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Media Analyst to Redstone: 'Sell Paramount'

October 2, 2008 |  4:48 pm


What are the chances that Sumner Redstone will sell Viacom Inc.'s Paramount Pictures?

Zip. But one Wall Street analyst, Rich Greenfield of Pali Reserach, thinks it's a good idea and is urging the octogenarian media mogul to unload the historic studio.

"Paramount has become Sumner Redstone's 'sports team,' " Greenfield wrote in a report today. While Paramount is profitable, he writes that the studio's "annual cash flow drives a valuation that is well below its private market value." Greenfield estimates that the studio's film library generates "at least" $400 million to $500 milllion annually, "implying" that Paramount would be worth $4 billion to $5 billion to a buyer. But that value, Greenfield attests, is not reflected in parent Viacom Inc.'s stock price.Redstone

It's not every day that a Wall Street analyst brazenly challenges one of the media companies he covers, and Greenfield wasn't mincing words in his report. "Investors increasingly loathe Viacom due to a nearly non-existent management team (with no access to anyone involved in operations), who have done a poor job explaining why they are underperforming peers in advertising sales growth, as well as failing to provide a clear understanding of the timing and potential scale of revenues and profits from its emerging video game business," Greenfield writes.

Not surprisingly then, Greenfield cut his 2008 EPS estimate for Viacom to $2.65 per share from $2.69 per share and knocked down his price target to $40 from $51. He shaved his 2009 EPS estimate a penny to $2.92 per share, but nonetheless reiterated his "buy" recommendation, noting the stock remains undervalued.

Greenfield believes that the recent turnaround at Paramount Pictures -- thanks to such hits as Marvel's "Iron Man" and Steven Spielberg's and George Lucas' "Indiana Jones and the Kingdom of the Crystal Skull," has had very little positive impact on Viacom's stock  -- and suggests Time Warner Inc., which owns Warner Bros., would make a good home for the studio, especially since "it has stated its desire to expand its content business."

CtlogoThat seems a bit of a stretch. While Time Warner did try to buy MGM a few years back for its film library, it's hard to imagine that in this market the media giant that recently put New Line out of business as a full-fledged studio, and closed its two specialty film labels, would consider buying another major.

Regardless, it doesn't make any difference. The feisty 85-year-old Redstone, who ferociously fought Barry Diller in a bidding war for the studio in 1993, is not about to let it go -- even though he recognizes making and distributing movies is a shrinking, low-return and volatile business.

Even Greenfield admits that  he's proposing an unlikely scenario. "Sumner sees this as an important trophy asset," he said in a telephone interview.

So what does Sumner have to say to Greenfield?

He wouldn't get on the phone to answer the question, but his aide-de-camp Carl Folta scoffs at the possibility: "The notion that we would or should sell Paramount is absurd."

-- Claudia Eller

Photo: Paramount (Anne Cusack/Los Angeles Times); Redstone (Chris Pizzello/Associated Press)