Viacom (VIAB 29.78, +0.51, +1.74%) is trading modestly higher after RBC
upgraded the stock to Outperform this morning. The upgrade was predicated on
renewed expectations of a merger with CBS (CBS 50.02, +0.36, +0.72%).
Merger prospects have improved since Viacom was able to reach a new carriage deal with AT&T's (T) DirecTV two weeks ago. The two companies were in negotiations over whether DirecTV would continue to pay for and offer its subscribers Viacom's flagship cable networks like Nickelodeon, Comedy Central, and MTV.
Following that deal, the NY Post reported that the two companies would once again resume merger talks.
It seems like a matter of when not if the two media companies merge. A deal has been the desire of the Redstone family, whose National Amusements owns a controlling stake in both companies.
The two companies were in negotiations last year. They had reportedly agreed on a price (share ratio in an all-stock deal), but the primary hurdle to a deal was who would become number two in charge of the combined company and the successor to Les Moonves. The CBS CEO wanted his COO Joe Ianello to be the successor, but Shari Redstone (Vice Chair of both Boards) wanted Bob Bakish, her hand-picked Viacom CEO to run the company after Les Moonves retired.
As this battle ensued last year, Les Moonves was forced to step down after a sexual harassment scandal. That meant it was just matter of time before the merger would eventually take place.
Joe Ianello has been interim CEO for seven months. The uncertain future of CBS as a standalone entity has seemingly been a roadblock to finding a permanent CEO.
Some CBS investors initially pushed back on a deal with Viacom. CBS is the number one network in the US. In February, CBS reported 8 mln direct-to-consumer subscribers between CBS All Access and Showtime, nearly two years ahead of schedule. CBS is targeting 25 mln subscribers for both services by 2022.
Viacom's cable networks are more vulnerable in a media landscape that has seen streaming content overtake traditional cable bundles. That said, Bob Bakish has done fairly well in stabilizing the business. Viacom has guided for mid-single digit revenue growth in constant currency with domestic affiliate revenue growth this year.
Notably, the all-stock deal is not expected to garner much of a premium for Viacom shareholders. The big appeal of a potential merger comes in the form of cost synergies, which could total $1 bln.
As a result, RBC recommends owning both CBS and Viacom shares. CBS trades at just over 8x EV/EBITDA estimates while Viacom's valuation is at the low end of the industry, trading at just under 7x EV/EBBITDA estimates vs. the 9x average for the group.
A CBS-Viacom tie-up would be the latest in a round of heavy consolidation in the media industry that has been disrupted in the age of direct-to-consumer streaming content and social media.
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