Description

We are keeping this one fairly short, for background of ViacomCBS you can read a number of older posts on VIC.

ViacomCBS Inc. is a significant under-performer YTD, down approximately -16% versus ~ +5% on the S&P 500. Viacom & CBS completed its merger on Dec. 4th 2019, and Venetian recently pitched it prior to the merger and gave a broad overview of the business. For us, this is not a long-term hold type of business, we are looking to be more tactical by getting in front of a few upcoming catalysts (none of which have been mentioned on VIC) that look to materialize over the next 12-18 months. ViacomCBS trades at roughly 5.90x 2020 EPS, and 5.2x 2021 EPS, which puts it alongside some of the cheapest names in the stock market including; big box department stores, auto manufacturers, airlines, and some upstream E&Ps. We think the quality of the business is substantially better than those aforementioned cheap segments of the market and at the current price there is little value being attributed to accretive asset disposals, synergies (both rev and cost), accretive stock buyback, and a big call option on M&A.

Discovery Parallel:

Discovery announced the acquisition of Scripps Networks for $12bn in July of 2017, and initially the stock sold off on concerns going into the deal, the stock at one point sold off almost 50%.

At the time there were significant concerns about leverage and synergy targets back in late 2017, as well as secular concerns with cord cutting. Given all these concerns there was an inflection with a series of positive announcements that lifted the stock materially off the lows including:

• Upsized synergies $350m→ $650mn

• 12-year global deal to stream the PGA tour

• Announcement of that Discovery’s networks would be added to Sling and Hulu by year-end, leading to above average affiliate growth.

• Material deleveraging.

While Discovery was trading at less than 5x FCF, it ended up doubling in short order and has remained at roughly those levels since topping out in 2018. While ViacomCBS is clearly not as cheap (on a current FCF basis) as Discovery was at those trough levels, we think the market is drastically underpricing the FCF growth that will occur over the next 2 years and the substantial non-core asset sales which could provide ample capital for a massively accretive buyback.

Catalysts

To help rationalize the combined entity ViacomCBS has been entertaining the possibility of selling-off significant non-core assets. ViacomCBS has a world-class content library and leadership position with over 3,600 films and 140,000+ TV episodes. While most of the assets are core, there are significant non-core assets that could potentially be sold to streamline the business. There is significant opportunity to enhance value through a combination of:

• Accretive asset sales, including the sale of CBS’ headquarter building (~$1bn), Simon & Schuster ($1.0-1.2bn EV; contributes $150mn EBITDA), and CNET which was purchased in 2008 for $1.8bn-- estimated EV ~$1bn. All combined this could potentially raise $3.0-3.2bn in cash. Viacom18 is another asset that could be sold, was recent valued at around $2bn w/ a small transaction in 2018, current value likely in the $1.75-$2.0bn range

• Potentially positive announcements, first earnings (Feb. 20th) call since deal closure, possibility to increase synergy targets (Discovery analog: upped its synergy target from $350mn → $650mn). Legacy Viacom cable networks are likely to get added to Hulu and YouTube in 2020 as CBS station deals are up for renewal. Renewal of NFL contract in 2H 2020. Further transparency on VIAC’s direct-to-consumer offering with the inclusion of Paramount content.

• Significant dry powder to execute on accretive buybacks (legacy $2.5 CBS buyback), 15-20% of the current market cap by year end (assuming Black Rock building sale) and a ~ 3.0x leverage ratio.

• M&A target, while not talked about to a great degree we think there are a significant number of large internet/tech names that view ViacomCBS as a highly strategic asset within their media ecosystems. On day one of an acquisition a company like Apple could have a competitive assortment of media properties to drive its roadmap and compete w/ the likes of Amazon, Netflix, HBO, and Disney etc…

• Multiple re-rating, we think if Viacom CEO Bob Bakish can execute on his core growth strategy investors could easily see the multiple re-rate upward by at least a couple turns. 

• Paramount output deal leaves Epix in 2022.

Discounted Multiple

The discounted multiple in our view doesn’t make a whole lot of sense given that Discovery is now trading at a 2.5x turn premium on 2020 EPS to ViacomCBS, and almost half the multiple of Fox. If you take into account the synergies the gap widens even further. On top of this, investors are giving no credit to profitless Paramount which has been undergoing a significant turnaround. Paramount has not generated any meaningful profitability in several years, however, its valuation is material and could be worth as much as 15-20% of the market cap based on comps. 

Clearly to get this sort of discounted multiple there are other issues at play, and that relates to capital allocation and control (Sherri Redstone) over the company. We think part of the concern resides in the capital structure issues with regards to the merger, and the significant shareholder push-back from CBS investors during the merger process. The merger details gave no visibility on target leverage or a definitive buyback program. We think there are still significant investor questions around dilutive M&A, merger execution, and overall complexity of the portfolio of assets.

Summary

While certainly there are secular pressures with regards to linear TV, we believe the gap between ViacomCBS and what we consider to be lesser media peers is far too wide.  ViacomCBS now has the scale needed to negotiate better terms with regards to Hulu and YouTube TV, as well as substantially under appreciated revenue synergies with the ability to gain additional carriage of Viacom on virtual platforms. We don’t want to complicate the simple catalyst driven idea, because at the end of the day the stock is not going to move unless one of these catalysts hit. Overall, we think the assets in totality are far too cheap given the levers that can be pulled and significant downside protection in the absolute valuation. If just a few of the catalysts hit we think the stock could return north of 30% in fairly short order (sub 6 months), and a home run (+100%) in an M&A situation.

Catalyst

• Building sale
• Simon & Schuster sale
• CNET Sale
• Viacom18 monetization
• Earnings update on strategy, leverage targets, and synergies
• Multiple re-rating