By Marcus Falck and Oscar Kock (Stockholm School of Economics), Orlando Poraqi and Alessandro Carleo (Bocconi University) - Date: 10/11/2019
Overview of the Deal:
Acquirer: CBS Corporation (CBS US)
Target: Viacom Inc. (VIA US)
Transaction Value: $12bn
Announcement Date: 13th August 2019
Acquirer Advisors: Goldman Sachs, JP Morgan, Moelis & Co, Lazard Ltd, Centerview Partners LLC
Target Advisors: Morgan Stanley, Evercore Partners Inc., LionTree Advisors LLC
Back in 2016, National Amusements – a theater company and mass media holding company, published a letter it has sent to Viacom and CBS. It recommended the two companies to merge – considering a possible reunion a decade after the companies got separated. National Amusements controls around 80% of the voting shares of both Viacom and CBS and is privately owned by Sumner Redstone and his daughter Shari Redstone.
“We believe that a combination of CBS and Viacom might offer substantial synergies that would allow the combined company to respond (…) to the challenges of the changing entertainment and media landscape. (…) we would like both companies’ boards to consider a potential re-combination of the companies.” - National Amusements letter to CBS and Viacom
In fact, 13 years after the entertainment empire was split in two, Viacom and CBS managed to find an agreement to re-merge, the latest in a recent rash of entertainment industry megadeals.
“The optimal structure would be an all-stock transaction in which the stockholders of each company would receive shares in the combined company of the same class as they currently hold.” - National Amusements letter to CBS and Viacom
The deal was announced on August 13 this year and structured as an all-stock merger, where each of Viacom’s Class A voting share and Class B non-voting share converts into 0.59625 Class A voting share and Class B non-voting share of CBS, respectively. Thus, giving the shareholders of CBS 61% and Viacom shareholders 39% ownership of the new company, ViacomCBS Inc.. The transaction, expected to close in the end of 2019, will result in a combined entity with more than $28bn in revenue and a market capitalization of approximately $30bn.
Viacom and CBS laid out the strategic rationale for the merger arguing that the re-merged media company as a whole would be in better shape to survive the cable TV cord-cutting that has undermined the industry's economics, and to produce content for buyers like Netflix and Amazon.
Company Details (Acquirer – CBS Corp.)
CBS Corporation (NYSE:CBS) is a US-based multinational media company which operates broadcasting, television production, and publishing businesses. More precisely, CBS operates television and radio stations, produces and syndicates television programs, publishes books, provides online content, as well as outdoor advertising Customer Resource Management (CRM) solutions for enterprises.
- Founded in January 2006
-Co-President & Acting CEO: Joseph Ianiello
- Co-President & Chief Advertising Revenue Officer: Jo Ann Ross
- Chief Technology Officer: Philip R Wiser
- Number of employees: 12,700
- Market Cap: $13.911bn - EV: $24.07bn
- TTM Revenue: $15.26bn - LTM EBITDA: $3.63bn
- EV/Revenue: 1.58x - EV/EBITDA: 7.71x
Company Details (Target – Viacom Inc.)
Viacom Inc. produces media entertainment content. The Company creates and acquires programming for television, the Internet, mobile devices, video games, and other consumer electronics products. Viacom also produces, finances, and distributes motion pictures to movie theatres and on DVDs, television, digital and other platforms internationally.
- Founded in December 2005
- President/CEO: Robert M Bakish
- Chief Marketing Officer: Dario Spina
- Chief Transformation Officer: Jose Tolosa
- Number of employees: 11,200
- Market Cap: $9.027bn - EV: $18.49bn
- TTM Revenue: $12.89bn - LTM EBITDA: $2.79bn
- EV/Revenue: 1.43x - EV/EBITDA: 6.12x
Projections and Assumptions
As a drastic shift in audience behaviour has emerged over the last several years, viewers have moved away from traditional cable and satellite TV subscriptions in favour of streaming services and social media. This permeating trend within the entertainment industry has given rise to the continuous growth and popularity of massive streaming services’ like Netflix and Amazon Prime Video, but also forced upon large-scale consolidation within the traditional media sector looking to capture what is left of it.
