"Double your pleasure! Double your fun!" (Former jingle for Wrigley's Doublemint Gum)
Twins are breaking out on Wall Street. In March, the Wm. Wrigley Jr. Company (NYSE:WWY) announced that it was bringing back its popular 1960s-era Doublemint Twins advertising campaign to breathe added life into its Wrigley's Spearmint and Doublemint chewing gum lines. Yesterday, Viacom (NYSE:VIA) (NYSE:VIAB) approved the company being split into two separate units.
Are two companies better than one?
Viacom shareholders will have to wait nine months, as the two companies undergo a gestation period (yes, not until the first quarter of 2006), to find out how Wall Street will value their fraternal twins. If today's trading action is any indication -- the stock is down 2% (ah, another two!) -- splitting the company into what the company calls "two strong, focused, and nimble companies" is being greeted with a big yawn.
The company retaining the Viacom name will be a mix of the hip and the established -- everything from MTV, VH1, Nickelodeon, and Comedy Central to Paramount Pictures. It is expected that this stock will attract a higher trading multiple that can then be used to make acquisitions. The company also says that its significant cash flow will provide the opportunity to repurchase shares.
The other unit, to be called CBS Corporation, will contain its namesake and UPN TV networks, radio operation Infinity Broadcasting, Viacom Outdoor advertising, the Showtime cable business, publishing powerhouse Simon & Schuster, and other established business operations. Labeled by the company as a "strong generator of free cash flow," it is envisioned as returning capital to shareholders through dividend payments and stock repurchases.
An outstanding unknown is how Viacom will divide its $9.9 billion in debt between the two siblings -- although the company's almost $3.0 billion in trailing free cash flow should allow this golden goose to lay two golden eggs. Expectations are as follows: One will be a faster growth company; the other a dividend generator (at least at the start).
So, are two companies twice the fun?
Analysts expected the combined Viacom to earn $2.00 in 2006 -- pricing the stock at 16.8 times forward earnings. Competitor and Motley Fool Stock Advisor pick Time Warner (NYSE:TWX) is priced at 18.7 times forward earnings and is rumored to be ripe for a restructuring.
Higher-growth competitor (according to analyst expectations) News Corp (NYSE:NWSA) stock trades at 20.7 times earnings for the fiscal year ending June, 2006. News Corp recently repurchased the shares of its entertainment business it did not already own. Its mix of higher growth assets (and higher growth expectations) has been rewarded with a higher earnings multiple on Wall Street.
Viacom's stock has been in a 5-year swoon and is currently trading toward the bottom of its 52-week range. With its high quality assets and low earnings multiple, the twin stocks, in this observers opinion, are poised to reward patient investors.
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Fool contributor W.D. Crotty owns shares of News Corp. Click here to see the Motley Fool's disclosure policy.
