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Why Viacom Killing the Paramount Sale Is A Big Mistake

Analysts believe the proposal made plenty of business sense, but the Redstones didn’t want to sell

Viacom on Wednesday lost its interim CEO Thomas Dooley, slashed its dividend and made official something that long been suspected: that former CEO Philippe Dauman’s proposed sale of a minority stake in Paramount Pictures will not be happening.

That’s a final victory for Viacom Chairman Emeritus Sumner Redstone, but analysts think Viacom’s other shareholders could be the big losers.

“The divestment of Paramount was critical to value support,” Michael Nathanson at MoffettNathanson wrote in a Wednesday note, joining a string of analysts who have endorsed Dauman’s idea to monetize Paramount.

Nathanson calculated that the decision not to sell half of Paramount for $2 billion — close to an April valuation of the studio by RBC Capital Markets, but much lower than the $5 billion offer by China’s Dalian Wanda Group that the Los Angeles Times reported — resulted in the stock being worth $5 less per share.

In a Sept. 12 research note, BTIG Research’s Rich Greenfield wrote that selling all or part of Paramount was almost a no-brainer. “On Paramount, even if it can be turned around over the next few years, it is hard to imagine it being worth more than the $10 billion plus that Wanda is interested in paying for the asset,” he wrote. “Not to mention, the investment in Paramount necessary to rebuild would be quite significant, given that it has been starved of cash.”

“With Viacom’s total enterprise value of just $27 billion and someone willing to pay over $10 billion for Paramount alone, everyone in the media industry should be thinking about buying all of Viacom and immediately selling off Paramount (which would pay down the vast majority of Viacom’s debt in the process),” Greenfield added.

Wanda, which is owned by China’s richest man, Wang Jianlin — and which paid $3.5 billion for Legendary Entertainment in January — has made it fairly clear it’s interested in owning a Hollywood studio. In fact, the same day Viacom announced its Paramount deal was off, Wanda agreed to a strategic partnership with Sony to finance select films.

Greenfield said taking the sale off the table is itself a risk for Viacom, as it might prompt buyers to look elsewhere for potential studio investments.

“The other risk at Paramount is that if they fail to sell now, buyers such as Wanda may look elsewhere for acquisitions such as Lionsgate, MGM, Sony, etc.,” he wrote.

Viacom first announced its intention to sell a stake in its movie studio on February 23. Almost seven months to the day later, those plans officially died. Unofficially, it all but ended when Dauman, longtime Viacom CEO and former confidant of the 93-year-old Redstone, was ousted on August 17.

Dauman, who championed the proposal to sell a minority stake in Paramount, walked away from those talks with a $72 million severance package and the opportunity to pitch the deal to the company’s board, but once he lost the power struggle with Redstone and daughter Shari, who reconstituted Viacom’s board in their own image, its fate was essentially sealed.

Dauman has been criticized for his stewardship of Viacom, spending nearly $10 billion buying back the company’s stock — which is down 23 percent over the past five years, instead of making strategic acquisitions like competitor Disney’s purchases of Marvel and Lucasfilm.

Sumner and Shari Redstone did not want to sell any part of the studio, which Viacom bought for $10 billion in 1994 — but has finished in last place by market share of the six major studios in every year since 2012, and is on pace to do again this year. Dauman did.

The Redstones defeated Dauman in a power struggle, and as they control the majority of Viacom’s voting rights through their ownership in private theater chain National Amusements, they got their way.

Marci Ryvicker, who covers Viacom for Wells Fargo, called the decision to kill the potential sale “no surprise” in a research note published Wednesday.

Cashing out part of Paramount may have been good for Viacom’s bottom line, but as in all cases with this company, there’s only one number that really counts. The Redstone bloc owns about 80 percent of Viacom’s voting shares. They didn’t want to sell Paramount, and it won’t be, share price and business logic be damned.