This is my first post in a few years, and I’ll ease my way in — I am doing a quick case analysis on media transactions and wanted to start with one of the more entertaining mergers as of late, CBS and Viacom.
On the 4th December 2019, CBS and Viacom officially, I mean, officially completed their merger. As far as mergers go, it was one of the more entertaining transactions I have followed. When it gets incorporated into an HBO TV series arc (Succession), you know it’s good drama. Overall, the deal seemed to give voting control completely to National Amusement, or moreso, Shari Redstone. In theory, she has the power to veto all decisions into her favor. It could be argued the need for her to control CBS/Viacom was the main reason for the merger, and why so adamantly National Amusement recommended the re-merging of the sister companies. While others suggest, the merger was the best way to control content from a unified standpoint and compete in the new digital landscape. In doing so, it allows for better defenses against the “streaming wars” and other content owners who are consolidating — like Disney/Fox and NBC/Universal.
From a technical standpoint, we’ve analyzed this merger, using IBPlaybook’s analysis structure, and seen who has the most to gain from it. More specifically, we look at what it means for the shareholder? The overall analysis suggests this was a beneficial merger for everyone involved. However, it commanded an adverse reaction in the markets when the merger was announced. Let’s take a more in-depth look at both these points to see where things stand.
With LionTree Advisors, Morgan Stanley, Centerview, and Lazard as fairness opinion providers in the deal, the board for both CBS and Viacom were well represented. One of the pain points in reaching an agreement between CBS and Viacom was the exchange rate that would be used in the stock price.
As the most contentious aspects of this deal, we see the exchange rate settle on a slight discount. Viacom shareholders would receive 0.60072 shares for every 1 CBS share. Looking a bit closer into the numbers, we see what looks to be a merger of equals. With a merger of equals, 0% to even a slight discount from market price is to be expected, with roughly a 60/40 ownership structure, which we see here.
Based on the investor presentation, we see the following:
This supports the merger of equals transactions, which also supports a slight discount in the exchange rate.
Accretive and Beneficial for the Shareholder
So why was this beneficial to the shareholders on both sides? Let’s look at the pro forma:
Using the original share price and the weight of operating earnings, we get the pro forma P/E:
From CBS’s perspective (pre-announcement):
From Viacom’s perspective (pre-announcement):
Based on data that was gained before the announcement, it was found that CBS shareholders stood to benefit from a 1.9% net value accretion. The same data also showed a net value accretion of 0.6% for Viacom shareholders.
As such, the analysis suggested that shareholders would benefit and gain from a merger. In that respect, the merger was a win for both sides.
Lots of Negativity
Unfortunately, there was much negativity surrounding the merger when it was announced. The leading argument was that CBS/Viacom acted too late. Many people admitted that a merger could be beneficial to defend against the likes of Netflix, NBC/Universal, Disney/Fox, but the benefits were too little too late. The content offerings from this merger may have added to their cumulative catalog, but the digitization of assets and move towards “online” was not improved. The executive comp and cost of the transaction was also proving to be costly. And the new ownership structure could be seen as damning to shareholders if they don’t believe Shari Redstone is a competent leader.
The arguments made against this merger make much sense. There’s a logic behind them, but it is still believed this will be a beneficial move in the long term. And if they’re able to maintain a differentiator like the NFL to keep their marketshare, CBSViacom’s health shall remain stable in the near-term. The aforementioned quantitative analysis shows what shareholders stood to gain from the joining of these two companies. It is now more a case of refining the product and company structure to ensure it can compete with the other content creators and platforms out there. That seems to be the main issue the markets had when the merger was announced, hence the negativity.
As of right now, it is hard to gauge the health of VIAC shares because of the COVID-19 impact on global stock markets. It has suffered a decline, much like others ill-prepared for streaming during this time. Still, we can look to the analysis of the merger to conclude that it was accretive and beneficial for both CBS and Viacom shareholders.