One Year After Merger, ViacomCBS Has Wall Street More Optimistic

Robert M. Bakish and Sherri Redstone
John Lamparski/Getty Images

Bob Bakish and Shari Redstone mark ViacomCBS' ringing the opening bell at NASDAQ on December 05, 2019 in New York City.

While presiding over $371 million in restructuring charges, management has touted progress on the carriage deals front and placed a big bet on rebranding streamer CBS All Access as Paramount+ early next year.

Staff reductions to the tune of more than 800 people, the exit of top CBS brass, new executives with digital expertise, less investor worry about carriage deals, cash-generating asset sales, and all that amid the coronavirus pandemic – those were key themes of the first year of the recombined ViacomCBS. And, notably, Sumner Redstone, the mogul who created National Amusements, the family holding company that controls ViacomCBS, died in August at 97.

On Dec. 4, 2019, when the recombination was finalized, CEO Bob Bakish vowed: "Through the combination of CBS’s and Viacom’s complementary assets, capabilities and talented teams, ViacomCBS will create and deliver premium content for its own platforms and for others, while providing innovative solutions for advertisers and distributors globally."

Wall Street observers see management as having delivered on key promises this year."The company has done reasonably well, and Bakish is perceived as being effective in turning operations around," Vogel Capital Management CEO and former Wall Street analyst Hal Vogel tells The Hollywood Reporter. Bakish himself said on a Nov. 6 earnings conference call this year that his team is ahead of the merger plan.

Below is a closer look at some of the key trends and developments of the company's first year and topics in investors' focus.

Executive changes

While some on Wall Street wondered whether there may be a clash of the Viacom and CBS factions after the deal close, Bakish put his stamp on the company's executive suite fairly quickly.

CBS boss Joe Ianniello and CFO Christina Spade exited, followed later by other high-profile CBS executive departures, such as the recent exit of chief digital officer Marc DeBevoise. Ianniello was replaced by NBCUniversal veteran George Cheeks, Spade by former Amazon and Pandora executive Naveen Chopra, and DeBevoise by Pluto TV boss Tom Ryan as president and CEO of a newly unified ViacomCBS Streaming. The two latter appointments have injected fresh eyes and new streaming expertise into the executive suite.

Meanwhile, among CBS executives in key roles at the merged firm are Jo Ann Ross as chief advertising revenue officer and Ray Hopkins as president, U.S. network distribution. They oversee the company's two biggest lines of business next to streaming. And David Nevins serves as chief creative officer, CBS and chairman and CEO of Showtime Networks.

Bakish has been "practical and pragmatic," picking managers he feels are best for the job no matter where they come from, one company insider tells THR.

Layoffs/cost cuts

One of the traditional financial opportunities in mergers is cutting costs by getting rid of duplicated jobs and restructuring combined operations. During the first nine months of 2020, ViacomCBS has recorded $371 million in restructuring charges, up from $156 million in the year-ago period, and $51 million in merger-related costs.

The charges "primarily consist of severance costs, including the accelerated vesting of stock-based compensation," according to a recent regulatory filing. The merger-related consist of "professional fees mainly associated with integration activities, as well as transaction-related bonuses."

Management has not provided any details of job cuts tied to the merger and the pandemic, but the firm, which had more than 20,000 employees when the merger closed, in a late September filing with the New York State Department of Labor Office mentioned 711 layoffs, led by 357 at Viacom International, 95 at CBS Television Stations, and 86 at Showtime Networks.

Recently, another round of layoffs became known, with sources saying another 100 employees from across the company were impacted. The cuts focused on shared services (finance, legal, technology), but also affected other departments, including ad sales and creative functions.

This summer, management raised its 2020 merger synergy target to $300 million from $250 million, and its three-year run-rate cost savings target to $800 million from $750 million. Bakish has highlighted that the pandemic means there was potential for cost reductions beyond that, with the firm looking for "continued cost and operating revenue opportunities that will create both immediate and lasting benefits."

Chopra on the recent earnings call said "we remain focused on reducing our costs," adding that "we are benefiting from COVID-related cost savings, which helped offset some of the COVID impacts of revenue." And he highlighted that "a portion of these cost savings are sustainable, while some are timing-related and will return as we increase production activity."

Carriage deals/traditional business

Before the Viacom-CBS deal, investors often reacted to carriage disputes or deal renewals, but after a slew of new deals with the likes of Dish, Verizon and YouTube, those concerns have been less in focus on Wall Street.

Needham & Co. analyst Laura Martin in a recent report noted the benefits of bringing Viacom and CBS carriage deals' expirations in line with each other. "Over the next three years, we believe that upside comes from making Viacom and CBS contracts co-terminus," she wrote. "This would significantly improve ViacomCBS' negotiating leverage with Comcast, Charter, etc."

Management has also touted progress on the carriage deals and fees front. "We’re also unlocking more value in distribution by expanding our footprint through cross-company renewals and new deals, and simultaneously strengthening our positioning in advertising by bringing to bear the power of our combined portfolio and capabilities," Bakish said on the recent earnings call.

Streaming

Like for other entertainment giants, streaming has become an ever-increasing focus on ViacomCBS' earnings reports and calls.

As of Sept. 30, the company had nearly reached its raised year-end target for domestic paying streaming subscribers with 17.9 million, which led it to raise its goal to "at least" 19 million.

CBS All Access is "in the early stages" of benefitting from the Viacom-CBS merger with more to come, Bakish said on the recent earnings call, lauding "compelling content and ubiquitous distribution" as key drivers of growth.

ViacomCBS previously said it would early next year broaden and beef up its U.S. subscription VOD service CBS All Access and rebrand it under the Paramount+ name. Bakish argued that this would ensure a new leg of growth in streaming, describing the goal as making the streamer a "must-watch" service after a first broadening of the service this summer gave management the confidence to "lean into streaming even more."

