MacDonald: Viacom/CBS Will Be 'Producing Increasing Amounts of Cash Flow in the Future'
DAVID HAFFENREFFER, CNN ANCHOR: Those media stocks had a tough day in yesterday's session. The media giant Viacom reports earnings a little bit later on today, it is expected to earn 16 cents a share.</s>DEBORAH MARCHINI, CNN ANCHOR: For a closer look at the company and its pending merger with CBS, we're joined by media analyst Richard MacDonald of JP Morgan. And welcome, what are you looking for from Viacom, do you think the 16 cents a share is accurate?</s>RICHARD MACDONALD, JP MORGAN: Yes, that's what we are looking for is 16 cents, up from 14 from last year.</s>MARCHINI: OK, so not a bad performance, but...</s>MACDONALD: No, I think actually good, I think especially their cable networks, MTV, Nickelodeon, they're going to do extremely well.</s>MARCHINI: The story with a lot of these companies is not so much earnings as cash flow.</s>MACDONALD: Right.</s>MARCHINI: And in this case?</s>MACDONALD: In this case, it's even better, especially with the new Viacom/CBS. The real story there is that there's very little capital that's required to keep those companies growing, and they'll be producing increasing amounts of cash flow in the future.</s>HAFFENREFFER: Is this picture only going to get better once CBS is into the fold?</s>MACDONALD: I think so. They are really -- there's some, they're probably going to win both on the revenue line and on the cost line. They haven't said -- given us very much direction on the cost line yet, but on the revenue line, both -- CBS thinks they can help Viacom's cable networks enhance their revenues-per-rating point, and at the same time the Viacom folks think they can bring a younger audience to CBS's somewhat older demographics.</s>MARCHINI: Sumner Redstone and Mel Karmazin, match made in heaven?</s>MACDONALD: Well, it will be very interesting. It will be a lot of fun. And they both say that they are going into this marriage with completely open minds. So we'll see how it works. And they're locked in for three years in any case.</s>MARCHINI: Prenuptial?</s>MACDONALD: Yes, there is a big -- it's about 400 pages.</s>HAFFENREFFER: So much of a company's revenues is based on advertising revenues coming in for the TV and radio operations, say, at CBS. How can you predict how the company is going to do along the lines of the economy, how do you sort of take all that...</s>MACDONALD: The answer is I can't. But there is a pretty -- as long as the economy stays relatively healthy, and we do expect some kind of tough comparisons, certainly in '01. This company has so much opportunity to exploit its market positions, both domestically here in the U.S., and we think somewhat overseas, not as say, as well as a News Corp, or something like that can overseas, but they should be able to capture some very new revenues and should be able to power through any kind of slowdown, as long as its not dramatic.</s>MARCHINI: CBS is not the number-one rated network, does it matter much anymore?</s>MACDONALD: No. actually, that's a very good question because what really matters is demographics, especially viewers 18- to 49- year-olds, and even more so, people are targeting within that demographic to go after somewhat younger demographics too, which is where the sweet spot is.</s>MARCHINI: CBS's audience used to be, forgive me for saying it, old.</s>MACDONALD: Very old, and that's one of the benefits, I think, they see from having -- bringing in the folks who brought us MTV and even younger, and VH1 and Nickelodeon. So, I think there is a big benefit there.</s>HAFFENREFFER: Have you got a favorite stock in the sector?</s>MACDONALD: Yes, we have taken the somewhat unusual position of recommending Disney aggressively, and we really like Disney. We think broadcasting, in general, throughout this year will be very strong, and ABC has had the best performance so far in the first quarter -- we, in the fourth quarter, and also the first quarter, and we think that's going to continue because they attract, typically, younger demographics.</s>HAFFENREFFER: Why unusual position?</s>MACDONALD: Well, I don't think there are that many people who are as positive as we are about Disney right now. We think there's lots of upside in the stock, we're not convinced that -- I think there's a two-year restructuring process that's going on there that's extremely interesting to me.</s>MARCHINI: Rupert Murdoch was just worrying publicly that his News Corporation might become a breakfast snack for behemoths in the media-information-television industry, things like Time Warner and AOL, the parent of this network. Do you like News Corp. on the basis of a takeover target or as a stand-alone?</s>MACDONALD: I think both. I think what he's -- there are some very interesting things that are going there, there is no other company as well positioned as News, worldwide. They have this Asian satellite television network, which people are attributing very little value to, which could have, we think, tens of billions of dollars of value, and they also have Internet positions over there, and we think, actually, the two of those combined five years from now could add as much as $50 a share to the stock.</s>MARCHINI: It's going to spinoff the satellites.</s>MACDONALD: Yes, so that's exactly what he's thinking about doing. He wants to make sure that he gets full value for that because, if he doesn't, it is possible that somebody could make him an offer that his family couldn't refuse, he's got a bunch of kids, and they're all in debt.</s>MARCHINI: Take the money and run.</s>HAFFENREFFER: Richard MacDonald, thanks for coming in.</s>MARCHINI: Great to see you. Thanks so much.</s>MACDONALD: Thanks very much.