CBS-Viacom reunification doesn't add up

Published Mon, Jun 20 20164:10 PM EDT

Breakingviews

Jennifer Saba

Viacom's troubles keep mounting. The MTV operator warned weary investors on Friday that revenue and profit will fall short of expectations as a sordid boardroom battle plays out. The idea of the $24 billion CBS buying its weaker sibling is making the rounds 10 years after the two companies split. But the likely benefits of reuniting don't justify CBS paying a premium. Media mogul Sumner Redstone controls both companies through a roughly 80 percent stake in voting shares. The logic of the original split was to free the faster-growing Viacom with its Nickelodeon and Comedy Central networks from the stodgier CBS, home to "60 Minutes" investigative reports. That was supposed to unlock value for shareholders, and it also enabled Redstone to give two key lieutenants realms of their own. Things played out differently. Under Chief Executive Leslie Moonves, CBS shares have doubled in a decade. Meanwhile Philippe Dauman at Viacom eked out just a 7 percent share-price gain. Now Dauman has been kicked off the Viacom board along with four others by his former mentor. He could soon lose his job altogether. More from Breakingviews : Too-big-to-fail tour missing Washington headliner The turmoil opens the door to recombining with CBS. But the numbers don't add up for Moonves. Assume Viacom fetches a 25 percent premium to Friday's closing price, and CBS would have to offer over $22 billion in equity or about $35 billion including net debt. CBS might find about $500 million in cost savings, a figure toward the high end of estimates by research firm MoffettNathanson, which sketched out a possible deal. Taxed at 30 percent and capitalized on a multiple of 10, those savings would be worth about $3.5 billion today. That wouldn't cover the premium, and it assumes the synergies would come immediately and without cost. Alternatively, take the average estimate for Viacom's pre-tax profit in the year to September 2017 compiled by Thomson Reuters – some $3.6 billion. Add the savings and give Uncle Sam his cut, and the post-tax return on the total deal would be just 8.3 percent. In the uncertain world of M & A, investors expect a bigger cushion over an acquirer's weighted average cost of capital, which Morningstar pegs close to 8 percent for both CBS and Viacom. Redstone might be able to reunify his divided empire in other ways. Or Viacom's business and share price could slide further, helping the numbers work for CBS. For now, though, Moonves is better off minding his own business. For more independent commentary and analysisfrom Reuters Breakingviews, visit breakingviews.com

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