Barclays, citing diminishing negotiating leverage with MVPDs and overall negative ad growth for U.S. cable networks, is lowering its price target for Viacom from $37 to $32.
Barclays analyst Kannan Venkateshwar said that although Viacom has reached a resolution in its distribution dispute with Charter, the company’s equity is still trading “significantly below levels prior to news of the dispute.”
“As recent renewals have shown (eg: Cable One, Suddenlink, Dish–Viacom last year), the correlation between a new carriage deal and affiliate growth appears to be limited, in part due to sub losses but it is tough not to attribute some of this to Viacom's negotiating leverage,” wrote Venkateshwar in a research note.
Venkateshwar said that Viacom’s leverage is still high despite the company repaying around $2 billion in debt over the last 6 months and that earnings growth continues to be “anemic.” He also noted that some sources of capital that the company was counting on have not materialized in time.
“While ratings performance at Viacom has been better at some networks relative to rest of the media ecosystem, this comes in an environment where national cable advertising growth is slipping into negative territory for the first time outside of recessions. Overall, therefore, while the resolution of the Charter dispute is a positive, we believe the company needs to look for strategic alternatives to provide a better support for its floor valuations,” Venkateshwar wrote.
He resurfaced the idea of a potential recombination with CBS but argued that CBS wouldn’t likely pay a significant premium for Viacom, adding that Barclays' price target shift is based on 7.5x CY2018 EV/EBITDA estimates.
In general, Barclays said that investors seem to be anticipating another mixed quarter for media companies.
“Based on our conversations with investors, sentiment across the space continues to be quite negative and any data point supporting this negative sentiment is likely to outweigh the impact of potentially positive data points,” Venkateshwar wrote.