Here Are 3 Reasons You Should Steer Clear Of ViacomCBS

Variety's Power Of Women: New York

NEW YORK, NY - APRIL 21: Honoree Shari Redstone attends Variety's Power Of Women: New York at Cipriani Midtown on April 21, 2017 in New York City. (Photo by Mike Coppola/Getty Images)

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One of the most boring deals of the year happened on August 13 — CBS and Viacom were reunited after a three year battle by National Amusement's Shari Redstone whose 96 year old father originally put the two together.

If there is any reason to pay attention to the deal it's this: Redstone is expected to pursue more acquisitions to achieve "scale," according to CNBC.

Beyond chum for investment bankers and merger arbitrageurs, I don't see this as a way to boost the value of what will become ViacomCBS. (I have no financial interest in the companies mentioned in this post).

The deal will put Viacom CEO Bob Bakish in charge of the company — which was known as Viacom until the two were split apart in 2006. This deal is a stock swap that valued Viacom at $11 billion on August 12 — exchanging each share of Viacom for .59628 shares of CBS — and giving CBS shareholders about 60% of the combined company. Layoffs are expected to yield most of the $500 million in combined cost savings, according to the New York Times.

ViacomCBS is a collection of content and distribution assets. These include Viacom’s Paramount film studio and MTV and Nickelodeon cable networks and CBS's TV broadcasting unit and book publisher Simon & Schuster. The company also includes CBS's digital TV service and Viacom's Pluto TV streaming service, according to the Times, which noted that the companies will be able to use their negotiating power to boost consumers' cable bills.

Most mergers fail because they don't pass the four tests for successful acquisitions. ViacomCBS flunks three of them and one is hard for me to judge.

Declining Industry

The cable TV industry is in decline thanks to streaming services like YouTube and Netflix. According to IBISWorld, In the five years ending 2019, industry revenue are expected to decline at "an annualized 1.4% to $90.0 billion, with providers offsetting a more substantial subscriber loss through rate hikes and upgrades. In 2019 alone, revenue is projected to fall 1.6%."

It's not all bad news — after all the slow rate of decline (a 3% five year annual rate of decline in subscriptions) means that plenty of people are still stuck with that expensive cable bundle (the average consumer buys 187 channels and watches 17) — and with price increases, there is still plenty of profit to be had — $11 billion in 2019, according to IBISWorld.

Nevertheless, the future is in streaming services — since millennials and GenZ are skipping cable TV altogether and accessing content on their smartphones, laptops, and tablets. The consumers who watch a mere 9% of the channels they buy will not be around to pay those rising cable bills for much longer.

The future is in providing consumers with a wider selection, higher quality, and a lower price accessible anywhere. That is called Internet Publishing and Broadcasting industry.

According to IBISWorld, it's a $141.1 billion industry growing at a five year annual rate of 13.6% thanks to dramatic increases in the number of online users, time spent online and mobile internet connections have dramatically increased. About 62% of the revenue comes from advertising while about 25% is a result of subscription sales. Internet Publishing and Broadcasting industry revenue is projected to rise an annualized 9.9% to $226.3 billion over the next five years, according to IBISWorld.

Combined Companies Not Better Off

In the short term, the combined companies may be able to force consumers to pay more. But that will just drive more people away from the bloated cable bundles. Meanwhile, there is no reason to believe that ViacomCBS has the kind of content production talent needed to produce the popular shows that have driven growth at Netflix.

But Redstone is reportedly not going to try to compete by creating compelling new content. Instead it wants to borrow money to buy content such as sports rights from other providers. Redstone believes that ViacomCBS is not big enough — compared to competitors — to borrow the money it will need to pay for that content.

That's the gist of a CNBC article which noted that at $50 billion, ViacomCBS's enterprise value — the market value of its equity and debt — is way below that of its rivals.

Legacy media providers like AT&T/Warner Media, Disney, and Comcast/NBC Universal sport enterprise values of $453 billion, $315 billion, and $305 billion, respectively.

Meanwhile Internet broadcasters are much bigger than that — For example, here are the enterprise values of Amazon ($924 billion), Apple ($922 billion), Alphabet ($707 billion), Facebook ($495 billion), and Netflix ($143 billion), according to CNBC.

Weirdly, Redstone believes that the way to solve its size problem is to make more acquisitions. According to CNBC, candidates include $39 billion enterprise value Discovery, a major player in European sports; Starz/Lions Gate/MGM which would combine Starz streaming with CBS's Showtime; and Sony Pictures — which owns movie and TV franchises.

Price Is Hard To Evaluate

Reuters reported that most of the premium that CBS is paying for Viacom is reflected in CBS's stock price. If CBS is not paying a premium for Viacom, then perhaps the anticipated $500 million in cost savings will make the deal pay off — in terms of the current value of the future cash flows from the combined companies.

But one thing is clear to me. The stock prices of CBS and Viacom reflect how far they have fallen in investors' eyes. Viacom at around $29 a share is 65% below its January 2014 all-time high while CBS's $48 is 66% lower than its August 2000 peak.

Integration Challenges Loom

Redstone decided to put Viacom's CEO in charge of the combined companies. But I am guessing there will be pitched battles inside the combined company to agree on how the merged companies will be organized and who will occupy the big boxes on the organizational chart that will emerge from those debates.

While that is happening, I would guess that key people will be distracted from taking steps to boost the revenues of the combined companies.

ViacomCBS is far behind its legacy media rivals and lags even further the Internet broadcasters which represent the future. Redstone's strategy of acquiring smaller legacy players and borrowing more money to license sports content will not put the company ahead of the pack.

