Media stocks have recently been slammed by ongoing concerns about cord cutters disrupting the business model of cable TV packages and advertising. Over the past six months, shares of Viacom (NASDAQ: VIA) and Time Warner (TWX) have both declined over 20%. Those steep losses have attracted activist investors to both stocks. Let's discuss what these major shareholders want and what their involvement might mean for the companies.
Viacom/Paramount's Transformers. Source: Paramount
Viacom: The management needs to go
Activist investor Eric Jackson from SpringOwl Asset Management wants Viacom to change its board, reduce costs, and aggressively expand its digital ecosystem. Jackson believes that those changes could boost the stock by as much as 135%. In a 99-page online report, Jackson declares that "Viacom management has underperformed for years with no accountability" and notes that its board is one of the biggest and highest paid in the industry. Earlier this year, another major investor sued Viacom, declaring that its 92-year old executive chairman Sumner Redstone was "physically and mentally incapacitated" and "unable to fulfill the responsibilities" for which he was paid.
Last quarter, Viacom movie revenue fell 24% annually and operating income plunged 43% due to tough comparisons to the prior year quarter. Media networks revenue rose 5%, fueled by higher affiliate fees offsetting weaker ad sales, but total revenue still fell 5% to $3.8 billion and missed expectations by $90 million. Analysts expect Viacom revenue and earnings to grow 3.7% and 12.1%, respectively, in fiscal 2016.
Looking ahead, there are a few bright spots in Viacom's business plans. The company is currently using three new ad products -- Velocity, Echo, and Vantage -- to try to offset declines in traditional ad sales. Velocity inserts big brands directly into TV programs via product placements; Echo gives advertisers access to social media campaigns; and Vantage mines viewer data to target niche audiences beyond broad age and gender-based demographics. To expand its digital presence, Viacom has started unbundling more popular networks like Nickelodeon into stand-alone streaming services. Its theatrical revenues should also warm up this year with new Paranormal Activity, The Ring, Zoolander, Teenage Mutant Ninja Turtles, and Star Trek films. The stock also remains fairly cheap at just six times forward earnings.
Time Warner: Sell itself or split up
Time Warner has reportedly been targeted by both Carl Icahn and his former right-hand man Keith Meister, who now leads activist hedge fund Corvex Management. It's unclear what Icahn and Meister want, but the New York Post speculates that they could push Time Warner to divest some assets or sell itself.
Batman v. Superman: Dawn of Justice. Source: WB
Divesting assets wouldn't be a new strategy for Time Warner, which was once a much bigger and more sluggish conglomerate. Over the past decade, it dropped AOL, its pay TV business, and its print business to become a more streamlined media company specializing in cable and network TV, movies, and video games. Last quarter, Time Warner revenue rose 5% annually to $6.56 billion and beat expectations by $50 million. Revenue at its Turner cable networks slipped 2% annually, but HBO revenue rose 4.8% and Warner Bros. (network TV, films, video games) revenue surged 15%.
That uneven growth suggests that Time Warner could streamline itself by selling the Turner division or spinning off HBO or its growing video games unit into new companies. Recent rumors have suggested that Apple might be interested in buying the company or some of those assets to diversify its top line away from the iPhone and establish a foundation for its suspended streaming TV efforts. But as I mentioned in a previous article, that acquisition wouldn't make sense due to mismatched margins and the fact that Apple already has access to HBO Now.
As a single company, Time Warner's outlook looks average. Analysts expect its sales to grow 4.5% annually for the current year and for earnings to rise 12.8%. Looking ahead, the company still has a few big catalysts in 2016, including the new Batman vs. Superman and Suicide Squad films, the new season of Game of Thrones, and new WB Interactive titles.
Don't jump to conclusions
Activist interest in these two companies suggests that big changes could occur soon. However, efforts from these investors have failed before, so it is far from certain that Viacom will replace its board or that Time Warner will restructure. Nonetheless, investors should keep a close eye on these headlines to see how both media giants react.
