Viacom: All About the Split

Viacom (NYSE:VIA) divulged its second-quarter earnings last week. Things are looking good, but we all know what's on the minds of investors: the conglomerate's plan to make like an amoeba and split into two companies.

Sure, the headline promoted some pretty cool statistics. We have a revenue increase of 10% to $5.9 billion. Operating income jumped 4% to $1.4 billion. Net income from continuing operations rose 6% to $762 million, or $0.47 per diluted share. If you include the effect of discontinued operations -- last year at this time the company still had Blockbuster (NYSE:BBI), which it eventually spun off in Q4 2004, and the Famous Players theater chain was sold on July 22 of this year -- the net income on a dollar basis actually is the same for this quarter and the quarter one year ago: $753.8 million (although the company has been repurchasing stock, improving earnings on a per-share basis). Free cash flow (FCF) did, unfortunately, decrease 10% to $889 million as a result of tax obligations and higher capital expenditure outlays.

But the real question is: Will the sum of the parts prove greater than the whole? Will FCF increase for shareholders if they hold shares of both companies separately?

Time will tell, as the saying goes, but I personally am bullish on the spinoff to be called Viacom, which will include the cable channels under the MTV Networks umbrella and Paramount Pictures. The other spinoff, to be called CBS Corporation, will take the CBS broadcast operation, plus UPN, the Infinity radio asset, and Viacom Outdoor, among other properties.

To me, the Viacom company will represent better chances for capital growth; in fact, if you read the details, you will see that CEO Sumner Redstone (who, according to media reports, plans to step down as CEO post-split but remain as chairman of the spinoffs) essentially spells this out. CBS Corporation's goal will be to deliver dividends (not that there's anything wrong with that), while Viacom will have an acquisitive nature to it. Plus, consider that the major networks are having loads of problems competing with the cable landscape, and that Infinity's grasp on terrestrial radio might be further hindered by the encroachment of the satellite radio business in the form of Sirius (NASDAQ:SIRI) and XM Satellite Radio (NASDAQ:XMSR). Once you do that, you'll begin to see why I am gravitating toward what will be the new Viacom. Disney (NYSE:DIS), in fact, has reportedly also been interested in selling its radio group.

The cable networks also have the advantage of being edgy and flexible, not only with their content, but with the way they program it. MTV, for instance, can quickly repeat a show into the ground to amortize costs (think The Real World). Sure, broadcasters have experimented with such paradigms, but not in the way that MTV has. Plus, cable networks can earn extra money via affiliate fees in addition to advertising monies. The segment showed a nice 14% jump in this quarter's operating income. Compare that to all the other operating segments; they're not as fantastic, are they? We have an operating loss, two low single-digit increases, and a double-digit decrease. Cable's been good to Viacom in recent times, as well.

I'm not suggesting you run out and buy Viacom-the-spinoff when it hits the street; do some due diligence and consider your options. Also, I personally am not interested in buying Viacom right now. Since the "powers that be" feel a split is necessary to eliminate drags within the company, I'll wait for the split to actually occur before deciding whether to get in on one of the spinoffs. And the chart shows that the news of the split hasn't exactly acted as a catalyst for the stock, so there probably are better places for your money right now.

More on Viacom:

• Viacom's Game Face
• Viacom: It's Twins!
• MTV's Pet Project
• Also, we have the Viacom discussion board at your disposal.

Fool contributor Steven Mallas owns shares of Disney. The Fool has a disclosure policy.