall Street former Wal-Mart executive William Fields. He was named in March to run Blockbuster, which is the main source of anxiety among investors. Viacom executives wouldn’t comment on the meeting, but Fields is expected to outline how he’s making the operation more efficient to run like the well-oiled Wal-Mart machine, putting into place such policies as buying videos directly from studios to cut out middlemen.

Company sources confirm that Fields also is considering moving Blockbuster’s headquarters to Dallas from Fort Lauderdale, Fla., to save money. Other moves reportedly under consideration include putting in service centers where people can upgrade personal computers, increasing merchandise sales at Blockbuster and adopting an aggressive strategy in which Blockbuster will seek a bigger piece of the video sales market rather than focusing so much on rentals.

Blockbuster has been hurt by the growth of sales directly to customers, changing video rental patterns in which customers seem to be increasingly just renting hits and a sharp downturn in the video game rental market caused by the transition to different game systems. In addition, insiders note, Viacom changed Blockbuster’s accounting system to a more conservative method that more realistically treats the shelf life of a video at around six months rather than two years.

Some investors have even suggested spinning off all or part of the video rental chain. But insiders insist that won’t happen. Furthermore, they note, company critics fail to note that Blockbuster has contributed some $1.5 billion to Viacom in the past two years (although investors counter that Blockbuster’s ongoing expansion, especially overseas, eats up a lot of the money it generates).

Nonetheless, Fields will be hard pressed to overcome the long-held, but still rising, skepticism that video stores will soon be dinosaurs due to advancing technologies such as video-on-demand and the proliferation of affordable satellite dishes.

Criticism toward Viacom has eased a bit in the past month. The company disclosed that it will buy back a small portion of its stock. And its Class B shares--the ones most widely held by investors--climbed from a low of $30.25 to close at $37.25 on the American Stock Exchange on Monday. Class A shares closed at $36.75.

Viacom still has some major supporters. Fund manager Mario Gabelli says he’s been an aggressive buyer of Viacom lately, although he believes that the company needs to cut its debt. Still, he’s bullish on the company’s global growth prospects given the worldwide hunger for American entertainment and opportunities created by the fall of communism in Eastern Europe.

Viacom sources say Redstone does plan to confront the debt problem by earmarking a good chunk of its cash toward paying down debt, now at $9.6 billion after being pared by $1.7 billion using proceeds from the sale of Viacom’s cable operation to Tele-Communications Inc. The goal: trimming debt to between $6 billion and $8 billion. Most of the money to whittle it down will come from internally generated cash, with a few nonstrategic asset sales possible. Analysts say Viacom’s radio operation and Blockbuster’s ailing retail music group are likely candidates.

To some extent, Viacom is caught up in the backlash toward all of the over-hyped media mergers of the past three years. Time Warner has yet to convince skeptics that it can be managed well, and Walt Disney Co. found ABC was a tougher deal than imagined. Investors also are concerned about the huge debts that the companies have taken on, the amount of profits debt payments eat up as well as the complicated corporate structures that seem to result.

“These companies are just like the industrial conglomerates that went out of favor decades ago,” Brown says. “People want pure plays now where they can really see things.”

*

Sony Update: Last minute tinkering with the new Sony management structure was still going on Monday. The most likely result will be an executive team that includes United Artists President John Calley and New York-based Sony executive Jeffrey Sagansky, both working closely with Sony Corp. of America Executive Vice President Yuki Nozoe. All three executives are expected to be based at Sony’s Culver City lot.

Adding Nozoe to the mix is a clear sign that Sony President Nobuyuki Idei wants his own eyes and ears at the troubled studio operation, which hasn’t been the case since the Japanese electronics giant plunged into Hollywood back in 1989. Indeed, a lot of observers believe that had Tokyo been more plugged in at Culver City, things might never have run amok in the first place.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Less Than Paramount Growth

Despite its purchase of Paramount Communications and Blockbuster Entertainment, Viacom Inc.’s stock has fallen. Monthly closes since June 1993:

Monday’s close: $36.75

Source: TradeLine

Researched by JENNIFER OLDHAM / Los Angeles Times