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Shaky Paramount Deal Could Be the First of More Bad News for Viacom Investors

By Billy Duberstein – Mar 31, 2017 at 6:24PM

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The Chinese government may be putting a stop to their co-investment deal -- here’s what the setback means for the company.

Last year was tough for Viacom (NASDAQ: VIA) (VIAB) investors, and 2017 could be even more difficult. Earlier this month, the New York Post ran a story that the media conglomerate's deal with two Chinese investors -- Shanghai Film Group and Huahua Media -- may be on the rocks. That is bad news for Viacom shareholders.

No White Knight for struggling studio

The original agreement was announced in January when Viacom boasted of a $1 billion, three-year deal with the Chinese companies to finance up to 25% of the company's film slate. The plan seemed like a good way for Viacom to conserve cash while also placating the Redstone family. Previously, a plan had been on the table to sell a 49% stake in Paramount -- the movie studio Viacom owns -- but that plan was rejected by Sumner Redstone, Viacom's majority shareholder.

The Paramount Pictures logo.

Image source: Paramount.

As it turns out, results from the movie business are much less predictable than Viacom's other entertainment segment. In fiscal year 2016, filmed entertainment, which includes Paramount studio operations, lost a tremendous $445 million. The first quarter of fiscal 2017 was not much better, as the business racked up another $180 million in losses.

In the meantime, Viacom's debt has ballooned to over $12 billion dollars, over four times trailing twelve-month EBITDA (earnings before interest, taxes, depreciation, and amortization). That is a lot of debt for a large media company: CBS, Twenty-First Century Fox, and Time Warner have debt-to-EBITDA ratios between two and three times, and their operating results are also stronger.

Unfortunately, if sources in the New York Post story are right, the co-financing solution may be "DOA". The Chinese government is stepping in to prevent capital from leaving the country, as many business leaders and investors are worried about a devaluation of the yuan. Earlier this year, the Wanda Group backed out of a deal to acquire Dick Clark Productions, and the latter is suing for a breakup fee.

Adding to the drama, Paramount parted ways in February with chief executive Brad Grey. The studio is currently being run by a committee, while Viacom looks for a successor. One possible choice, Scott Stuber, was lured away to Netflix.

TV not so great either

Adding to Viacom's troubles, cable executives have publicly stated that they may play hardball with Viacom's television networks when carriage fees come up for negotiation. Tom Rutledge, CEO of Charter Communications, recently said Viacom's channels were "expensive" and had "not been well-curated." Coming from the second-biggest cable provider, comments like that should very much concern both Viacom investors and the company's new CEO Bob Bakish. In 2014, cable provider Suddenlink dropped Viacom and only lost a minimal number of subscribers.

Piling up the negatives

Earlier this year, in his first conference call as CEO, Bakish unveiled a comprehensive plan to get Viacom back on track. He certainly has his work cut out for him. If the Chinese deal officially falls through and distributors start bearing down on the rest of its media outfit, the company could suffer a domino effect of declining results, a credit rating downgrade, increased interest rates, and more.

If Bakish can orchestrate a comeback, he may very well be eligible for the top media CEO title in 2017. Until that time, however, I think investors should steer clear of Viacom stock. Proof of a turnaround remains to be seen.

Billy Duberstein has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.

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