The CBS-Viacom Merger - What It Means For The Media Industry

Aug. 16, 2019 9:51 AM ETAMC, AMCX, AMZN, CMCSA, DIS, WBD, FOX, LGF.A, NFLX, T, PARA, VIA-OLD12 Comments

Summary

  • The August 13, 2019, announced merger between CBS and Viacom has significant ramifications for the media industry.
  • The industry is in a race to get scale and acquire Millennial eyeballs with Over-The-Top (OTT) offerings.
  • The new ViacomCBS company will likely be an also-ran. It has much catching up to do in attracting Millennials. Best to wait this deal out until it closes.

Media Merger Mania

The $30 billion merger between CBS Corp. (CBS) and Viacom (VIA) was finalized on August 13, 2019. CBS shareholders will own 61% of the combined company, which will be called ViacomCBS.

The deal will combine a large group of compatible assets. Viacom owns networks like MTV, Nickelodeon, Comedy Central, and Paramount Pictures, and CBS owns popular shows like Big Bang Theory, NCIS, and Survivor.

The two companies used to be under one roof. Viacom spun off CBS in 2006. Shari Redstone, who controls National Amusement and is 80% owner of both companies, wanted to keep the two together. Now, she has her way.

The rationale is both companies need to get scale together to fight larger media companies and invest in streaming assets. There have been a series of mergers and acquisitions in media in the past year or so. AT&T (T) bought Time Warner in June 2018 for $85 billion, to gain access to media access and keep its core business relevant to Millennials.

Disney (DIS) bought Twenty-First Century Studios in March 2019 for $71 billion. They immediately spun off FOX Corporation (FOX) as a new separately listed public company. FOX TV stayed with Disney, but FOX News and Sports are in the newly listed company. The idea at the time was to “create a focused company.” You can see my analysis of FOX in my earlier Seeking Alpha article on June 14, 2019: “Fox Corporation’s New Listing Undervalues Its Brand Value.” I argue that the stock is worth at least $51.62, over 50% higher than today.

Will ViacomCBS do the same thing with CBS News and Sports? Not likely. CBS owns one other channel, CBC TV, plus 15 CBS stations. The combined company will control 22% of the U.S. TV market.

So, the two sets of channels will combine, a compatible move. But this leaves the news and sports networks. It’s not likely ViacomCBS management will spin off those networks like FOX did. Part of the reason is to keep viewership synergies when so many competitors are vying for them.

For example, CBS Sports has the NFL contract which is not up for renegotiation until 2022. ViacomCBS will not want to release these viewers to a separate company as a spin-off. Often, the contracts are negotiated years in advance. Having Viacom’s viewers will hike bargaining power.

Content is King

Viacom owns several large channels like BET, Comedy Central, Nickelodeon, and MTV channel. But it has no news and sports divisions. Viacom will want to promote their shows to CBS’s sports and news viewers.

Shari Redstone, who will be the largest shareholder, once said that her father always said: “Content is King and that is never more true than today.” That’s why she wanted the merger.

Streaming and Over-The-Top Strategies

A major reason for the merger is to capture Millennials' eyeballs and compete with a number of competitors like Netflix (NFLX), Amazon (AMZN) which has the Prime Video and Twitch networks, and Hulu, now controlled by Disney (after the 21st Century deal closed in March. ) Comcast (CMCSA) agreed to sell its 33% stake in Hulu to Disney in 2024.

These are known as “Over-the-Top” (OTT) channels, as subscribers don’t need a cable or TV connection to view their shows. CBS and Viacom are playing catch-up in this arena.

Netflix, for example, says it will have 158.5 million subscribers by the end of Q3. Hulu announced at the beginning of the year that it had 25 million subscribers. Amazon’s Prime Video is estimated to have over 100 million viewers as of the end of last year. Even though HBO Now is a separate OTT streaming service, ATT is planning a separate OTT service in Q4 2019. This will apparently be in addition to their separate skinny bundle service called Watch TV and their DC Universe OTT service from WarnerMedia.

CBS All-Access and Showtime OTT services have only 8 million subscribers. Viacom acquired Pluto Network in January for $340 million. It has just 12 million active viewers, 7.5 million of which are TV connected. But it is an ad-supported only business, with no subscription fees.

This bottom line is that CBS and Viacom have generally really young (Nickelodeon) and much older audiences for many of their shows like NCIS. They need to reach out to Millennials and hope their combined networks will make inroads here.

Financial Impact of the Viacom-CBS Merger

The new CEO of the combined business, Bob Bakish, said that the new company will generate $500 million of run-rate synergies within 12 to 24 months after closing. He said that earnings will be accretive (higher) for the new entity (compared to each separately added together). The combined company will have more than $28 billion in revenue.

After the merger was announced, CBS shares were trading higher, but Viacom shares traded lower. One major minority shareholder, Gabelli, complained there was no premium paid in the deal for Viacom shares. He was not happy that there will be no minority shareholder vote on the deal.

Other Mergers Possible?

Discovery, Inc. (DISCA), AMC Entertainment (AMC), AMC Networks (AMCX), Lions Gate (LGF.A), Sony Pictures, and Imagination Entertainment have all been mentioned in the press as potential takeovers. My analysis of DISCA in Seeking Alpha, “Discovery is a Free Cash Flow Machine,” on Aug. 8, argues that it is worth $44.48, or 61% above today’s price. This company could easily get snatched up Comcast Corp. (CMCSA) or any other cable operator that wants its rich content and Millennial viewers.

What Should You Do?

The deal will happen automatically without a vote, unless the courts or regulators stop it. The deal is expected by both companies to close by the end of 2019. It’s probably best to wait and see how this shakes out. Theoretically, but not likely, it’s possible another media company could swoop in and buy CBS or Viacom separately.

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This article was written by

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Mark R. Hake, CFA, has been a consultant to various companies, including hedge funds, software, and technology companies. Prior to that, Mr. Hake was President of Hake Investment Research and Hake Capital Management. He has been featured in Barron’s, CNBC, Bloomberg, and other news organizations as a contrarian investor and deep value specialist.

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