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CBS-Viacom: Creating Value in Media
09/11/2019 5:00 am EST
Current holders of Viacom stock will receive 0.59625 shares of CBS for every share of Viacom held. The merger reunites two companies that were once part of the same firm until their breakup in 2006.
The combined entity, to be called ViacomCBS, will be headed by Bob Bakish, the current CEO of Viacom. The deal brings together a number of attractive media properties, including CBS, MTV, Nickelodeon, and Showtime.
I am a long-time owner of both CBS and Viacom — I received my shares via my ownership of Westinghouse many years ago — and am excited about the merger. It brings scale to a business that needs scale to compete effectively in the changing media landscape.
To be sure, neither CBS nor Viacom has commanded a lot of respect from Wall Street over the last 12 months, as both stocks have significantly underperformed the S&P 500 during that time period.
And both stocks sold off on the merger news, as Wall Street apparently is concerned that the combined company will be less attractive as a takeover candidate.
One factor reducing the combined company’s takeover appeal is that fi rms that currently own broadcasting networks (Disney and Comcast) will find it difficult to own a second broadcasting network (CBS) from a regulatory standpoint.
And other potential suitors, such as Verizon (which reportedly had considered acquiring CBS at various times in the past), has said it no longer is interested in building building out media assets.
True, a suitor such as Amazon, which offers streaming services and could use the vast content vault owned by ViacomCBS, represents one option. But the retailing giant has not shown a propensity to make huge takeover deals.
Of course, other online giants with big media aspirations — think Apple, Alphabet (with its YouTube segment), Facebook, Netflix, or even an increasingly digitally savvy Walmart — could view an acquisition of ViacomCBS as a faster and potentially cheaper way to buy content for their various online services. Quite frankly, I’m not sure ViacomCBS needs to be acquired for the stock price to show an upward track.
CBS has been doing a good job already of monetizing its content — the company remains on track to reach its goal of 25 million streaming subscribers by 2022. CBS shares currently trade at just eight times the consensus analysts’ earnings estimate of $5.46. Viacom shares currently trade at less than seven times its 2019 earnings estimate.
I think the deal has legitimate synergies that should help drive profits and a higher multiple. While it is possible to see CBS stock break below $40 during extended market weakness, I think these shares are too cheap to pass up and would be a buyer at current prices.
I’m making an assumption that since CBS technically is the acquirer, ViacomCBS will maintain CBS’ direct purchase plan and roll Viacom’s DRIP participants into the plan. CBS’ direct-purchase plan has a minimum initial investment of $250. Subsequent investments are a minimum $50.
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