SKAGEN Focus invests in undervalued Viacom
For a long time, SKAGEN Focus' latest investment, the media giant Viacom, lay at the forefront of the entertainment industry. However, the rise of disruptive streaming services has taken some of the shine off the company.
Wave after wave of change has swept through the media industry over the past 15 years. Traditional media has had to make way for digital channels. Younger users in particular exclusively use web-based streaming services such as Netflix and YouTube. Traditional linear TV in the form of large cable offerings to consumers has dramatically shrunk in scope.
New media landscape
In the US in particular, the shift has been pronounced. The move away from traditional linear TV took place as early as 2012, just five years after disruptive competitors launched their platforms. Another example is Spotify. With 70 million paying users, this Swedish company has forever changed the perception of how accessible music should be. Spotify is heading towards stock exchange listing, and is priced by some analysts at more than the value of the entire US record industry.
Meanwhile, the streaming pioneer Netflix' share price has risen at record speed over the past two years, and the company is now valued at almost USD 100 billion. As a result, few investors are interested in the traditional media landscape, despite the fact that the companies are trading at prices we have not seen for several decades.
Old-school media company
One exception is the global, highly concentrated equity fund SKAGEN Focus, which has benefited from swimming against the tide. At the beginning of the year, the portfolio managers started buying into Viacom, a company which has historically been one of the dominant players. These days, Viacom has a stock value of a modest USD 13 billion.
"At its current valuation, the stock market has largely discounted Viacom's turnaround potential using the strong cash flow that it continues to generate," explains Jonas Edholm, portfolio manager of SKAGEN Focus.
Gold mine of content
Viacom is sitting on a gold mine of content, through ownership of the film company Paramount Pictures and traditional TV channels such as Nickelodeon, Comedy Central and MTV, amongst others. Viacom is owned by the holding company National Amusements, with the 94-year-old media mogul Sumner M. Redstone and his daughter Shari Redstone at the helm.
In December 2016, Robert Bakish took over as new CEO, after a period of internal conflict between the former CEO and the Redstone family.
Since then, Bakish has carried out a number of radical changes, managing to halt the downward trend. He has hired new heads for Paramount, amongst others, and entered new distribution agreements with cable TV networks as well as re-profiling the TV channel Spike. Viewing figures and advertising income for several of Viacom's TV channels, including Nickelodeon, have improved. MTV has also taken an important step forward, although it continues to face significant adjustments and challenges.
"The company's ownership and catalogue of titles in Paramount Pictures corresponds to an extremely large proportion of the current book value. There is a need to get the company's content into distribution models which are directly aimed at consumers, and furthermore, we believe that the new management will cut costs substantially," says Jonas Edholm.
Changes that may trigger value
A possible trigger is also that the activist investor, Gamco, Viacom's second largest owner, is pushing to spin off Paramount Pictures or International Media Networks.
"A consolidation wave is sweeping across the sector, whereby traditional media companies want to increase in size in order to attain synergies and stand up to the competition. It is not unreasonable to imagine that Viacom will be part of this process," says Edholm.
As an example, towards the end of 2017, Disney bought the largest part of 21st Century Fox and created a media giant for streaming services.