The traditional media companies have adapted to the changing demand by horizontally integrating through extensive M&A activity. Last year AT&T acquired HBO, CNN, TBS and the Warner Bros. Studio, all part of the Time Warner conglomerate, in an $85bn deal; and in March this year, Disney completed its $71bn acquisition of 21st Century Fox. In terms of size, the merger between CBS and Viacom will in comparison be relatively small, and the market capitalization of the new company is still trumped by Netflix’s $126bn, Comcast’s $201bn, Disney’s $237bn and AT&T’s $286bn.
Even though the equity value of ViacomCBS will remain low compared to larger incumbents, the merger will put the new company in a good position for future growth in both the streaming space and in the cable and satellite television space. The combined entity will have an increased presence in streaming with its access to a library of 140,000+ television episodes and 3,600+ movie titles, that it can package into CBS’s current streaming services: CBS All Access and Showtime. Moreover, CBS Viacom will have the largest TV audience in the U.S., with 22% of the viewership share, followed by Comcast (18%), Disney and Fox (14% respectively).
The merger model had presented an EPS accretive transaction and Viacom’s stock rose 2.4% and CBS 1.4% on the day of announcement but have since then dramatically fallen 19% and 23% respectively. This shortfall stems from investors’ uncertainty regarding the synergies of the merger and the negative revisions to key metrics that were published in the Form S-4 filing, a document that details material information about the companies involved in an M&A transaction. The new company projected less profit and lower cash flows between 2020–2024 than investors had anticipated. Furthermore, these investor projections of the development of each firm’s share price is subject to the transaction’s regulatory approval and other closing conditions.
CBS Viacom has projected $500m in annual cost synergies within 12-24 months of closing, which is expected to happen in early December this year. Though the exact details of the cost synergies still have not been outlined, Viacom’s CEO Bob Bakish, has related the synergies to job eliminations, sourcing benefits and real estate benefits. Since the two companies have been merged before and have been heavily influenced over the years by the majority voting holder of each entity, National Amusements, the managerial and cultural integration will most likely not face much difficulties; which may allow for a more aligned vision from inception that will strengthen the merged entity in future pursuits.
CBS and Viacom both pursue Direct-to-Consumer business models, i.e. offering in-house production through their own platforms, but with different strategies. CBS is characterized by a subscription strategy, and Viacom by an ad-supportive free strategy. The merger will enable these strategies to intersect and draw upon the benefits of each; first by bringing consumers in through the free space where some can stay and value is created through ads, and others can be moved on to subscription products, where the new company can sell one or more packages to the consumer. This multifaceted DTC ecosystem is especially effective in counteracting churn rates. Since churn from the subscription model formerly incurred direct loss of consumers, with this new ecosystem, they can be easily moved to the ad-supportive free model, hence enabling lock-in effects.
In the turmoil of the media and entertainment industry, categorized by fewer and larger players, this merger brings increased financial scale for ViacomCBS to pursue significant organic investments in programming and innovation. Moreover, it positions them well to take advantage of opportunities that may emerge in the marketplace from an M&A perspective. We can expect further M&A activity from the combined entity to face its competition, as Shari Redstone, the President of National Amusements and incoming Chairman of the Board for ViacomCBS, has already expressed her intents for further inorganic growth.
Risks & Uncertainties
Netflix can keep its edge in a streaming video industry undergoing radical change even as Disney gives it a run for the money. There is the expectation that the two will control 60% of the U.S. market by 2024. But a packed field of streaming platforms will beg for a shakeout as content costs surge. The situation may become precarious if subscriber growth stalls while content spending keeps soaring. In the streaming wars, cable operators once looked like losers. That bearish sentiment turned more bullish due to their broadband stronghold. App aggregators such as Roku should also join the winner's circle as consumers try to manage a multitude of streaming apps. The same subscription fatigue should spur growth in free, ad-supported video. Traditional media companies, which have high exposure to affiliate fees, are most at risk.
Moreover, since the shares of CBS and Viacom sank just 1 week after the announcement – having been soaring due to the positive market reaction and the accretive nature of the EPS, it is not clear yet how and which synergies will effectively make the NewCo stand out from the competition. In addition, as already mentioned above, the negative revisions to key metrics in the S-4 filing played a crucial role too. However, National Amusements already demerged into two separate companies Viacom and CBS years ago – since the first was far more profitable than the latter having brands such as Nikelodeon and MTV in their portfolio, which increased their revenues. So, what’s the point of re-merging?
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