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Executive Pact Lifts a Weight Off Viacom

March 21, 2003|Sallie Hofmeister | Times Staff Writer

Viacom Inc. President Mel Karmazin's new employment contract should remove the damper on the company's stock price and allow top executives to focus on a growth strategy for the entertainment giant, analysts and company sources said.

The well-regarded 59-year-old executive agreed to remain in his role for three more years under a compromise reached late Wednesday with Viacom's chief executive and controlling shareholder, Sumner Redstone. The accord ended more than a year of intense speculation about Karmazin's future.

The two executives agreed to a series of checks and balances that allowed them to overcome a stalemate that had bogged down negotiations. Karmazin had refused to remain at the company if his powers were diluted, while Redstone was unwilling to allow his second in command to retain broad powers, including bypassing him and reporting directly to the board.

Employment contracts the two signed Thursday return significant powers to Redstone but protect Karmazin's authority to continue to run Viacom on a daily basis.

For instance, under his new contract, which takes effect in May, Karmazin will report to Redstone. Karmazin also can be terminated by a majority vote of the board rather than a super-majority. However, Karmazin would have broad latitude to quit if Redstone meddles in operations or if the board doesn't name him the successor if his 79-year-old boss is no longer CEO.

The two executives have had difficulties sharing power since becoming partners nearly three years ago, after the merger of Viacom Inc. and CBS Corp., where Karmazin was chief executive.

Resolution of the long-standing tug of war drove up Viacom's stock Thursday by $1.94 a share. It closed at $40.84 on the New York Stock Exchange.

"It's about time, and thank God," said John Tinker, an analyst at Blaylock & Partners. "This is an extraordinarily difficult time in which to operate, and there are a lot of fundamental things for them to focus on."

Even though Viacom has continued to outperform its media rivals, Tinker cited its disappointing financial results in the fourth quarter. He also pointed to issues facing several of its operations, including its radio and TV stations, cable channels and Blockbuster Video.

For instance, Viacom may have less success in ratcheting up the fees it charges cable operators for its programming, such as MTV, VH1, Nickelodeon, TNN, BET and Showtime. That's because distributors such as Comcast Corp. are consolidating and have more leverage. Cable companies also are rolling out video-on-demand services that threaten Blockbuster's movie rental business.

What's more, a prolonged war with Iraq could have an adverse effect on advertising, which accounts for nearly half of Viacom's revenue.

Analysts note, however, that the company's balance-sheet strength gives Viacom acquisition power when most other major media companies are crippled by debt and are scrambling to sell assets. Viacom has nearly $2 billion in cash on its books, which it has earmarked for acquisitions.

On the top of Redstone's list of acquisition targets is the 50% stake in the Comedy Central cable channel that AOL Time Warner Inc. owns and is expected to sell as part of a debt-reduction initiative, sources say.

Viacom already owns 50% of Comedy Central. Buying the rest -- at an estimated cost of $1.2 billion or more -- would allow Viacom to save millions of dollars by combining the channel's back-office operations with those of its other networks.

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