It is no news that the performance of Nickelodeon, Viacom’s (NASDAQ:VIA) flagship channel, was significantly below its 2011 ratings. The rough 25% decline in the ratings can be attributed to the fading charm of some of its popular shows such as SpongeBob SquarePants and iCarly. This has allowed Disney’s (NYSE:DIS) ‘The Disney Channel’ to take the lead in the kids demographic. Getting Nickelodeon back to the top and improve its ratings substantially should be Viacom’s top priority given the financial significance of this network. Thankfully, the company seems to be doing just that by investing heavily in original programming and cleaning up some of the older series that are not performing well.
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Viacom plans to bring 70% more original programming in Q4 of 2012 compared to the same period a year ago.  An example is the newer version of the immensely popular series Teenage Mutant Ninja Turtles.  This is likely to draw some attention and help improve ratings. In addition to adding new programs, Nickelodeon has terminated some of its weaker performing shows in the past few months. These include iCarly, How To Rock and Victorious.  These steps should improve the channel’s ratings over the course of the next few months and help its ad revenue growth.
We estimate that the U.S. operations constitute close to 13% of Viacom’s value. This is based on our estimate that Viacom earns close to $1.4 billion in revenues in the U.S. with EBITDA margins of around 43%. Combining that with other networks such as Teen Nick, Nick Jr., and Nickelodeon in international markets, the value contribution could reach as high as 25% to 30%.
Hence, it is critical that Viacom tries hard for a ratings rebound. Ratings directly impact ad revenues and any short-term impact on subscription fee is likely to be absent. However, if ratings continue to remain low, it could impact Nickelodeon’s subscriber and fee per subscriber growth negatively in the long run.
Our price estimate for Viacom stands at $67, implying a premium of roughly 15% to the market price.Notes: