Who Will Buy Viacom And CBS?

| About: Viacom Inc. (VIAB)

Summary

CBS and Viacom shares are up on hope of a sale.

The problem is, who would bid? Competitors might, but that's unlikely.

The most likely buyers are Internet and infrastructure companies.

CBS (NYSE:CBS) and Viacom (NYSE:VIA) (NASDAQ:VIAB) shares rose Thursday on word that Sumner Redstone was stripped of his remaining executive titles at the two companies.

Redstone is the largest shareholder in both companies, but his grip on life is slipping, as yours would be too if you were 92. His will has yet to be unveiled, of course, but there are no heirs who might be called entrepreneurial. A sale of the assets is likely.

Once that process starts, it is likely to be just the start for another round of media consolidation, something I have been predicting would happen since 2012.

Some of the assets in these companies are top-notch, some are not, and while both could be sold as-is, it's also possible that given the present unhealthy state of the market (it would have been better for heirs had this started a year ago) there could be the corporate equivalent of a garage sale about to start.

As is true when you lay out a bunch of junk on the front lawn and put out some signs around the neighborhood, the question is always who will show up, and who will buy?

It has always been assumed that the first buyers to line up would be other media companies. Disney (NYSE:DIS), Comcast (NASDAQ:CMCSA), Fox (NASDAQ:FOX) (NASDAQ:FOXA) and their friends at Time Warner (NYSE:TWX). But their assets are as distressed as those of the companies on the block. Time Warner and Comcast are the only two bidders whose value has grown over the last year. Time Warner might be interested in CBS, but it would be a huge lift - Time Warner is now worth $57 billion and CBS $22 billion.

Time Warner's balance sheet shows little cash, substantial debt, and less than $4 billion in annual cash flow - not enough to sustain the cost unless you're talking about a deal that's mostly stock. Will its institutional holders want to be watered down? A key to what happens at CBS will be Mario Gabelli - his funds own a substantial portion of the Class A voting shares.

Disney, Comcast and Fox already own networks, broadcast and cable, and would be unlikely to bid on CBS. All three also own movie studios, meaning they are unlikely to bid on Viacom either. You can't have an auction without buyers, and this fact has probably been behind the delays in selling the assets.

The next most likely set of buyers would be infrastructure owners, specifically AT&T (NYSE:T) and Verizon (NYSE:VZ). Both might be interested in getting what Comcast has, vertical integration. Owning the content that travels along your pipes means that, when it comes time to pay for that content, you're writing the check to yourself.

Both could afford to bid for either company, or both. Given their lack of management with knowledge of the businesses involved, this might also be a way for current management to entrench itself. But given that current management has not been doing that great a job it might not be what an infrastructure player wants at all.

Who else? Netflix (NASDAQ:NFLX) is worth twice the value of either Viacom or CBS. Amazon.Com (NASDAQ:AMZN) might want either one for the studio and programming assets. But such a deal would be messy. Both these companies already have a way to market, one that competes with CBS and Viacom. Each might be interested in pieces. However, Viacom's Paramount movie studio could attract interest.

Other players with the same motivation would be Google (NASDAQ:GOOG) (NASDAQ:GOOGL) (for YouTube programming) and Apple (NASDAQ:AAPL) (for Apple TV) - both could write a check for either, or both. But would they want to?

Given the size and market shares of the players, of course, any deals like this will face antitrust scrutiny and take a year or more to close. If something does move, I'd suggest you buy rumors and sell news. If you are thinking of playing, in other words, you should already be in the game.

Or just play the home game, right here. Who do you think will bid, and why?

Disclosure: I am/we are long DIS, GOOGL, AMZN, AAPL, CMCSA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.