ViacomCBS Deal Closes as Wall Street Debates Outlook

Shari Redstone Sun Valley Resort 2018 - Getty - H 2019
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Management touts the firm's big U.S. TV audience share, content library, growing streaming services and international upside, but some analysts say investors want to see proof of the merger benefits over time.

Nearly 14 years after Sumner Redstone split his entertainment empire in two, Viacom and CBS Corp. are reunited. The companies made the closing of the latest entertainment industry mega-deal official after the market close on Wednesday, bringing together such assets as Paramount Pictures, MTV, BET, Comedy Central, Nickelodeon, the CBS broadcast network and Showtime.

The combined company's stock starts trading on Thursday on the Nasdaq exchange under the symbols "VIAC" and VIACA."

The company also owns such streaming services as PlutoTV and CBS All Access. While the deal fits in with the broader consolidation the entertainment sector has experienced in recent years, many on Wall Street say the combined firm will have to prove the benefits of the combination. In line with that, the two stocks have traded below the prices they were at when the merger was unveiled. "The stock is going to be a show-me story after the merger," a media investor recently told The Hollywood Reporter.

So much focus will be on how the firm's leadership will deliver on various promises, including $500 million-plus in targeted cost savings, as well as more difficult to model revenue synergies. 

Bob Bakish, who has served as Viacom's CEO, leads the merged company as president and CEO, while Joe Ianniello, who has been CBS Corp.'s acting CEO, is now chairman and CEO of CBS, overseeing all CBS-branded assets. They are supported by former CBS CFO Christina Spade as CFO ViacomCBS. Shari Redstone, who has been vice chair of both companies, is chair of the combined entity. 

"This is a historic moment," Bakish said Wednesday in a statement. "Through the combination of CBS’ 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. I am excited about the opportunity we have to serve our audiences, creative and commercial partners, and employees, while generating significant long-term value for our shareholders."

Other key executive appointments and departures were decided in recent weeks, including the confirmation that Jim Gianopulos would oversee the merged firm's filmed entertainment business and continue as chairman and CEO of Paramount Pictures, as well as expanded responsibilities for Chris McCarthy, David Nevins, Brian Robbins and Marc DeBevoise.

Privately held National Amusements, owned by the Redstone family, is the controlling shareholder of ViacomCBS. Under the all-stock deal, CBS shareholders got 61 percent of the merged firm, while Viacom investors got 39 percent.

The two entertainment firms had operated as separate companies since their split in 2006, and they had twice before explored a recombination without reaching an agreement. Shari Redstone had touted the benefits of scale, also suggesting the re-merged giant could look for further acquisitions down the line. Bakish echoed that when the deal was announced, saying: "We will continue to look at opportunities in the marketplace." Bankers and analysts have in the past mentioned the likes of Lionsgate/Starz and Discovery as possible future merger partners for the company.

Management has been touting the combined company's 22 percent share of the U.S. television audience, larger than Comcast, Disney, Fox, Discovery or WarnerMedia; its big content library; growing streaming services; and international upside as key growth opportunities. It has also said it sees its combined production business as an arms dealer of sorts to the highest bidders, including traditional networks and streamers, instead of hoarding content for its own brands. Bakish this year said the companies have 750 TV series that have either been ordered or are in production.

"I am really excited to see these two great companies come together so that they can realize the incredible power of their combined assets. My father once said ‘content is king,’ and never has that been more true than today," said Redstone when the deal was unveiled this summer. Bakish back then told Wall Street that the recombined company can accelerate the two firms' respective growth strategies and generate "significant synergy value." The company has targeted $500 million in cost synergies. In a recent filing, though, the companies said cost synergies could hit $540 million in 2020.

Wall Street watchers have predicted the savings would come from such corporate functions as legal, finance, human resources, government relations, communications and technology operations, which can be combined. Some have estimated the deal could lead to 2,000 layoffs. Bakish has emphasized that the cost savings target would not include content and marketing costs.

Bakish on a November earnings conference call also laid out four key areas of revenue synergy opportunities: distribution, advertising, content licensing, and streaming. "Any upside from these revenue initiatives would be over and above the $500 million cost synergies," said MoffettNathanson analyst Michael Nathanson in a recent report. And Goldman Sachs analyst Drew Borst wrote: "Management noted revenue synergies are the driving factor of the pending Viacom CBS merger."

Various Wall Street analysts have argued though that ViacomCBS will have to prove the financial and strategic benefits of the deal beyond the initial cost cuts over time. "Much of the merger remains to be hashed out," Macquarie Capital analyst Tim Nollen wrote in a recent report. "For now we sit on the sidelines."

Among the key challenges for the merged firm is the impact of cord cutting given Viacom's younger-skewing cable networks that pay TV giants have argued provide less value to them in the digital age. CBS has focused on fewer networks, mostly the CBS broadcast network and premium brand Showtime, along with offering direct-to-consumer services, leaving it less exposed to carriage disputes and possibly helping the combined company's other networks in carriage talks. But Viacom under Bakish has renewed various carriage deals with pay TV giants and focused on building new revenue streams, including in streaming, mobile and live events. 

"We seem to be the last people on Wall Street that don't see a CBS-Viacom merger as inevitable," Bernstein analyst Todd Juenger, who was a bear on the deal ever since first reports of merger talks, wrote this summer a couple of weeks before the deal was unveiled. "But we admit, our conviction is waning that the CBS independent directors will do what, in our strong opinion, is the best thing for CBS common shareholders, which is to avoid taking on the problems of Viacom."

