Viacom will split the company in 2006

[Vortex]

Viacom will split the company into two pieces by the first quarter of 2006. The company would be split into a more Growth Oriented company (Paramount Pictures, MTV, BET, Music, Publishing) and a Value company (CBS, UPN, TV Productions, TV Stations, Showtime, and the Paramount Parks division).

So it looks like Paramount Parks will still be running the park after 2006. Unless Viacom whats to sell the parks still.

[jzarley]

Yep, and all-in-all I think this is a win/win situation for investors. I had posted some additional detail about the conference call/quarterly earnings report in a post yesterday...

http://www.pkicentral.com/forums/index.php?showtopic=5255

Joel

[KIBeast]

I wonder how, if at all, this will affect their overall budget?

[jzarley]

In theory, it should really affect very little relating to park operations.

The whole rationale for selling the parks (and the theater chain, Simon & Schuster, Blockbuster, etc.) was that these business are so low growth that they held down the value of the stock of the entire company. That doesn't mean that they weren't good or profitable businesses, just that their industries were mature enough that they couldn't provide double-digit revenue growth that Wall St. expects for "growth" stocks. The idea was that by selling the low growth units, that would leave only the high growth businesses, which in turn would allow the Viacom stock to surge. They then could acquire additional businesses with the inflated stock, show more growth, and so on, and so on...

However, the problem with this line of thinking is that most of the "hard asset", low growth divisions are profitable, stable contributers to Viacom's overall performance. So, it may not make a lot of sense to sell off your well performing, but slow growing assets in order to chase increased value in your near term stock price.

That's why splitting the company into two separate (and publicly traded) entities is a great compromise position. Sort of a "eating your cake and having it too" scenario.

Joel

[CoastersRZ]

So which side of the coin will Nickelodeon land in? The CBS, Paramount Park side or the Paramount Pictures and MTV side? Would Nickelodeon fit under the TV stations banner? Because I take that to mean the local television stations that Viacom operates. I believe that the Paramount Parks will still promote Paramount Pictures movies and the properties in the other company after the split next year.

[jzarley]

Nick (and Nick at Night) is part of MTV Networks, which also includes VH1, Sci Fi, Spike, MTV (of course), and a few others that I'm sure I'm forgetting.

By TV stations they mean the actual local affiliates themselves. (For example, WCMH channel 4--the local NBC affiliate in Columbus--is actually owned and operated by NBC/Universal.) CBS owns local TV stations as well. (And, a lot of them are owned by independent media groups.)

And, sure, I'm sure they'll continue to promote synergies where they can between the "growth" and "value" companies (I like that description that Vortex used to distiguish them...). Both companies will still be spawn of Viacom. This is simply a way to get the maximum value possibility for their assets out of the stock market.

Joel

[Ryan]

Since Nickelodeon was managing the parks now as of last year, and since they are now in the growth group of Viacom entities, who will manage Paramount Parks? Themselves? Or will a company from the value group oversee the operations like Nickelodeon was doing and Paramount Pictures before them?

[Jasper]

That is good news i dont know how the name would sound any way else.

[jzarley]

Since Nickelodeon was managing the parks now as of last year, and since they are now in the growth group of Viacom entities, who will manage Paramount Parks? Themselves? Or will a company from the value group oversee the operations like Nickelodeon was doing and Paramount Pictures before them?

To be honest, the parks have been passed around with each corporate reorganization. While right now they're part of the Nickelodeon mangement group, they've also been part of Blockbuster (as part of the "Retail & Recreation" group), and Paramount Pictures. So, if nothing else--park management is certainly used to management change

Right now I think they ultimately report up to Tom Freston, but that will change to Les Moonves in the new company. (Although, they've probably reported to him at some point in the past too...)

The good news is that Paramount Parks will have greater importance in the "Value" company than it currently has in Viacom as a whole, since they'll make up a greater portion of the overall revenue in that part of the split company. Ultimately that should be good for the parks...

Joel

[KIBeast]

"That is good news i dont know how the name would sound any way else."

It would sound better as just King's Island, which is what the original name was.

[Dolt932]

gone

[BoddaH1994]

In theory, it should really affect very little relating to park operations.

