Investors Ponder The Possibility Of A Viacom-CBS Recombination

Investors have been contemplating a possible merger between Viacom, Inc. VIAB and CBS Corporation CBS, believing that this move would be good for Viacom but not necessarily good for CBS, Barclays’ Kannan Venkateshwar said in a report.

Analyst Venkateshwar maintained an Overweight rating on Viacom, while reducing the price target from $48 to $46. The EPS estimates for FY1 and FY2 have been reduced from $3.90 to $3.65 and from $4.79 to $4.03, respectively.

On September 21, the Wall Street Journal reported that Viacom is on the lookout for its next CEO.

Potential Upside From Merger

“CBS shareholders are more likely to see upside from the deal only if post transaction EBITDA multiples are at 8.5x or higher or asset sales funding buybacks are part of the mix post transaction,” Venkateshwar wrote. He added that every $1 billion in asset sales following a merger with equivalent buybacks would increase for shareholders of both companies by ~300bps.

Every $500 million in synergies would increase upside by ~10-15 percent for both companies. Viacom may benefit more in case of a premium, the analyst noted.

All Stock Deal Likely

“Given the high leverage of both companies and the same shareholders, an all stock deal may be more likely if the reported transaction does eventuate,” the analyst mentioned. He added that the potential upside from a deal is better for Viacom shareholders under various scenarios that it is for CBS shareholders, unless the deal is structured as a take under.

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