DBRS Assigns BBB Rating to Viacom’s Senior Unsecured Notes and Debentures, Downgrades Bank Debt to BBB

Dominion Bond Rating Service (DBRS) has today assigned a BBB rating to the Senior Unsecured Notes and Debentures of Viacom Inc. (Viacom or the Company) and has downgraded the rating on the Company’s Bank Debt to BBB from A (low). All trends are Stable.

These rating actions are a direct result of Viacom undertaking substantial share repurchases and the acquisition of Dreamworks L.L.C (Dreamworks) that has exceeded free cash flow generated by the Company, in contrast to DBRS’s earlier expectations (see report dated May 4, 2006). As a result, debt levels have increased to nearly $8.2 billion from just over $5.4 billion at the time Viacom and CBS Inc. (CBS) were separated. The Company has also indicated that its target for net debt-to-EBITDA will likely be in the 2.75 times to 3.0 times range, which is not consistent with an A (low) rating given the ongoing shift in the media industry and the cyclicality of advertising revenue that Viacom is highly dependent upon (39.2% of total revenues).

In addition, Viacom’s Entertainment segment (Motion Pictures) continues to face pressure even with the acquisition of Dreamworks, which has increased revenue but has not reversed the trend of single-digit EBITDA margins. DBRS believes that this segment could face serious scrutiny if Viacom’s new management team cannot execute a turnaround in the next couple of years.

However, DBRS acknowledges that the Cable Networks segment continues to perform quite well, with EBITDA margins well in excess of 40%, reflecting the segment’s top performing networks (MTV, Nickelodeon) and focused demographic content (Dora the Explorer) along with continued growth outside of the United States. Stability in this segment is underpinned by continued double-digit revenue growth in affiliate and ancillary fees, which tend to be more stable than advertising. DBRS notes that advertising revenue growth has slowed in 2006, but still remains quite strong, reflecting the current economic environment.

DBRS notes that further rating pressure could occur if Viacom initiates further share repurchases above the current $3 billion program that exceed future free cash flow generation, along with any unexpected pressure in its Cable Networks segment. Given the performance of Viacom and CBS stock since the split, DBRS somewhat questions the rationale of this decision and whether in the longer term it might have been more practical to keep the two companies attached, especially since both now have the same long-term debt rating.

Notes:
All figures are in U.S. dollars unless otherwise noted.
These ratings are based on public information.