The whole rationale for selling the parks (and the theater chain, Simon & Schuster, Blockbuster, etc.) was that these business are so low growth that they held down the value of the stock of the entire company. That doesn't mean that they weren't good or profitable businesses, just that their industries were mature enough that they couldn't provide double-digit revenue growth that Wall St. expects for "growth" stocks. The idea was that by selling the low growth units, that would leave only the high growth businesses, which in turn would allow the Viacom stock to surge. They then could acquire additional businesses with the inflated stock, show more growth, and so on, and so on...

However, the problem with this line of thinking is that most of the "hard asset", low growth divisions are profitable, stable contributers to Viacom's overall performance. So, it may not make a lot of sense to sell off your well performing, but slow growing assets in order to chase increased value in your near term stock price.

That's why splitting the company into two separate (and publicly traded) entities is a great compromise position. Sort of a "eating your cake and having it too" scenario.

Joel

Good explanation, but let me clarify it a little more:

You have to understand the basics in order to see the whole picture. As you well know, Viacom is a publicly traded company, which means that a lot of the company is owned in small parts by regular people, like you and I. Now, a lot of the price of stock has to do with the company meeting/exceeding/falling short of expectations. These expectations are based on several things, but mainly growth.

Some people have said that the amusement industry is a low-margin industry, but I don't know if that's true. In fact, I'm willing to bet that it's not. The amount of actual money made off of the parks themselves is only a part of Viacom's decision to buy/sell/split.

Now, as Joel stated, there will be both a quickly growing company which will concern assets like MTV, and a slowly growing company that will concern things like the parks. The reason why splitting these is a positive business decision is be made is that, as I stated before, the price of stock has a lot to do with the projections of growth, and whether or not the company can meet these expectations. In this particular case, growth is difficult in amusement parks, so it's causing a slowdown in Viacom stock. On the other hand, if they were to split, the fast company would have high projections and the slow-growth company would have lesser projections, and both of which would be able to meet these expectations, so the stocks will rise accordingly.

This also accounts for why some things are done around the park that we would like to see. Things like rides getting pained, cracked pavement fixed, themeing fixed, more associates on rides, etc. A lot of this stuff can't get done because the return of investment is too low, and that could cause the stock to fall. To put it in other words, since PKI has built IJST, and has marketed it as a new and innovative attraction, it's likely that individuals who would not normally go to the park would end up going in order to see this ride. These same people will very likely eat in the park, play games, pay admissions, etc. This increases revenue, and contributes to growth, thus the stock goes up. On the other hand, if Viacom were to invest millions of dollars to paint the park, fix cracked midways and damaged themeing, there would be little to no return of investment. It's highly unlikely that someone would come to the park to see a ride that has been fixed, or a midway that has been repaved. This investment with little return would cause the stock to fall. This is why there is such a delay on things getting done for beautification. I mean, the Eiffel Tower could have used a pain coat as long as I can remember, but they unfortunately had to wait until it looked really dirty and they risked people not returning as a result of the look and feel of the park in order to paint it.

If the company splits, what does this mean for Paramount Parks? I'm willing to say that it would be a great thing. Think of it this way: since PP is a slowly growing asset of Viacom, what do they have to gain from investing a lot of money in it? Probably nothing but risk. Now, if it's a slowly growing company and PP is a core asset, then they will rely on bring more and more people into the park every year to meet the expectations of experts, and how do they do this? By offering newer and more innovative attractions and perks to the PKI that we already know.

I'm far from an expert, so correct me if you see anything you disagree with,

Ryan

[CoastersRZ]

Yes, well said. In other words, PKI and Paramount Parks will now be a larger part of the company. Because of this, the success of the new company will rely more heavily on the success of the parks, which means more attention will be paid to them, to try and grow their revenues. Not to mention with less things to pay attention to, there will be more time for the executives at the new company to spend time (and money) on Paramount Parks.

I only see this as a win win situation for PKI and Paramount Parks. Hopefully, some more capital dollars will be invested to try and grow the parks. But they will still get to use the Viacom licenses which over the past five years have become a vital part of the PKI as we know it today.

[jzarley]

I'll take it a step further ...

Contrary to all the threads related to other companies buying PKI (i.e., CF, SF, etc., etc.), after the split I actually see Paramount Parks in the position to BUY some additional parks. CoastersRZ's and Ryan's points about the parks playing a bigger role in the "value" side of the company, is exactly right.

