After Stock Slaughter, What's Next for Redstone?

Written by R. Scott Raynovich - Light Reading

Tuesday, October 14. 2008 at 11:45 AM EDT Post a comment

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Why worry about short sellers when, apparently, the biggest seller of your stock is the controlling owner?

Imagine the dismay of Viacom Inc. (NYSE: VIA) and CBS Corp. (NYSE: CBS) shareholders, crippled by heavy losses, when they discovered the person driving the panic-selling last week was none other than Viacom Executive Chairman and Founder Sumner Redstone, who was forced into dumping millions of shares.

It's got to be an embarrassing moment for the media mogul, who was forced to liquidate shares to meet the debt requirements of his family-owned movie theater chain, National Amusements.

In a statement issued yesterday, National Amusements said it had completed the sale of 17 million CBS Class B (non-voting) shares and 7 million Viacom Class B shares. The company said it had no plan to sell additional shares. The amount sold was substantially less than the $400 million the company had originally disclosed that it would sell. No explanation was given about why the company stopped selling.

It also doesn't help the morale of employees at the company, many of whom are forced into holding the stock via retirement plans, which prohibit reselling -- à la Enron. The source said that many CBS employees are having their retirement savings destroyed by the share decline.

CBS shares have lost about two thirds of their value this year, now trading around $9 after trading last year at $30. Viacom shares, trading today around $20, have fared only a little better, down nearly 50 percent since the beginning of the year.

Figure 1:

Click thumbnail for full image.

On Friday, CBS shares plummeted about 20 percent and Viacom lost 18 percent, although both stocks recovered in yesterday's powerful market rally. The National Amusements share sale forced a Friday earnings warning from CBS, in which it said third-quarter earnings would be substantially less than previously disclosed. This transpired on the day that National Amusements was unloading some of its stake.

Despite the recovery yesterday, this latest development certainly puts Redstone in a weaker position and, no doubt, damages his credibility. I would not be surprised to find these companies in play. Both are looking very cheap on a price/cashflow basis. With Redstone's National amusements in a defensive state and with heavy debt load, some one might make a bid for one or the other.

For example, CBS is currently trading with a trailing price/earnings ratio of 6 and an enterprise value/EBITDA ratio of 4, which is dirt cheap. Private equity players often take an interest in companies with enterprise value/EBITDA ratios below 10. But here's the real shocker: CBS's current dividend yield stands at 13 percent.

Granted, with earnings going down and the economy in a tailspin, it's possible the dividend could be cut. In the earnings warning Friday, however, the company said it has no plans to do so.

For the moment, at least, those numbers look attractive to somebody with deep pockets. Could we see Redstone battling a hostile takeover play later in the year or in 2009? It's looking increasingly possible.