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Tuesday, April 24, 2012 3:58 PM ET

Nickelodeon's impact on Viacom shareholders

By Steve Birenberg

Opinions expressed in this piece are solely those of the author and do not represent the views of SNL Kagan.

Recently, SNL Kagan published an article discussing the sharp drop in ratings for Viacom Inc.'s flagship Nickelodeon channel.

Since last fall, Nick's ratings have been consistently down 20% to 30% on a year-over-year basis. There is no question that this
is of great concern to investors, and Viacom shares have severely lagged the market and peer cable network companies since the
ratings decline first came to light.

Viacom management firmly state that they believe Nielsen's ratings data are flawed. They point to data from Rentrak Corp. that
shows just a small decline in ratings, consistent with a pattern seen across many cable networks for the past six months. Yet
investors and analysts are not buying management's explanation. Instead, they are focused on Viacom's overall advertising growth,
which is barely positive against gains of mid-single digits to midteens for other national cable network companies. In addition,
despite complaining about Nielsen, management has effectively accepted the ratings by dramatically increasing its investment in
new programming for Nickelodeon.

Most of the speculation on what went wrong at Nickelodeon has focused on Netflix Inc. Nickelodeon programming is available on
Netflix, and many observers believe children are watching what they want on the over-the-top service rather than accepting Nick's
linear programming schedule.

SNL Kagan's Adam Swanson took another view. Adam noted that programming on two newer Viacom networks, Nick Jr. and
Nicktoons Network, used to appear on Nickelodeon. For example, Nick Jr. was once a successful programming block on
Nickelodeon — so successful it was spun off to create Nick Jr. Perhaps viewers of Nick Jr. and Nicktoons used to watch
Nickelodeon?

I am not sure we will ever fully understand what has happened to Nickelodeon's ratings. However, I think one way to look at it for
Viacom investors is to compare the economics of the three networks. The economics of cable networks are quite good given the
dual revenue stream of advertising and affiliate fees. It is totally understandable that Viacom management would want to launch the
new networks given how a fully distributed cable network with modest ratings can create hundreds of millions or billions of asset
value for shareholders. This was especially the case several years ago before the recession, Netflix, cord cutting, cord shaving and
over the top became significant concerns.

SNL Kagan projects that Nickelodeon will have 100.6 million subscribers in 2012, producing operating cash flow of $1.361 billion.
Viacom and other cable network stocks trade at about 8x operating cash flow, so arguably Nickelodeon is worth more than $10.9
billion, or about 33% of Viacom's total enterprise value of $32.8 billion. Viacom shares are valued 1.0 to 1.5 multiple points below
peers due to the Nickelodeon concerns. Thus, you could say that the ratings issues at Nickelodeon are costing Viacom
shareholders $1.4 billion to $2.1 billion in value.

Meanwhile, according to SNL Kagan, Nick Jr. is in 85 million homes and will generate operating cash flow of about $106 million in
2012; while Nicktoons is in 68 million homes and will generate roughly $50 million in operating cash flow. Both networks are
growing, with SNL Kagan forecasting 2015 operating cash flow to be 28% above 2012 for Nick Jr. and 53% higher for Nicktoons.
Nickelodeon also is growing, but more slowly, with 2015 operating cash flow expected to be 19% higher than 2012. Of course, due
to Nickelodeon's much larger size, the incremental operating cash flow of $250 million in 2015 is more than the combined projected
operating cash flow that year for Nick Jr. and Nicktoons.

Given that they are growing faster, let's give Nick Jr. and Nicktoons a slightly higher multiple. At 10x operating cash flow, the
networks are worth $1.57 billion today. This is at the low end of the $1.4 billion to $2.1 billion value destruction we calculated at
Nickelodeon. A neutral trade at best if the new networks are cannibalizing Nickelodeon ratings.

Looking ahead to 2015, let's say a mature Nickelodeon is worth 7x operating cash flow, or more than $11 billion. Valuing Nick Jr.
and Nicktoons' $210 million in projected operating cash flow at 9x creates asset value of $1.9 billion. The newer networks have
increased in value by $500 million, a meaningful amount for sure, but relative to the $11 billion value of Nickelodeon, the
incremental value creation is marginal.

To repeat, we may never know exactly what is happening with Nickelodeon's ratings, specifically whether the development of Nick

Source: S&P Global Market Intelligence | Page 1 of 2

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Jr. and Nicktoons is partially or mostly to fault for the ratings slide. However, I think it is fair to say that fixing Nickelodeon is
priority one for Viacom investors. Success at smaller networks built off of Nickelodeon programming and branding is not enough to
drive value for Viacom as a whole.

To their credit, Viacom management is taking the ratings challenge at Nickelodeon head on with dramatic increases in
programming investment. I chose to take a wait and see attitude and sold my Viacom shares at the end of February. My thesis
remains that the industry-wide ad recovery has matured and entered a normal phase. Ratings winners will be rewarded on Wall
Street. Until Nickelodeon turns around, Viacom will not be a winner even with success at its smaller networks.

Steve Birenberg has no positions in Viacom for himself or clients of Northlake Capital Management LLC or the Entermedia Funds.
Birenberg is sole proprietor of Northlake, a registered investment adviser. He also is co-portfolio manager of Entermedia, owns a
stake in Entermedia's investment management company, and has personal monies invested in the funds.

Source: S&P Global Market Intelligence | Page 2 of 2