Description

Viacom (VIAB) or CBS Corp (CBS) appear as an appealing opportunity in advance of their planned merger that is expected to close on Dec 4th. 

In this writing I will focus on the valuation and return profile for this investment. For a more detailed strategic overview of CBS business and its potential combination with VIAB, please see the excellent Rasputin998 idea posted on Aug 2018. 

Rasputin writing clearly articulates how investor fears about cord cutting and TV advertising decline are overstated for a global media company like ViacomCBS.

Consumers are still eager for quality content and willing to pay for it. While the platforms through which this content is consumed will progressively shift from cable TV to DTC, the opportunity for premium content producers to monetize their efforts should not decline.

ViacomCBS should have a strong competitive position in this changing industry landscape, with significant scale and capabilities that should enable it to compete with main players Netflix, Disney, Comcast / NBC and Discovery an continue to create significant owners earnings going forward.

Pro Forma Strategic Position

·     Largest share of US TV audience with 22%

·     Premium content production at scale with over $13bn spent over last 12 months

·     Growing DTC strategy with Showtime, CBS All Access and Pluto TV

·     Global Production and Distribution platform, including Paramount one of the 5 Global Film Studios

·     Estimated $500mm of run-rate cost synergies

Pro-Forma Financials

Base Case 

Assumes consensus Op Earnings growth for VIAB (+0.3%) and CBS (2.8%), flat D&A, flat Capex, $750mm annual dividend, remaining FCF to repay debt, 8x EV/EBITDA exit multiple.

Downside Case

Assumes consensus Op Earnings growth for VIAB (-1.7%) and CBS (0.8%), flat D&A, flat Capex, $750mm annual dividend, remaining FCF to repay debt, 6x EV/EBITDA exit multiple.

Best Case

Assumes consensus Op Earnings growth for VIAB (2.3%) and CBS (4.8%), flat D&A, flat Capex, $750mm annual dividend, remaining FCF to repay debt, 10x EV/EBITDA exit multiple.

Valuation Summary

Based on the range of scenarios presented the investment would suggest a total return to the end of 2022 of 1.4% to 113.7% with a median of 55.9% which would appear attractive in the current market conditions. 

The exit multiples in the various scenarios are supported by owner earnings yields which are 15.5%, 10.3% and 7.7% in the downside, base, best scenarios.

Risks

·     Acceleration of cable cord cutting dynamics, not sufficiently replaced by DTC growth and monetization

·     Economic recession impacting total advertising spent

·     Inability to realize cost synergies

·     Content production cost inflation creating headwinds for operating margins

Catalyst

• Release of pro-forma guidance for 2020 and 2021
• Realization of merger cost and revenue synergies
• Deleveraging, leading to share buybacks and dividends