The Pros And Cons Of A CBS-Viacom Union

Controlling shareholder National Amusements Inc. [NAI] asked the boards of Viacom, Inc. VIAB and CBS Corporation CBS to consider a potential combination of the companies. The merger could result in significant cost savings in the near term, and may also help putting in place “a much-needed restructuring of Viacom's cable network portfolio,” Credit Suisse’s Omar Sheikh said in a report.

Analyst Sheikh reiterated Outperform ratings for both Viacom and CBS, with price targets of $42 and $75, respectively. He highlighted greater upside potential for CBS from current levels.

NT Synergies

Sheikh enumerated the following synergies from the merger in the near term:

• Lower corporate overhead
• Lower SG&A in the networks businesses of both CBS and Viacom
• The analyst estimated cost savings to reach $400-$500 million within the first couple of years following a merger.

LT Turnaround Potential For Viacom Assets

“In addition to near-term cost savings, we also believe that substantial value can be created if a merger is a catalyst for improving Viacom's operational performance,” Sheikh wrote. He mentioned these as:

• Focusing the current programming and marketing spend of the core cable networks business on a smaller number of brands
• Returning Paramount to historical levels of profitability

Ownership Of NewCo

The analyst believes CBS could own 61 percent of the NewCo, and that CBS B shareholders could therefore gain substantially more economic benefits of the near- and long-term synergies from the combination of the two companies.

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