By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
I had flagged ViacomCBS (VIAC) as my top deal stock pick on the New York Stock Exchange because its sharp bullish move from 37 to 42.60 in the past ten trading sessions suggested accumulation (who? why?) to me. Momentum can be as ephemeral as a desert mirage or springtime cherry blossom so it immediately jolts me out of my reveries when engrossed amid the green phosphorescent flicker of my Bloomberg screen. Hence my column on 13 January 2019 titled “Making money in a potential CBS-Viacom merger deal!”, where I recommended CBS as a real time merger candidate for Viacom once Les Moonves was axed for sexual harassment.
The CBS acquisition of Viacom in a merger midwifed by CEO Bob Bakish closed on 4 December, creating CBS Viacom, whose common and now controlling shareholder is Sumner Redstone’s daughter Shari Redstone. CBS Viacom now boasts some of the world’s most valuable media brands, distribution platforms, affiliate TV networks and is now the largest US television network by viewership, 20% of the US market. Its media brands include the Hollywood movie studio Paramount Pictures, CBS All Access, Showtime, CBS News, Simon and Schuster, Monday Night Football, MTV, Nickelodeon, TV production studios and the digital streaming Pluto TV.
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Wall Street media analysts estimate the merged company will generate $30 billion in revenues and $6.36 billion EBITDA in 2020. This means 2020 earnings per share (EPS) will be $6.30 and the shares closed at 42.60 on the NYSE as I write. This is a compelling deep value opportunity, even if I concede that a network that once hired my heroes Edward Murrow (who covered the London Blitz for CBS Radio), William Shirer (who covered the rise and fall of the Third Reich for CBS Radio) and Dan Rather (the anchorman who brought the wars in Lebanon, Afghanistan and Iraq-Iran in the 1980’s for the CBS News broadcast network) is definitely Old Media, thanks to the scale of cord cutting in its seven cable channels.
There are several catalysts that convinced me to buy the shares for my own accounts and for friends/family accounts I manage. One, the valuation of ViacomCBS at just above 7 times earnings sets us up in a low risk reward calculus. I can easily design a 25% total return trade on ViacomCBS where my worst possible outcome is dead money in 2020, using Chicago Board Options Exchange (CBOE) listed options. Two, the scale of free cash flow (free cash flow yield is a stellar 11% now) means that at least $700 million each in stock buybacks in 2020 and 2021, a scenario not priced into VIAC at current levels.
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Three, this content empire is a potential takeover candidate for a media/technology firm with digital media ambitions and an established installed base. This is a dominant trend in Madison Avenue and Wall Street – think AT&T Time Warner, Comcast NBC, Disney ABC/Fox. Apple, with a valuation of $1.2 trillion will have no problem snapping up a $25 billion media/content empire in Wall Street using its super currency (up 75% in 2019 – Tim Cook is the Superman of Silicon Valley for me now, even though he does not come with a Lois Lane, though a Louis Lane is possible!) in a share swap merger deal.
Four, if any potential acquirer must be willing to pay a nosebleed takeover premium to Shari Redstone, whose family holding company National Amusements, owns a controlling strategic stake in ViacomCBS. Five, 2020 is a Presidential election year and thus a money spinner for America’s preeminent broadcast TV network’s bottom line. Six, the Wall Street grapevine suggests CEO Bob Bakish will upgrade the lowball $500 million post-merger cost/revenue synergies target announced at the time of the original deal in August. Seven, the debt in the combined company will be reduced by management and thus boost balance sheet leverage ratios.
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Eight, Bob Bakish has made it clear that he will not fight the Darwinian streaming media wars with Netflix, HBO or Disney. His focus will be obsessively on cashflow generation via licensing content to third parties, TV affiliate fees and content syndications. Nine, in a world where the 10-year US Treasury note yields a mere 1.90%, ViacomCBS’s prospective dividend yield in 2020 will be a solid 3%. At 6.5 times enterprise value/EBITDA, I believe the franchise is undervalued on Wall Street in a frothy, inflated stock market now trading at 20 times operating earnings.
Ten, the migration of advertising to digital media platforms and disruptive streaming media technologies will refocus management efforts to boost content monetization, strategic alliances/licensing deals and global growth opportunities. ViacomCBS can leverage its priceless film/TV content libraries in this effort. After all, ViacomCBS has a colossal 20% market share in US TV viewership but only 10% affiliate fee share.
Eleven, I expect Bob Bakish will announce the sale of more non-core assets, such as the recent sale leaseback of the historic CBS building in midtown Manhattan.
Risks? One, bidding wars for sports content, mainly Monday Night Football. Two, a rise in Pay TV subscriber losses as streaming become ubiquitous. Three, Hollywood box office flops at Paramount Pictures. Four, cost overruns in content generation like TV pilot shows and movies. Five, a US recession that guts ad spending. Yet Mr. Market has priced these risks in his lowball valuation metrics on ViacomCBS. My take? ViacomCBS rises to 56 sometime in autumn 2020 as Bob Bakish works his magic on the business even if no deal emerges.