Merger mania in Wall Street media shares was a profitable theme for me in 2018, particularly since I owned 21st Century Fox shares well before Walt Disney made its epic bid for the Murdoch clan’s flagship brand, the parent of President Trump’s beloved news channel. The Fox deal meant 65% paydirt for my trading book as the House of Mouse made a takeover bid for the House of Citizen Rupert.
CBS, the legendary US broadcast network that once gave the world Edward Murrow and Dan Rather, has been a media conglomerate in deep turmoil due to the harassment claims against its CEO Les Moonves, its head honcho for the past 15 years and arguably the most brilliant programming executives in the Western world. Les Moonves was the classic imperial CEO who paid himself more than a billion dollars even as network ratings slipped and manipulated his own board. Moonves finally resigned after the New Yorker magazine published multiple stories about his predatory behavior since the 1980’s. The CBS board was caught flat footed in the glare of this harsh media spotlight – and CBS shares plunged. This governance and ethics disaster has both created a money making opportunity as I feel that CBS, a content colossus in a Digital Age that craves content, is now takeover bait on Wall Street. Why?
One, Moonves was the main barrier to a potential merger between CBS and Viacom, a cable/media business whose controlling shareholder is also the family office of the Redstone clan (National Amusements). Yet now Les Moonves is gone. Shari Redstone wants to merge the two media giants.
Two, the next CBS board meeting is on January 31 and I cannot imagine how a merger with Viacom is not on the agenda now that the disgrace/exit of Moonves has immeasurably strengthened the hand of Shari Redstone. While Viacom has some sad sack cable channels, it also owns iconic properties like Comedy Central, MTV, Nickelodeon and Hollywood movie studio Paramount Pictures. Ironically, CBS and Viacom were a single business until a 2006 splitsville deal amid boardroom civil wars, palace coups and lawsuits.
Now 47, CBS trades at a rock bottom valuation of 9.6 times earnings, unjustifiably low for one of the world’s great media empires that can well grow EPS at 15% in 2019 and 2020. Six of the CBS board members who opposed the Viacom deal are now gone. CBS does not even have a new permanent CEO.
Three, I have tried to get guesstimates of post-merger cost synergies from my media research/I-banking contacts in New York. The consensus is anywhere from $1.2 to 1.4 billion or 35 – 40% of Viacom’s earnings before income and taxes.
A deal is a win-win scenario for both CBS and Viacom. Even if this deal does not happen, both CBS and Viacom are now in play. That much, at least, is certain. Robert Bakish, Viacom CEO, has excellent relations with Shari and would be the ideal candidate to run the merged company, the reason his arch-rival Moonves opposed it so bitterly. Thank you, Me Too, for this invaluable gift!
Four, in a world with Disney-Fox, Comcast-Sky or AT&T-Time Warner, scale redefines the media business. A CBS-Viacom merger would achieve this scale. This deal should have happened in 2018 but ego invariably wins over economics in corporate boardrooms. This is the one thing my profs. never taught me at Wharton.
Five, Viacom offers strategic synergies for CBS other than cost. After all, Nickelodean would expand CBS’s footprint into the lucrative kiddo market. As a Daddy who has endured Shrek, the Cartoon Network and Eurodisney in my time, I appreciate the vast content potential of children’s media. Global syndication and licensing platforms at Viacom would leverage CBS content. In the Age of Netflix and Youtube, the combined library of the two firms could deliver amazing revival show opportunities.
Six, I envisage an equity swap combination not too dissimilar to the aborted deal of 2018 or 0.6135 shares for every Viacom share. If I assume current valuation multiples hold, CBS shares could rise to 65 – 70 when a deal happens. CBS shares trade at 47 now in New York. Downside risk? Minimal since no deal means CBS is takeover bait for a Big Tech predator. (Who owns Youtube and has $102 billion in cash in Silicon Valley?). Disney paid 12 times earnings for Fox. Ma Bell paid 11 times earnings for Time Warner. The risk-reward calculus for CBS is a no brainer even though I concede that hope, alas, is not a strategy!
Also published on Medium.