Beyond future carriage deals, Wall Street observers will also keep a close eye on content spending at ViacomCBS. Analysts this fall reduced their near-term growth prospects for ViacomCBS after a regulatory filing with financial projections for CBS free cash flow, which came in well below analysts' expectations amid the company's plans to spend to beef up content for its various platforms.

Finally, Wall Street is also looking for signs of whether there are more deals to come. Content strength and improved scale have been key drivers behind Hollywood consolidation in recent years amid competition from streaming video and technology giants. The CBS-Viacom deal agreement comes after Walt Disney's $71.3 billion acquisition of large parts of 21st Century Fox and AT&T's $85 billion takeover of Time Warner.

Viacom and CBS said this summer in unveiling their marriage that over the past 12 months that they had jointly spent $13 billion on premium content, making it one of the largest media players as a combined entity. The merged firm has a  library of 3,600 film titles and 140,000 TV episodes, which is important as CBS All Access, Showtime OTT and Pluto TV take on Netflix, Amazon, Disney+, Apple TV+ and others.

Still, analysts say the new ViacomCBS looks small compared to peers and tech giants. Adding up the revenue that CBS and Viacom each logged in their latest fiscal years amounts to $27.4 billion, with operating income of $5.3 billion. In comparison, Disney had $59.4 billion in annual revenue and $15.7 billion in operating income. The company's market capitalization is also dwarfed by the likes of Disney, AT&T and Netflix.

"Even a merged CBS-Viacom is still arguably quite sub-scale compared to the other streaming players," Credit Suisse analyst Douglas Mitchelson wrote in a report earlier this year. And Alan Gould of Loop Capital said: "A combined CBS-Viacom will need to combine with additional content companies."

Juenger has been one of the most outspoken bears on ViacomCBS, writing in September after a meeting with Bakish: "We agree on topics such as the importance and challenge of cultural integration; the opportunity to improve disclosure; the linear TV business is likely to get smaller; new OTT models will likely generate lower returns, making it imperative to seek out increased total addressable market (TAM); and one cannot put the same content on multiple linear and OTT products."

But he added: "In some cases, our views diverge as a function of the degree of severity and downside risk — for instance, the cultural integration and the magnitude and rate of decline of linear TV. But perhaps the biggest divergence is on the final point ... ViacomCBS is not, in our opinion, carrying it through to its logical conclusion. If we agree that ViacomCBS (or Disney, or anybody) cannot put the same content on multiple services, but they desire those new services to significantly grow (and the old services not deteriorate) — they must then create more new content (which costs dollars), or re-purpose existing content (which foregoes licensing dollars and/or requires new content to backfill)."

Concluded Juenger: "We continue to believe ViacomCBS must take one of two paths: announce a transformation with no investment (no one will believe it), or announce an 'invest and grow' plan (we all take our numbers down). In either scenario, we believe the stocks will deservedly underperform." As a result, he has rated both Viacom and CBS shares at "underperform."

In comparison, Guggenheim Securities analyst Michael Morris is more of a bull. "We believe the fundamental bear case on ViacomCBS has been based on two factors: 1) that the company is over-exposed to traditional TV, which is in decline, and 2) several strategic elements are at odds with one another," he wrote in a recent report. "We don’t believe that an 'all-in' OTT approach for media companies is the only viable strategy, particularly as SVOD becomes more crowded. We ... see a unique, undervalued opportunity in a multi-pronged approach."

The analyst sees some challenges on the way, though. "The company has a strong core position to expand carriage and renew content arrangements," he argued, but acknowledged "that the process will take time while a lack of near-term milestones presents a potential headwind to a positive sentiment shift."

Added Morris: "Where we see the biggest gap between management intention and investor expectation is the allocation of resources in pursuit of growth. Specifically, we believe that Netflix’s success and the strategic decisions by Disney and Time Warner to pull content into exclusive, self-distributed models have led investors to believe that integrated production and distribution is the only potentially successful model."

Continued the analyst: "By contrast, ViacomCBS management believes that consumption is segmenting across formats and that the largest addressable market for scaled content providers will be presented to businesses with multiple exploitation formats. Specifically, Mr. Bakish and his team see media consumption patterns segmented across full-priced, traditional channel bundles, skinny bundles, subscription video on demand (SVOD), niche-SVOD, and free ad-supported platforms (AVOD)."

Morris argued that two key elements of this strategy are misunderstood by investors. "The ultimate balance of these five formats (and perhaps other formats not yet contemplated) from a consumer usage perspective is unclear, particularly when considered across geographies," he wrote. "By building assets across these segments, the company is creating a platform through which to best understand consumer behavior for the long term and to allocate programming investments based on market demand."

Concluded Morris: "At the core, we believe that the combined company’s $13 billion content budget (which is allocated across sports, entertainment and news genres — a strategic asset, in our opinion) is under-appreciated at the current valuation."

Barrington Research analyst Jim Goss also said that near-term headwinds in ViacomCBS' content and digital strategy could give way to longer-term upside. "The combined portfolio of digital SVOD and AVOD products provide for many ways to address consumer viewing behaviors, as well as opportunities to present new products in front of consumers," he wrote in a recent report. "For both companies, investments in digital products and original content for those services are creating near-term profit headwinds with anticipation for meaningful growth as those services gain scale."