And, Paramount Parks appears to be sitting in pretty good shape right now...from all accounts they finished better in the 2004 season than either of their regional competitors...

Joel

[Captain Picard]

The way I see it CF is run this way and they are doing ok. I would think Paramount Parks would feel more free to put more investor money in the parks when they know that is what the investor wants.

They wouldn't have to hear investors cry about using 25 million of Viacom investor money to build a coaster. If you buy PP stock you know the money will be used this way.

[jzarley]

Usually (and I stress usually), investors don't complain too much about capital expenditures, if they view them as a significant improvement to the overall investment, and see the ROI. If fact, a big complaint that SF investors kept making last year was that they spent too little on cap ex to grow attendance/revenue.

I've never heard or read any complaints from Viacom stockholders about cap ex projects in the parks. To be honest, I think Paramount Parks has always been such an afterthought in the big Viacom machine that the parks don't make it to most investors' radar...

I would imagine that park-level cap ex projects have a pretty good ROI. I remember reading at some point a few years ago that pretty much every coaster installation pays for itself within 2-3 years based on the increased attendance a new major attraction brings in. Plus, I imagine each major installation improves the overall value of the real estate (of course, that also raises the property taxes...), and makes the park more valuable for future sale. So, a $25 million coaster installation is pretty much a "sure thing" as far as cap ex investments go...it's just going to take a few years to get a return on the money. Compare that to a $100 million movie that may--or may not--ever come close to making back its money. So, if I was a Viacom stockholder, I'd feel better about spending $25 mil on a coaster than I would $100 mil on a movie... (Well, I guess that depends on the movie )

Joel

[BoddaH1994]

Usually (and I stress usually), investors don't complain too much about capital expenditures, if they view them as a significant improvement to the overall investment, and see the ROI. If fact, a big complaint that SF investors kept making last year was that they spent too little on cap ex to grow attendance/revenue.

You probably mainly never really hear about it because MOST amusement companies do it very wisely. PP, for example, does a lot of market research, and puts out what will likely make the most people happy, they also distribute their money evenly amongst the parks. Hence the fact that loosely speaking, all of the Paramount Parks are just about in the same ballpark as far as quality goes.

On the other hand, if you look at SF's additions, they spent $30 million on Kingda Ka, and have very little to show in the rest of their parks. I see this as a desperate attempt to stay afloat.

I would imagine that park-level cap ex projects have a pretty good ROI.  I remember reading at some point a few years ago that pretty much every coaster installation pays for itself within 2-3 years based on the increased attendance a new major attraction brings in.  Plus, I imagine each major installation improves the overall value of the real estate (of course, that also raises the property taxes...), and makes the park more valuable for future sale.  So, a $25 million coaster installation is pretty much a "sure thing" as far as cap ex investments go...it's just going to take a few years to get a return on the money.  Compare that to a $100 million movie that may--or may not--ever come close to making back its money.  So, if I was a Viacom stockholder, I'd feel better about spending $25 mil on a coaster than I would $100 mil on a movie...  (Well, I guess that depends on the movie  )

I have no doubt that the return of investment on expansions is a worthy cause. It's really just a matter of slow growth. On the same note, this would also explain why expansions are in the $15-$25 million range instead of in the $100 million as Disney and Universal do. It's more viable to make money on a smaller investment in a seasonal park.

I do agree that investments in PP are more... shall we say stable, than in the movie industry, but you always run the possibility that a franchise will really take off. With that, it's not just about the boxoffice, but about the DVDs, promotional materials, etc. Could be big.

[jzarley]

Overall, it sounds like we seem to be singing from the same hymnal

I think your point about cap ex could be expanded to all public businesses...not just the entertainment industry. (If they're managed well, anyway...) There should be a return (or at least, anticipated return) for all investments any company makes. That's just part of the fudiciary responsibility of management...

I also agree that if a movie franchise takes off, its overall value will quickly eclipse any investment you put into a theme park. (It's the "if" that gets ya ). But, the whole scale of risk/reward is what business is all about.

There's a great book by Buzz Harrison called "Walt's Revolution" that really gets into the nuts & bolts of choosing/financing/evaluating theme park attractions. It would probably bore the heck out of most people, but I bet you (and a few others reading this) would really enjoy it.

Joel