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Street Fight: Analysts Diverge On CBS, Viacom After Companies Announce Merger

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Credit Suisse expects the merger to remove the uncertainty overhanging the two companies

On Tuesday, CBS (CBS) and Viacom (VIAB) finally announced they have entered into a definitive agreement to combine in an all-stock merger, creating a company with over $28B in revenue. Following the news, Bernstein downgraded CBS to Underperform, while BMO Capital and Macquarie moved to the sidelines on CBS and Viacom, respectively. More bullish on the stocks after the deal, Bank of America Merrill Lynch analyst Jessica Ehrlich upgraded CBS to Buy and Guggenheim analyst Michael Morris raised Viacom’s rating to Buy, with the latter arguing that the combined company will be more strongly positioned to leverage its content pipeline to pursue growth opportunities.

CBS, VIACOM MERGER: 

CBS and Viacom announced on Tuesday they have entered into a definitive agreement to combine in an all-stock merger, creating a company with over $28B in revenue. Under the terms of the transaction, which had been telegraphed by recent news reports, each Viacom Class A voting share and Viacom Class B non-voting share will convert into 0.59625 of a Class A voting share and Class B non-voting share of CBS, respectively. The companies added that the combined entity will be named ViacomCBS at closing, which is expected to occur by the end of calendar year 2019. Existing CBS shareholders will own approximately 61% of the combined company and existing Viacom shareholders will own approximately 39% of the combined company on a fully diluted basis. Bob Bakish, President and CEO of Viacom, will become President and CEO of the combined company. Joe Ianniello, President and Acting CEO of CBS, will become Chairman and CEO of CBS and will oversee all CBS-branded assets in his new role.

SYNERGIES TO ‘PALE IN COMPARISON’ TO VIACOM’S PROBLEMS:

Following the company’s confirmation of a deal to combine, Bernstein analyst Todd Juenger downgraded CBS to Underperform from Market Perform, with a $46 price target. The analyst argued that any synergies produced “will pale in comparison” to inheriting Viacom’s structural problems.

Meanwhile, his peer at BMO Capital downgraded CBS to Market Perform from Outperform and lowered his price target on the shares to $51 from $60. Analyst Daniel Salmon told investors in a research note of his own that he believes the next 12 months are more likely to be focused on content investment and potentially more acquisitions. However, the analyst acknowledged that he is “intrigued by the differentiated message” about building a larger third-party licensing business at a time when competitors are pulling back.

Following the news, Macquarie analyst Tim Nollen also downgraded Viacom to Neutral from Outperform, while keeping a Neutral rating on CBS shares. The analyst believes the deal’s strategic positives outweigh the risks, but thinks the integration might not be easy and that ViacomCBS will still be “small-ish” compared with competitors Comcast (CMCSA) and Disney (DIS). Nollen lowered his price target on Viacom shares to $31 from $37 and cut his price target on CBS shares to $53 from $55.

OVERHANG REMOVED: 

Bullish on CBS after the announcement, Bank of America Merrill Lynch’s Ehrlich upgraded the stock to Buy from Neutral, with a $63 price target on the shares. The analyst argued that the deal removes an overhang of uncertainty around the company’s leadership/M&A status and said she sees a “fairly clear” visibility toward double-digit earnings accretion, with optionality on further accretion through incremental cost and revenue synergies. Voicing a similar opinion, Credit Suisse analyst Meghan Durkin said that a merger should remove the uncertainty overhanging the two companies and has the ability to create incremental value well beyond cost synergies. Still, with the deal just signed, the analyst believes the operational strategy and corporate structure has not been flushed out with the details to model with confidence the revenue synergies that would attract new investors.

Noting that he sees the combined company as more strongly positioned to leverage its content pipeline to pursue growth opportunities while maintaining a leadership position in linear video, Guggenheim’s Morris upgraded Viacom to Buy from Neutral. The analyst also raised his price target on Viacom shares to $35 from $31 and increased his price target on CBS shares to $59 from $57.

‘OTT SUPERPOWER’: 

In a research note of her own, Needham analyst Laura Martin reiterated a Buy rating and a $60 price target on CBS, saying the company is retaining about 60% control along with many senior management positions in the deal. The analyst added that she sees the combined entity as an “OTT superpower,” with expected acceleration in its Subscription Video On Demand platform.

PRICE ACTION: 

In morning trading, Class B shares of Viacom and shares of CBS have dropped almost 6% each to $27.36 and $45.73, respectively.

Originally Posted on August 14, 2019 – Street Fight: Analysts Diverge On CBS, Viacom After Companies Announce Merger

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