Viacom's Split Personality

That's the goal, anyway.

The proposal unveiled last week by Sumner Redstone, chairman, chief executive and patriarch of Viacom (VIA.B), to divide the company into a cable network and movie studio operation on the one hand and a broadcast network, radio and outdoor advertising business on the other, prompted a brief little pop in share prices. But the announcement, which marks a dramatic reversal from the company's 2000 purchase of CBS, now seems to prompt as many questions as kudos.

Just how investors might win in this scenario is unclear. The strategy would create two vastly different companies, one focused on growth and the other on predictability. The growth company would be under the MTV-Paramount Pictures umbrella, and would include the basic cable networks within the MTV Networks franchise — MTV, MTV2, VH1, Nickelodeon, Nick-at-Nite and Comedy Central — plus BET, along with Paramount Pictures. That company would likely be headed by Tom Freston, co-president of Viacom.

The second company, likely to be headed by Les Moonves, the other co-president of Viacom, "will house the units perceived to have reasonable but more mature growth characteristics," according to James Goss, an analyst at Barrington Research in Chicago. That would include broadcast television businesses and stations, led by the CBS and UPN networks and major-market television stations, as well as television program production and syndication efforts including CBS King World, the Infinity Radio and Outdoor businesses, Simon & Schuster's trade publishing business, the Showtime/Movie Channel pay cable television businesses and the Paramount Parks theme park operations, he says. (Goss owns shares of Viacom; Barrington doesn't have an investment-banking relationship with the company.)

What Wall Street analysts — and legions of investors — want to know is whether the rough sketch of the Viacom cleaving is the best possible plan. It would certainly offer investors a chance to tailor their holdings to their investment philosophies, with growth-oriented investors opting for cable and movies, and value investors backing the proposed CBS-Infinity-outdoor advertising entity.

"The bottom line of this is that what they're proposing is an attempt to create two different types of investments," says Goss. "One is focused on rapid growth, and one is a more conservative type of growth company."

According to Goss, the cable group saw growth in earnings before interest, taxes, depreciation and amortization, or Ebitda, of 13.9% last year, despite Paramount's 6.3% loss for 2004, and is expected to see Ebitda growth of 14.8% this year. For the broadcast group, those numbers are 4% and 7.6%, respectively. Goss says it's too early to discern the value of each of the proposed companies because not enough details about their capital structures have been released.