Shares of Viacom Inc. (VIAB) led the S&P 500’s list of losers on Wednesday after the media conglomerate – which owns hundreds of film and TV assets like Paramount Pictures, MTV, and Nickelodeon – announced a troubling dispute with another American media giant.
Even if investors don’t include today’s loss, Viacom has been on a downward spiral on both a long- and short-term basis. VIAB stock has tumbled 8.5% in the last two months and nearly 69% from its all-time high of $88.36 per share five years ago. With Wednesday’s troubling news, investors may be hard-pressed to find a reason to hold onto their shares before the losses get potentially larger.
Here’s exactly why Viacom nosedived on Wednesday – and how potential investors should view the stock in the months ahead…
The News
Viacom is currently battling cable provider DirecTV’s new parent company AT&T due to disputes over a carriage renewal contract that would allow Viacom’s popular stations – including MTV, Nickelodeon, and Comedy Central, among more than a dozen others – to remain available to DirecTV’s roughly 25 million subscribers. If AT&T and Viacom don’t settle on the contract’s terms – particularly the fees DirecTV pays Viacom for its channels – then at midnight this coming Friday, Viacom’s more than 20 stations may go black for DirecTV subscribers.
The conglomerate has been aggressively campaigning against AT&T’s tactics by running crawl messages and promo spots on its channels that warn of the Friday deadline. Viacom asserts that AT&T is not only “abusing its new market position by favoring its own content – which significantly underperforms Viacom’s” but is also engaging in “a recent pattern of gouging their customers by charging them higher prices for an inferior product with fewer channels.”
AT&T threw its gloves off in response to what it sees as Viacom’s disingenuous appeal to DirecTV’s customers. The company specifically attacked Viacom’s channels, saying several “are no longer popular” and that their station portfolio has lost about “40% of their audience in the past six years.”
How Investors Reacted
Investors dumped their positions in anticipation of potential revenue cuts if Viacom’s channels are no longer available to DirecTV subscribers. VIAB stock dipped 5.5% from $27.52 on Tuesday to $26.01 by Wednesday’s close. That’s the stock’s lowest settlement of 2018 by a hair, slightly besting the next lowest close that occurred on Dec. 31 when shares hit $25.70 each. Wednesday’s drop puts Viacom’s year-to-date gain at a meager 1.1%.
The Bigger Picture
The animosity surrounding the situation largely stems from AT&T’s turbulent $85.4 billion purchase of Time Warner. Many firms in the media sector – particularly Viacom – saw the deal as monopolistic and highly leveraged against rivaling TV distributors.
However, the deal’s biggest rival was the federal government, which sought to disintegrate the merger at nearly every turn. While AT&T first announced its intention to acquire Time Warner – which included assets like HBO and Warner Bros. Studios, as well as media outlets like CNN – in October 2016, the Justice Department brought a case against the deal about a year later alleging it violates antitrust laws. Officials claimed that the ownership of Time Warner would give AT&T “both the incentive and the ability to raise its rivals’ costs and stifle growth of innovative, next-generation entrants.”
Despite the ongoing battle, AT&T ultimately emerged victorious last month when the U.S. Court of Appeals unanimously ruled in favor of the acquisition. The court asserted that the Justice Department’s case that the deal would lead to higher and unfair consumer prices was “unpersuasive.” Justice Department spokesman Jeremy Edwards said the government would not fight the appeals court’s decision, leaving AT&T to formally begin post-merger adjustments that included the departure of HBO Chairman and CEO Richard Plepler.
With AT&T now holding all the cards in terms of which media companies it does business with, Viacom stands to lose significant long-term revenue and profits if AT&T decides to cut their channels from DirecTV. The media conglomerate has already faced rate cuts from Charter Communications Inc. (CHTR) and other distributors as more customers shift to cord cutting. Losing business with DirecTV – by and large the nation’s largest multichannel video programming distributor (MVPD) – would have a devastating financial impact on Viacom, a company that just reported a year-over-year earnings decline of 40.5% for Q4 2018.
Looking Ahead
While the financial details remain nebulous, AT&T must have significantly lowered its fees in order to prompt such a strong public response from Viacom this week. It’s clear that Viacom holds virtually no cards in the situation, and even if DirecTV decides to keep the channels, Viacom could still suffer in the long term, as other large distributors like Comcast or DISH may be tempted to follow DirecTV’s lead.
Even though VIAB trades at a significant discount right now, investors should steer clear for the time being. The firm needs to stage a significant earnings turnaround before being considered a healthy and viable investment option.