Dauman choice exposes a rift at Viacom

The new king of the Viacom Inc. media empire was named to replace ailing founder Sumner Redstone, but the move exposed a boardroom rift that could play out in the ultimate struggle for control of prized assets that include Nickelodeon, MTV and the legendary Paramount Pictures.

The Viacom board voted 10 to 1 Thursday to name Chief Executive Philippe Dauman, 61, as chairman of the media company, resolving for the moment the question of who would replace Redstone, the 92-year-old controlling shareholder.

The lone vote against Dauman came from Redstone’s daughter, Shari Redstone, the board’s vice chair. That puts Shari Redstone, 61, at odds with the new chairman, her fellow board members and even her father, who backed his loyal lieutenant.

“It’s going to be a bumpy road,” predicted Brian Wieser, a senior analyst with Pivotal Research Group. “The story still has to play out, but it feels like the long-awaited changes at Viacom are going to happen sooner rather than later.”

How the fissures in Viacom’s boardroom will unfold remains a Hollywood guessing game, but some investors already were expressing unhappiness with Dauman’s appointment.

“This is an unfortunate turn of events,” said Jason Ader, chief executive of SpringOwl Asset Management, an activist investor. “This doesn’t bode well for change — and change is warranted at Viacom. We wanted someone to come in right now and take a fresh look at the company. “

Some investors had been hoping that the underperforming New York media company would take more dramatic action by putting itself on the auction block, reuniting with its former corporate sibling CBS Corp., which Redstone also controls, or selling pieces of the company.

Viacom’s stock value has plummeted more than 40% in the last two years — although shares rallied when the markets opened on Thursday as investors cheered the prospect of dramatic changes. However, the gains were short-lived. The stock dropped back down after Dauman was named chairman. Viacom shares ended the trading day up 48 cents, or 1%, to $45.15.

“Viacom’s stock has been underperforming,” said Mark Rogers, chief executive of chief executive of BoardProspects.com, an online recruitment network for board members. “I feel that the company now really needs an overhaul of the board to right the ship. It cannot sustain itself with the status quo. And the ones who are hurt by all of this are the shareholders.”

Even before Thursday’s board vote, Viacom’s second-largest voting shareholder, Mario Gabelli, had been agitating for a sale of Paramount Pictures, the struggling Melrose Avenue movie studio behind the “Transformers” and “Zoolander” film franchises. Gabelli on Thursday renewed those calls during an appearance on CNBC.

The Los Angeles studio has lagged well behind its rivals that have more robust film slates and have taken bigger swings in their film choices. Dauman even has acknowledged that Paramount missed the mark last year by not lining up enough films in its pipeline to support its operations.

“Paramount’s profitability level is just unacceptable,” prominent media analyst Michael Nathanson said in a recent interview. He noted that Paramount produced about $100 million in profit last year, which is less than one-tenth of the amount generated in 2015 by the larger Universal Pictures or Walt Disney Co.’s studio.

“Paramount has got to be fixed,” Nathanson said. “Paramount has not done a good job innovating, and the studio would have more value if it were in someone else’s hands.”

Viacom’s TV networks, including MTV, Nickelodeon and Comedy Central, have struggled to reverse multi-year audience declines amid changes in viewer behavior. No longer ratings powerhouses, Viacom’s channels have become more vulnerable in an era when pay-TV companies are looking to pare the number of channels they offer customers in an effort to keep a lid on rising programming costs.

The company has been criticized for selling its Nickelodeon programming to streaming services Netflix and Amazon, helping to grow those businesses, perhaps at the expense of traditional TV channels.

Despite the challenges, Viacom’s board signaled Thursday that it wasn’t prepared to make wholesale changes to the company’s leadership. There were legal considerations too. Dauman’s contract stipulated that it would be a contractual breach if someone else were elected chairman after Sumner Redstone retired from the post.

“In choosing a successor to Sumner, the board considered the need for seasoned leadership in this time of unprecedented change,” board member William Schwartz said in a statement. “Philippe has been instrumental with Sumner in every aspect of Viacom’s success for nearly 30 years and most recently as CEO has taken on the tough task of navigating our future in a time of unprecedented innovation and disruption.

“He has laid out a strategic long-term vision for the company that we fully endorse,” said Schwartz, who heads Viacom’s governance committee.

This isn’t the first time that an entertainment CEO has faced opposition from a prominent member of a corporate founder’s family.

More than a decade ago, Michael Eisner, then chairman and CEO of the Walt Disney Co. openly battled with his board members, the late Roy Disney and his ally Stanley Gold, who were sharply critical of Eisner’s management. The discord prompted two years of turmoil and an aborted hostile takeover attempt by another company, and ultimately ended with Eisner stepping down.

Shari Redstone was offered the position of non-executive chairman of Viacom on Thursday, but she declined. Dauman will now serve as executive chairman and chief executive, consolidating his corporate influence.

“Shari is going to continue to advocate for what she believes to be in the best interests of Viacom shareholders,” Nancy J. Sterling, a spokeswoman for Shari Redstone, said in a statement. Shari Redstone on Wednesday said she would prefer the chairman’s position go to someone who was not “intertwined in Redstone family matters,” a direct reference to Dauman.

Dauman and Shari Redstone, who remains one of the firm’s largest voting shareholders, will probably clash again thanks to a complicated ownership structure.

The Redstone family controls nearly 80% of the voting stock of Viacom and CBS Corp. through its investment vehicle, National Amusements Inc. Sumner Redstone controls 80% of the National Amusements shares; Shari Redstone controls 20%.

Sumner Redstone’s stake in National Amusement will eventually be overseen by a seven-member trust that includes both Dauman and Shari Redstone. In addition, her youngest son, Tyler Korff, who is a rabbi, is a trustee, along with four other lawyers.

In marked contrast to the division at Viacom, the leadership transition at CBS was seamless. Board members on Wednesday unanimously elected Leslie Moonves as chairman. Shari Redstone made the motion to elevate Moonves to chairman to succeed her father.

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