CBS Deal May Be The Last Resort for Viacom (VIAB), Analyst Says

By Carrie Williams

Brean Capital comments on most recent Viacom newsViacom Inc. (NASDAQ: VIAB) was plagued by a string of bad quarterly results and a multitude of negative drivers recently, culminating in a 17% slump in its share prices within the past three months. However, it appears as though a fresh lease of life has been given to the entertainment content company thanks to the prospective deal with CBS (NYSE: CBS). Reacting to the news this week, Brean Capital analyst Alan Gould maintained his Buy rating and $44 price target on VIAB. The PT is an upside of 3.6% from the last close price of $42.44.

VIAB had announced a lackluster quarter with EPS of $0.69 (vs. $1.54 last year) which was within the pre-announced range of $0.65 – $0.70. The $3.23 billion (-14.8% YoY) FQ4 revenue missed estimates by $70 million. Domestic ad revenue had plunged by 8% due to soft ratings and the box office results were also poor, irrespective of the $110 million write-down. Consequently, Brean gave an EPS estimate of $3.80 for VIAB for FY17 which is lesser than the street consensus of $4.03.

The latest blow to Viacom had come from Sony Corp, with the announcement that its PlayStation Vue streaming TV service would drop Viacom’s channels from November 11. As per Viacom’s CEO Tom Dooley, the company is currently in an ongoing negotiation with Sony to revert their stance. Some of Viacom’s channels include the likes of Comedy Central, Nickelodeon, and MTV.

The CBS merger looks like the final lifeline for VIAB and the company anticipates to ink the deal by year end. However, the governance and compensation issues seem to be turning out as major bottlenecks for the deal.

Alan Gould explained that the ‘Buy’ rating for Viacom was mainly due to implied multiple on the cable networks of 5-6x EBITDA as well as the prospective CBS merger. However, Gould expects CBS to have a clear upper hand if the merger proceeds, due to CBS’s planned $1.5 billion share buyback during the quarter as well as better negotiating leverage compared to VIA.

Brian Capital analyst Alan Gould’s rating track record consist of a +6.9% yearly average return, with the ability to provide profitable ratings 81% of the time, according to data measured by TipRanks.com.