How ViacomCBS' Film, TV Divisions May Aim to Compete

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Paramount chief Jim Gianopulos recently re-upped his deal amid merger plans from CBS and Viacom.

'Mission: Impossible,' 'Transformers' and 'Star Trek' franchises would be under the same roof in the merged company.

With CBS Corp. and Viacom finally set to merge, the new ViacomCBS will bring together the Paramount Pictures film studio and both firms' TV production businesses into a new studio powerhouse.

The combined 2019 revenue of the two companies' studio businesses, namely Paramount and the CBS TV studio, would amount to more than $6.8 billion, with nearly $4.5 billion of that coming from TV production ($3.6 billion from CBS and $856 million from Viacom), and earnings before interest, taxes, depreciation and amortization of $920 million, Credit Suisse analyst Douglas Mitchelson recently estimated.

On a call Tuesday with reporters, ViacomCBS CEO designate Bob Bakish highlighted the merged firm's expanded capability to produce content at scale to add to its library comprising 140,000-plus TV episodes and 3,600-plus film titles, including such "iconic intellectual property" as Star Trek and Mission: Impossible. "It's true content scale," said the exec.

Bakish also vowed that ViacomCBS could "feed escalating demand for third-party content" from the likes of Comcast, Charter, Fox, CBS, Netflix, Disney+ and Facebook Watch. After all, the merger partners said they would bring together "production capabilities across five continents, including more than 750 series ordered to or in production."

While the deal is set to close only by the end of the year, it seems clear that Paramount chairman and CEO Jim Gianopulos, who just renewed his contract on Monday, will oversee the combined film studio operations. Boasting franchises as Mission: Impossible, Transformers and Star Trek, Paramount has been in turnaround mode under Gianopulos' leadership.

For its latest full fiscal year, ended in September, Paramount's film unit reported an adjusted operating loss of $39 million after an operating loss of $280 million in the previous year, and a loss of $445 million in the year before that. Management has forecast a return to profitability for the current fiscal year, with The Hollywood Reporter's calculations showing that Paramount actually turned the slightest of profits, $1 million, during calendar year 2018 on a 1 percent revenue gain to $3.1 billion. 

Paramount's growing TV production arm, which the company forecast would double its output this year, has helped boost profits and has had success with the Amazon hit series Jack Ryan and Netflix’s Maniac and The Haunting of Hill House, as well as The Alienist for TBS. Fitch analyst Patrice Cucinello says Paramount Television's increased output and the resulting higher licensing revenue have started providing "a growing and more stable revenue stream" for Viacom's filmed entertainment segment worth $400 million in revenue in fiscal year 2018 and expected to grow 50 percent this fiscal year. Other growth drivers have been Paramount’s bigger slate and the growing Paramount Players label that is bringing Viacom TV properties and contemporary fare to the screen.

Meanwhile, CBS Corp. has traditionally disclosed little about the financial performance of CBS Films, whose releases have included Inside Llewyn DavisPridePatriots Day and Hell or High Water. But early this year, it said that CBS Films was being folded into the CBS Entertainment Group, shifting its focus towards creating content for the company's streaming platforms, such as CBS All Access (with theatrical releases, through the company’s partnership with Lionsgate, of four previously announced titles, namely Five Feet ApartScary Stories to Tell in the DarkPavarotti and Lexi).

Importantly, CBS brings its top-notch TV production business CBS Television Studios, led by president David Stapf, to the table. It is part of CBS Corp.'s entertainment unit, which also includes the financials for the CBS network and more. "Notably, both CBS and Viacom have become providers of content to streaming players," Fitch's Cucinello highlighted in a recent report. "The new [merged company] could continue to provide content to third parties, benefiting from the potential scarcity effect as larger media companies pull their content off third-party platforms." However, Fitch believes that the pro forma company could also utilize its content production capabilities to offer a more comprehensive direct-to-consumer product offering.

Wall Street analysts see a series of other synergies in the combined studio operations. For example, the Paramount studio "could benefit from an influx of CBS' intellectual property," such as Star Trek, S&P Global analyst Naveen Sarma said in a recent report.

And "Showtime would be able to lock up Paramount’s pay 1 film rights," said Michael Nathanson, analyst at MoffettNathanson, who called Paramount’s film library "valuable." Indeed, Bakish said on the company's most recent earnings conference call that Paramount's pay TV window licensing deal with premium TV provider Epix expires in a few years and the company expects to capture the financial upside due to its "incredible value."

Importantly, the combined TV production business looks to be a key growth driver for the combined company. "CBS arguably has the strongest TV production/syndication pipeline in the industry," CFRA Research analyst Tuna Amobi tells THR. And Paramount has been expanding its production activity.

Mitchelson estimates the combined CBS-Viacom TV studio operations would bring in 2019 revenue of $4.47 billion, with EBITDA of $960 million."The addition of CBS' TV production business would enhance Paramount's own efforts and would reduce its earnings volatility," said Sarma. And Nathanson argued in a recent report, "CBS' and Paramount's production asset will quickly move up the ranks to challenge the big boys of Disney, Comcast, AT&T and Netflix and will be an attractive home for creative talent. The improved scale will create a stronger negotiating position vis-a-vis third parties and cost synergies in shared services."

On the company’s recent earnings call, Bakish highlighted the growth in Paramount's TV studio. "Paramount TV now has 26 shows ordered or in production, including the sequel series to TNT's The Alienist, the adaptation of the international best-seller Shantaram for Apple and two series for WarnerMedia's upcoming streaming service, among others. And production continues to ramp up at our other studios, too."

The focus was similar on CBS' earnings call. "CBS is now producing 89 shows, up from 70 shows just a year ago," CBS acting CEO Joe Ianniello said at the time. "That's a 27 percent increase. As we create more and more content, we are monetizing its value using a two-pronged approach. The first approach is to produce more shows for our own platforms."