Meanwhile, the firm's advertising-supported streamer Pluto TV's domestic users ended September with 28.4 million, also continuing its gains. Streaming and digital revenue reached $636 million, up 56 percent from the third quarter or 2019.

While some see Paramount+ competing with the big players, Vogel says ViacomCBS' streaming offers could carve out their own niche. "My opinion is that the approach to streaming has been correct as there is no way to compete head-on with Netflix and Disney," he said.

Stock and analysts' views

ViacomCBS' stock hit a 52-week high of $43.04 in December before falling to a low of $10.10 after a first earnings report and call for the merged company that was badly received and the initial coronavirus pandemic hit.

Several analysts have upgraded their stock rating or price target and expressed more bullishness than in the past, even though some remain more cautious, citing expectations for higher production and streaming costs going into the relaunch of CBS All Access and the outlook for streaming subscriber growth.

Martin, who has a "buy" rating on the stock, in October raised her financial estimates and price target by $6 to $36 "based on rapid streaming revenue growth and value creation." Projecting streaming revenue of $2.2 billion this year and $3.1 billion next year, she calculated that at an average streaming multiple of 11 times, "this implies that ViacomCBS' streaming assets, if they were publicly traded, would be valued at approximately $35 billion, about equal to ViacomCBS' total enterprise value," the analyst said. "By implication, investors are paying almost nothing for about $5 billion of earnings before interest, taxes, depreciation and amortization and $2 billion of free cash flow generated by ViacomCBS' non-streaming assets during 2020."

Barclays' Kannan Venkateshwar recently even upgraded his stock rating from "neutral" to "overweight," while boosting his stock price target from $22 to $36. "Recent trends point to a potentially more stable earnings and cash flow environment," he argued. "In addition, the company could benefit from multiple catalysts in the coming months. While the digital opportunity and execution at ViacomCBS is not comparable to that of peers like Disney, this revenue source is nevertheless starting to become more real and is helping offset some of the legacy pressure. This variable could become more prominent next year."

Third-quarter results and growth outlook "showed continued momentum in streaming initiatives as the company heads towards its Paramount+ rebrand in early '21," Morgan Stanley analyst Benjamin Swinburne, who has an "in-line" rating on the stock, echoed in a recent report, which also highlighted that merger synergies are higher than expected and business has bounced back from the coronavirus pandemic lows of the second quarter.

But he also noted: "The recovery in the business is likely to give ViacomCBS further incentive to lean into its streaming assets, which when combined with the return of production activity, leads us to raise our investment spending expectations and lower our 2021 adjusted earnings before interest, taxes, depreciation and amortization and free cash flow."

Guggenheim analyst Michael Morris, who has a "buy" rating on ViacomCBS, similarly said: "Management expects sequential improvement in both affiliate and advertising revenue in the fourth quarter, though we note that operating income before depreciation and amortization and free cash flow will be impacted by incremental streaming investment and a ramp-up in production cost."

Explaining his $33 stock price target, Morris wrote: "Our multiple is slightly above our peer group target average, reflecting our confidence in the company’s relative position – NFL exposure, large television and film production capabilities, partially offset by our concern toward the company’s overall strategy of distribution across multiple internal and external platforms, which has yet to yield clear outperformance."

Deutsche Bank's Bryan Kraft, meanwhile, downgraded his ViacomCBS rating from"buy" to "hold" just before Thanksgiving. "While we believe that streaming will continue to be a source of growth within ViacomCBS, we don't know enough at this time to conclude that it will be more than a hedge against the decline in the traditional networks business from a long-term earnings before interest, taxes, depreciation and amortization and free cash flow perspective," he explained. "Thus, we look forward to hearing more details regarding the company's streaming plans over the next couple months, in addition to the terms of pending ViacomCBS's NFL contract renewal; both of which are critical elements to our five-year forecast."

Cowen analyst Doug Creutz after the latest earnings update raised his stock price target to $29 but reiterated his "market perform" rating, arguing that ViacomCBS "remains exposed to the challenging advertising environment and incremental deterioration in [pay TV] subscriber trends." He added: "While we are not sold on the strategic rationale for the merger, we think that the combination of the two companies makes reasonable sense and that cost synergies should be easily achieved."

And UBS analyst John Hodulik, who has a "neutral" rating on the stock, noted: "While ViacomCBS had better-than-expected numbers in the third quarter, direct-to-consumer sub growth was weaker. The company added 1.7 million paid subs in the quarter, down from the 2.7 million and 2.3 million in the previous two quarters. This is despite thousands of hours of new Viacom content added, including library from Nickelodeon, BET, Comedy Central and MTV, the start of the NFL and Champions League seasons and the Apple TV partnership/bundle, which offered both CBS All Access and Showtime OTT at half price."

He added: "Guidance for the fourth quarter suggests net adds will decline again to 1 million due in part to folding smaller direct-to-consumer platforms, such as MTV Hits, into All Access, though this guidance may be conservative."

Deals/asset sales

Dealmaking has remained a theme for ViacomCBS following the combination that created it. The firm recently unveiled the $500 million sale of CNET, which Morris said would "support a combination of incremental digital investments and further balance sheet strengthening."

And just before Thanksgiving, ViacomCBS unveiled a deal to sell book unit Simon & Schuster to Bertelsmann's Penguin Random House for $2.175 billion, well above a recently reported possible price target of $1.7 billion-plus. It said proceeds from the divesture, expected to close next year, will be used to invest in "strategic growth priorities, including in streaming, as well as to fund the dividend and pay down debt."

The sale for CBS' Manhattan headquarters Black Rock is also still planned, but looks more likely to get pushed into 2021, according to observers.