Will Newly-Merged ViacomCBS Boldly Go After Other Media Assets?

Star Trek CBS Viacom Illo - H - 2019
Agata Nowicka

Bob Bakish and Joseph Ianniello will preside over a film and TV empire that brings together 'Star Trek' and 'Mission: Impossible' — but many believe it needs to go on a buying spree to contend with Disney and Netflix.

When Sumner Redstone split CBS from Viacom in 2006, he was busting up a major conglomerate in the hope that the assets would be better appreciated separately for their different qualities — CBS for its steady reliability and Viacom for its riskier, hit-driven growth potential. It didn't quite work out that way, and now daughter Shari Redstone is struggling to turn a couple of relatively small companies into a single entity.

On Aug. 13, CBS and Viacom said that they plan to recombine to create a company valued at about $31 billion — not exactly in the league of AT&T-WarnerMedia ($255 billion), or even Netflix ($137 billion). If a deal closes, the new entity — dubbed ViacomCBS — would aim to do battle not only with those much larger conglomerates but also with tech giants like Google and Apple.

To do that, Bob Bakish, the Viacom CEO who will take that role at the combined company, will need to gobble up a few more assets. Lionsgate would make a tasty morsel, many analysts say, as would its Starz channel, which CBS already has offered to buy for $5 billion, only to be rebuffed.

One banker suggests that Discovery, in which John Malone owns a big stake, might make the most sense. The company was floated as a takeover target for the combined CBS-Viacom just a few months ago. "Even a merged CBS-Viacom is still arguably quite sub-scale compared to the other streaming players," notes Douglas Mitchelson of Credit Suisse.

Given Viacom's past experience buying international TV businesses, such as Channel 5 in the U.K. and Telefe in Argentina, and the fact that the companies on Tuesday highlighted the growth opportunities abroad for the combined firm, foreign assets could also be on ViacomCBS' radar.

ViacomCBS also might look at acquiring AMC Networks, MGM or even Rupert Murdoch's slimmed-down Fox Corp., but even if Bakish managed to roll his soon-to-be-company into all of those, the hodgepodge's enterprise value would still be shy of today's giants.

"A combined CBS-Viacom will need to combine with additional content companies," says Alan Gould of Loop Capital. Beyond market-cap constraints, ViacomCBS also has lower financials than its peers. Adding 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 the deal, 61 percent of the company goes to CBS investors, while 39 percent goes to Viacom's.) In comparison, Disney had $59.4 billion in annual revenue and $15.7 billion in operating income.

The good news for ViacomCBS is that the deal shouldn't concern regulators, whose job is to fret over presumed threats of monopolistic practices. Even in their primary business of television advertising, a combined ViacomCBS would have collected about $2.7 billion in the most recent quarter, less than Disney's $3.4 billion.

ViacomCBS will boast, however, a larger share of the U.S. television audience, at about 22 percent compared with 18 percent for Comcast and 14 percent each for Disney and Fox, per data from Nielsen and SNL Kagan. The ViacomCBS library will contain 140,000 TV episodes and 3,600 film titles, an impressive load to draw on as its CBS All Access, Showtime OTT and Pluto TV do battle with Netflix and its ilk, including the upcoming Disney+.

Still, the merger may be "too little and too late," says Hal Vogel, CEO of Vogel Capital Management and a former entertainment industry analyst. "It will take at least 18 months to get the combo managed smoothly, and meanwhile it will still be a relatively small company."

On the plus side, Mitchelson notes that CBS-Viacom will be roughly as profitable as NBCU and that it will be spending an estimated $15 billion on content this year, nearly as much as WarnerMedia.

In the meantime, ViacomCBS employees need to worry for their jobs as the company seeks to save $500 million annually in synergies. Viacom CFO Wade Davis will leave the company, but acting CBS CEO Joseph Ianniello will stick around as chairman and CEO of the CBS-branded assets (so he loses Showtime and Pop TV) while Jim Gianopulos, chairman and CEO of Viacom's Paramount Pictures, told staffers Aug. 12 that he signed a new multiyear contract that will keep him atop the studio and that president of production Elizabeth Raposo also re-upped. Some suspect that Gianopulos craves a merger of his own — perhaps marrying Paramount with Sony Pictures.

"The new company will not have the financial and management capability to make a big acquisition any time soon," says Vogel. But, conversely, argues CFRA Research analyst Tuna Amobi, "I would expect the combined company to have ample scale to be a potentially formidable competitor while also likely to be an active player in future opportunities for further industry consolidation."

This story first appeared in the Aug. 14 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.