‘Mel Issue’ Hanging Over Viacom

Despite Viacom Inc.’s solid fourth-quarter performance, investors drove down the company’s stock Wednesday in response to disappointing results in its core cable business and continued uncertainty over the fate of President Mel Karmazin.

Viacom reversed a year-earlier loss, posting net income of $652.4 million, spurred by a continuing rebound in advertising sales at its TV and radio stations and cable channels.

Yet the company’s stock dropped by as much as 8% on the New York Stock Exchange before recovering to close at $36.55 a share, down 98 cents.

Viacom’s results were in line with analyst expectations. But many investors had hoped that Viacom by now would have renewed Karmazin’s contract, which expires at the end of the year. During a conference call with analysts Wednesday, Viacom Chief Executive Sumner Redstone said he and Karmazin are trying to reach an agreement “as soon as possible,� but did not elaborate.

Karmazin and Redstone have been engaged in a well-publicized power struggle since they became partners in 2000 after the merger of Viacom and CBS Corp., where Karmazin was chief executive. Some investors predict Viacom’s stock will plummet if the well-regarded Karmazin, considered an astute bottom-line manager, leaves.

In the fourth quarter, Viacom’s net income was 37 cents a share, contrasted with a loss of $42.5 million, or 2 cents, a year earlier. Revenue rose 12% to $6.8 billion. For the full year, revenue was up 6% to $24.6 billion, and net profit was $725.7 million, up from a loss of $223.5 million for 2001.

Several analysts said the profit margins of Viacom’s cable group, which is the single biggest profit center, narrowed to 43.1% in the quarter, from 45.7% last year.

Merrill Lynch analyst Jessica Reif Cohen said her biggest concern beyond the “Mel issue� was Viacom’s ability to increase cash flow in the face of rising programming costs. This raises the question of “whether Viacom is becoming a slower-growing company,� she wrote in a report Wednesday.

During the conference call, Karmazin said the decline in cable margins was not the beginning of a trend.

Redstone said the board was considering paying its first dividend in response to investor demand. But he said he first would like to see changes in federal laws to eliminate taxes on dividends, as President Bush has proposed.

He said his biggest disappointment of 2002 was the weak stock price, which dropped 7% last year.

Karmazin said the company’s 2003 budgets anticipate a war with Iraq, which would increase costs at CBS News and reduce advertising at its TV and radio stations.

Karmazin also warned investors that he planned to sell $10 million in stock next week, representing 2% of his holdings in Viacom. He said he would rather not sell at these low prices, but he needs the proceeds to pay taxes on options he plans to exercise before they expire. “I just wanted to let everyone know that there was nothing else going on,� Karmazin said.