April 9, 2018

Breakingviews: Pie for the eye – Viacom reject CBS

by Breakingviews.

In the media business, it’s the headline that counts. So it’s little wonder Viacom rejected a takeover offer from CBS, according to Reuters, that looks at first glance like less than the market price. As it happens, Chief Executive Leslie Moonves can easily cough up more thanks to the potential cost savings, while leaving something for his own shareholders.The first thing to know is that the two companies are a natural pair. CBS, which owns its namesake national broadcast station and pay-TV network Showtime, and Viacom, home to MTV, Comedy Central and Paramount Pictures, were formerly a single group. The Redstone family that controls both CBS and Viacom has desired for more than a year to reunite them.

Assume that the companies could achieve a conservative $750 million per year in cost cuts, or around one-quarter of Viacom’s sales, general and administrative expenses. Recent media deals such as Discovery’s takeover of Scripps Networks Interactive and Walt Disney’s purchase of parts of Twenty-First Century Fox targeted a higher percentage. Taxed and capitalized, the CBS-Viacom savings have a present value of roughly $6 billion. Take the two companies’ undisturbed market capitalizations as of Jan. 10 and add those $6 billion of synergies, and CBS-Viacom is a business worth about $40 billion.

That gives CBS a lot to play with. The offer Viacom rejected, of 0.55 CBS shares for each of its own, would have left holders of its non-voting B shares with 32 percent of the company, worth a little less than $13 billion. That is 24 percent more than they started with – even though the headline price of less than $30 per share makes it look like a goose egg.

CBS can do better. It could offer 0.7 of a share for each CBS share, say, giving Viacom’s non-voting shareholders 37 percent of the company. That would make them $4.4 billion, or 43 percent, better off. It would no longer look like a takeunder, and would leave some value on the table for CBS investors.

There is still the question of who runs the company. CBS’s first approach came with the condition that Moonves and his lieutenant Joseph Ianniello would come out on top. The Redstones would prefer Viacom Chief Executive Robert Bakish as the No. 2. Resolving that will take work, but given the size of the potential pie, it should be possible to find something to everyone’s taste.

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