For that I think it needs to develop compelling proprietary content. Nothing in this deal suggests that will happen soon.

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One of the most boring deals of the year happened on August 13 — CBS and Viacom were reunited after a three year battle by National Amusement's Shari Redstone whose 96 year old father originally put the two together.

If there is any reason to pay attention to the deal it's this: Redstone is expected to pursue more acquisitions to achieve "scale," according to CNBC.

Beyond chum for investment bankers and merger arbitrageurs, I don't see this as a way to boost the value of what will become ViacomCBS. (I have no financial interest in the companies mentioned in this post).

The deal will put Viacom CEO Bob Bakish in charge of the company — which was known as Viacom until the two were split apart in 2006. This deal is a stock swap that valued Viacom at $11 billion on August 12 — exchanging each share of Viacom for .59628 shares of CBS — and giving CBS shareholders about 60% of the combined company. Layoffs are expected to yield most of the $500 million in combined cost savings, according to the New York Times.

ViacomCBS is a collection of content and distribution assets. These include Viacom’s Paramount film studio and MTV and Nickelodeon cable networks and CBS's TV broadcasting unit and book publisher Simon & Schuster. The company also includes CBS's digital TV service and Viacom's Pluto TV streaming service, according to the Times, which noted that the companies will be able to use their negotiating power to boost consumers' cable bills.

Most mergers fail because they don't pass the four tests for successful acquisitions. ViacomCBS flunks three of them and one is hard for me to judge.

Declining Industry

The cable TV industry is in decline thanks to streaming services like YouTube and Netflix. According to IBISWorld, In the five years ending 2019, industry revenue are expected to decline at "an annualized 1.4% to $90.0 billion, with providers offsetting a more substantial subscriber loss through rate hikes and upgrades. In 2019 alone, revenue is projected to fall 1.6%."

It's not all bad news — after all the slow rate of decline (a 3% five year annual rate of decline in subscriptions) means that plenty of people are still stuck with that expensive cable bundle (the average consumer buys 187 channels and watches 17) — and with price increases, there is still plenty of profit to be had — $11 billion in 2019, according to IBISWorld.

Nevertheless, the future is in streaming services — since millennials and GenZ are skipping cable TV altogether and accessing content on their smartphones, laptops, and tablets. The consumers who watch a mere 9% of the channels they buy will not be around to pay those rising cable bills for much longer.

The future is in providing consumers with a wider selection, higher quality, and a lower price accessible anywhere. That is called Internet Publishing and Broadcasting industry.

According to IBISWorld, it's a $141.1 billion industry growing at a five year annual rate of 13.6% thanks to dramatic increases in the number of online users, time spent online and mobile internet connections have dramatically increased. About 62% of the revenue comes from advertising while about 25% is a result of subscription sales. Internet Publishing and Broadcasting industry revenue is projected to rise an annualized 9.9% to $226.3 billion over the next five years, according to IBISWorld.

Combined Companies Not Better Off

In the short term, the combined companies may be able to force consumers to pay more. But that will just drive more people away from the bloated cable bundles. Meanwhile, there is no reason to believe that ViacomCBS has the kind of content production talent needed to produce the popular shows that have driven growth at Netflix.

But Redstone is reportedly not going to try to compete by creating compelling new content. Instead it wants to borrow money to buy content such as sports rights from other providers. Redstone believes that ViacomCBS is not big enough — compared to competitors — to borrow the money it will need to pay for that content.

That's the gist of a CNBC article which noted that at $50 billion, ViacomCBS's enterprise value — the market value of its equity and debt — is way below that of its rivals.

Legacy media providers like AT&T/Warner Media, Disney, and Comcast/NBC Universal sport enterprise values of $453 billion, $315 billion, and $305 billion, respectively.

Meanwhile Internet broadcasters are much bigger than that — For example, here are the enterprise values of Amazon ($924 billion), Apple ($922 billion), Alphabet ($707 billion), Facebook ($495 billion), and Netflix ($143 billion), according to CNBC.

Weirdly, Redstone believes that the way to solve its size problem is to make more acquisitions. According to CNBC, candidates include $39 billion enterprise value Discovery, a major player in European sports; Starz/Lions Gate/MGM which would combine Starz streaming with CBS's Showtime; and Sony Pictures — which owns movie and TV franchises.

Price Is Hard To Evaluate

Reuters reported that most of the premium that CBS is paying for Viacom is reflected in CBS's stock price. If CBS is not paying a premium for Viacom, then perhaps the anticipated $500 million in cost savings will make the deal pay off — in terms of the current value of the future cash flows from the combined companies.

But one thing is clear to me. The stock prices of CBS and Viacom reflect how far they have fallen in investors' eyes. Viacom at around $29 a share is 65% below its January 2014 all-time high while CBS's $48 is 66% lower than its August 2000 peak.

Integration Challenges Loom

Redstone decided to put Viacom's CEO in charge of the combined companies. But I am guessing there will be pitched battles inside the combined company to agree on how the merged companies will be organized and who will occupy the big boxes on the organizational chart that will emerge from those debates.

While that is happening, I would guess that key people will be distracted from taking steps to boost the revenues of the combined companies.

ViacomCBS is far behind its legacy media rivals and lags even further the Internet broadcasters which represent the future. Redstone's strategy of acquiring smaller legacy players and borrowing more money to license sports content will not put the company ahead of the pack.

For that I think it needs to develop compelling proprietary content. Nothing in this deal suggests that will happen soon.

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I ditched corporate America in 1994 and started a management consulting and venture capital firm (http://petercohan.com). I began following stocks in 1981 when I was in

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