Viacom’s Success In The TV Production Business Could Boost Its Valuation

Viacom’s (NASDAQ:VIAB) filmed entertainment arm, Paramount Studios, is now set to enter television production. The company will be making a TV show based on Beverly Hills Cop movie series which was released during the 1980s and 1990s. ^[1] The movie series revolved around a loudmouth, humorous cop and had good entertainment value. There is a good chance that the TV series will garner a healthy audience and give a kick-start to Viacom’s TV production business. It makes sense for the company to diversify in this way for a couple of reasons.

First, the TV business has higher margins compared to movies. We note that Viacom’s Paramount Studios’ EBITDA margin (earnings before interest, taxes, depreciation and amortization) has stayed below 6% for the past few years. It is normal for the movie business to have substantially lower margins compared to the media networks business. DVD sales have been under pressure and margins tend to fluctuate depending upon the success of individual movies. However, in the case of Viacom, low margin appears to be a chronic phenomenon. In 2011, when Paramount topped worldwide box office sales, its EBITDA margin was just 4.3% – substantially below that of Disney Studios or Warner Brothers. Viacom could fill this gap by venturing into television production.

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Second, there is a growing demand for good quality content. This demand is not just coming from cable and broadcasting networks but also from streaming companies that are increasingly looking to acquire original content. In addition, there is potential for syndication in international markets where demand for pay-TV is rising. A classic example is Warner Brothers Television Group which has created a very successful business.

We estimate that Time Warner’s television production and licensing business is 2 to 3 times as valuable as its movie business. If Viacom can replicate the success of Warner Brothers Television group in a way where its TV production and licensing group becomes twice as valuable as its movie business in the long term, there could be as much as 15% upside to our current price estimate.

Our price estimate for Viacom stands at $67, implying a discount of more than 10% to the market price.

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1. Viacom’s Paramount Getting Back Into TV, The Wall Street Journal, Mar 4 2012 [↩]