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Before CBS Corp. and Viacom officially started their talks about a third attempt to recombine earlier this year, some observers cited potential cost synergies of $1 billion. But when the companies finally unveiled their deal agreement on Tuesday, they provided a target of $500 million in cost savings from merging.
Where does this gap come from? Insiders and bankers say that the difference between some of the high figures and the actual target is due to the cost savings the two companies’ management teams have already reached in the run-up to the mega-deal and the fact that their businesses have little overlap beyond the corporate side of the firms.
“It is more about savings by combining the back offices than any overlap in the brands, which are distinctive and complementary,” one company insider tells The Hollywood Reporter. “[Viacom CEO] Bob [Bakish] and [acting CBS CEO] Joe [Ianniello], since Leslie Moonves left, have both managed and cut costs.”
Wall Street analysts have moved toward the cost savings target unveiled by the companies in recent weeks. MoffettNathanson analyst Michael Nathanson earlier in the year worked with a $750 million synergies assumption before in mid-July citing a lower $500 million figure.
“Press reports have suggested $1 billion in cost synergies from this deal,” he wrote in a report in July. “However, unlike the other media mergers that we have seen recently (like Scripps-Discovery or Disney-Fox), the lack of direct overlap in CBS and Viacom’s core operations leads us to believe the synergies could end up more limited than in the two other combinations, i.e. $2 billion in anticipated synergies in the Disney/Fox deal. We assume $500 million in synergies for now, until we learn more about where the combined company could find even more savings.” Loop Capital analyst Alan Gould in early August also said he expected “management will guide to $500 million of synergies.”
“The transaction will be earnings per share accretive and is expected to deliver an estimated $500 million in annualized run-rate synergies within 12-24 months following closing, with additional strategic benefits,” CBS and Viacom said Tuesday, confirming analyst suspicions without detailing potential cost savings areas. Sources confirmed that the figure was for cost savings and didn’t include potential revenue synergies. (Ianniello said on a call with Wall Street analysts that there would be billions of dollars in revenue upside from such areas as affiliate fees, advertising, driven by advanced advertising, and direct-to-consumer business.)
So where will the cost savings come from? The deal announcement didn’t provide much immediate detail. And Ianniello in a staff memo said that “Bob [Bakish] and I will ensure a smooth and steady integration of our two great companies,” but didn’t provide details.
On a call with Wall Street analysts later in the day, Bakish said the cost savings target would not include content and marketing costs.
One banker, though, suggested such corporate functions as legal, finance, human resources, government relations, communications and technology operations as among those that can be combined to provide savings.
MoffettNathanson analyst Michael Nathanson in a report did this cost savings math: “If we assume 40-60 percent of CBS and Viacom’s combined corporate expenses could be eliminated, we estimate savings in the range of $200 million to $300 million are possible. There could be some additional synergies related to advertising and affiliate sales personnel, plus the limited duplicative distribution staffs at Paramount and CBS Production, which we estimate could range from $200 million to $300 million. In recent years, both NBC and Fox have unified their cable and broadcast sales divisions which has driven cost savings and (hopefully) improved market share. Within the studios, most companies have one head of international distribution who bundles in film and TV product sales. Adding it together, $500 million in cost
synergies seems reasonable to us and perhaps a tad low.”
Key top executives from both sides will form the leadership of the combined company. They are Viacom CEO Bakish as the president and CEO of the merged firm; Ianniello, who will oversee the CBS-branded assets as chairman and CEO of CBS; and CFO Christina Spade, currently CFO of CBS.
But cutting costs by going from two corporate back-office operations to one is also expected to include the departure of some other managers. One who has already agreed to leave the merged company is Viacom CFO and executive vp Wade Davis.
“One change we already know will happen is that Wade Davis will depart in connection with the closing of the transaction, as we’ve determined there isn’t a senior operating role at the corporate level of the merged company that would be consistent with the full breadth of his experience, expertise and the scope of his current role at Viacom,” Bakish wrote in a staff memo. “Wade has been one of Viacom’s most vocal and passionate champions. … We’re so grateful for his many contributions, and that he’ll be with us through the closing of the deal.”
Bakish in his memo also asked staff to continue what he described as great work. “Despite changes in our company and the industry — as well as the continued speculation of a potential merger — you’ve focused. You’ve executed. And, you’ve delivered, which makes us a much stronger company than we were just a few years ago,” he wrote. “I’m hoping you can maintain similar focus and determination in the months ahead as we work to close the transaction.”
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