The US media community is now starting to be seen in terms of two done deals and one that some analysts feel must get done – the AT&T purchase of Time Warner, the acquisition of Fox assets by Disney pre-Christmas, and the potential for Apple to go after or create a Netflix, a move we have already dismissed as weak, but that doesn’t mean it won’t happen.
So now US financial analysts are looking at the deal we suggested back in late 2016, that is the merger of CBS and Viacom once more, from the businesses which separated back in 2006.
But seen in the context of the AT&T deal for Time Warner, investors are more worried about AT&T’s rival Verizon and how badly, so far, its approach to video content has been. It has missed the mark with Go90, although has yet to admit it, and its purchase of Yahoo! has yet to yield it any significant mobile advertising growth. Verizon currently sees phone video as being AVoD, the only major who thinks so in the US.
Investors feel Verizon needs to be more like AT&T and gain access to some traditional high quality video content. Never mind that the AT&T deal may never be done, given that it has been frowned upon by the Department of Justice, which says it will try to block the deal in court.
Investors are like that – it’s like anti-trust and market regulation are no-nos and they simply ignore the possibility that anyone could block a merger, until it actually happens. So the interesting question for investors is how badly cut up will Verizon be if it fails to buy a content provider of the stature of Time Warner? And this is particularly apposite in a market where Apple has to react, and Netflix is taking a content stranglehold, and where rival strategies, such as the Disney plans, are on the verge of materializing. Comcast’s manipulation of NBC is another endorsement that operators and content businesses do in fact fit together.
Back in 2006, vertical integration was seen as “bad thinking” by the US investment community, so much so that it punished Viacom for it, forcing it to split into CBS, Blockbuster (which went bust thanks to competition from Netflix) and Viacom, which included cable networks and Paramount studios.
Now a different kind of vertical integration – that with a pay TV operator and cellular network – is all the vogue, and the US stock market needs to value stocks based on the improbable future that all these deals complete.
When you see Viacom through those eyes you ask, “how it can get access to a cellular route to market, and benefit from this new vertical integration?” But take a look if you are Sumner Redstone’s daughter Shari, who as a major shareholder is in control of both CBS and Viacom, and you see only that if you sell Viacom to Verizon, you will have to sell it cheap as a distressed property – today it is worth just $13 billion – and your other property CBS, which she also controls, is left on its own, currently worth far more, at $22.7 billion.
Merged they are instantly worth $36 billion, but once the merger is shaken out, most likely closer to $45 billion. Which is why her first reaction to rumors is to pick up the phone to CBS CEO Leslie Moonves, and why her first reaction to market tittle tattle is the same – talk to the highly rated CEO Moonves, who remember is making her money by pushing CBS to the top of the US national broadcast players – and repeat the question, “So how do you feel about a merger now?”
It’s the same conversation they had in 2016, throughout 2017 and it is rumored this week they are having it again. The appointment of Bob Bakish as CEO for Viacom has halted the deteriorating results, but not the falling share price. Nothing has moved the Viacom price upwards until a few days ago when these talks of mergers took hold and put 10% on an already anemic price, valuing the company at one times revenues.
We know that Bakish wants to be bigger – he made a play to acquire Scripps, but radically undervalued the stock and it ended up merged with Discovery – in the process creating yet another rival to challenge Viacom’s cable leadership.
It is widely understood that Moonves as CEO of CBS, has said he has no interest in Viacom, but this is perhaps a different question. Perhaps the question is “Do you have an interest in buying Viacom, and then being acquired to run Verizon’s content business?”
It is a business which could include Go90, Edgecast, Verizon Media Services, and Yahoo and AOL, now trading together as Oath.
Moonves is not the type of guy to lose sleep because of what a rival is up to, but if he ever lost sleep it would be at the idea that Disney, once it takes on the Fox assets, can put together enough content to overpower his own CBS All Access and other OTT offerings, and do it with in-house technology and at least one overseas operator network (Sky). He already has the prospect of that happening in the US with AT&T and Time Warner.
It will be interesting to see what order these things happen in. Will CBS buy Viacom, and then wrestle up the price before knocking on Verizon’s door? We don’t think the Verizon management has the latitude to buy Viacom, try to make it work then go after CBS.
None of this HAS to happen, except that Shari Redstone needs to put $10 billion or so on the valuation of Viacom, and right now that can only happen with a transaction – because under the current market economics, Viacom can perform admirably, and there is so much going on elsewhere that the Viacom share price will not recover naturally.