Is the Possible CBS/Viacom Merger Good for Stockholders?

CBS stock - Is the Possible CBS/Viacom Merger Good for Stockholders?

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CBS Corporation (NYSE:CBS) and Viacom, Inc. (NASDAQ:VIA, NASDAQ:VIAB) are mulling a team-up. They’ve been here before, but it’s not terribly surprising that they’re here again. Owners of CBS stock have not only seen streaming giant Netflix, Inc. (NASDAQ:NFLX) change the landscape of the video entertainment market, but mergers are becoming increasingly common in entertainment as companies fight to remain relevant .

Recently it came out that telecom giant AT&T Inc. (NYSE:T) hopes to acquire Time Warner Inc (NYSE:TWX) in an effort to blend media and messenger. Also, Walt Disney Co (NYSE:DIS) is looking to buy most of Twenty-First Century Fox Inc (NASDAQ:FOXA), hoping to beef up its exposure to television viewership.

Furthermore, CBS and Viacom are both ultimately controlled by the Redstone family. Shari Redstone currently serves as vice-chairwoman of both CBS and Viacom as well as the president of National Amusements (the majority holder of both companies, originally founded by her father, Sumner Redstone).

Yet, of all the alliances current and would-be owners of CBS stock might want to see, a deal with Viacom isn’t exactly at the top of the list.

Here We Go Again

If the whole thing seems vaguely familiar, there’s a reason. The Redstones most recently tried to unite CBS and Viacom back in 2016.

CBS Corporation’s CEO Leslie Moonves was able to quell the deal before it took hold. Shari Redstone, however, has continued discuss her desire for the merger, and idea that has once again taken hold.

It is also worth noting that CBS and Viacom have joined before. Back in 2000, the two companies ended up merging. By 2006, the two entities had split again, with the organization simply being too big and too complicated to successfully work as one.

It wouldn’t be any less complicated this time around.

The Pros For A CBS/Viacom Merger

The union wouldn’t necessarily be a complete disaster.

CBS, which also owns movie network Showtime and a couple of other properties, is in the same business as Viacom, which owns television channels BET, MTV, Nickelodeon and Comedy Central (among others), as well as Paramount film studios. Both organizations know the TV business, and to a smaller degree, the movie business.

If united, the two organizations would be a stronger hand in negotiating prices with cable television service providers like Comcast Corporation (NASDAQ:CMCSA) and DISH Network Corp (NASDAQ:DISH). The bigger the package of television content cable companies need — and the fewer options cable companies have — the more likely they are to pay up.

Also, CBS is currently proving that direct-to-consumer choices like CBS All Access means there’s room for others on the streaming landscape besides Netflix. And it’s exciting to think of all the other streaming products Moonves could develop. Adding Viacom properties to CBS All Access could widen its demographic appeal.

And The Cons

Cable television itself is a dying business.  Consumers flock are flocking to other options like the aforementioned Netflix and venues like Hulu or YouTube. And the cord-cutting phenomenon is speeding up. During the third quarter of last year, 405,000 pay-TV customers cancelled their service, up from the 250,000 the year before.

And there’s no denying Viacom could end up being a drag on CBS. The former is on pace to log a sixth decline in annual revenue in seven years. Most of Viacom’s channels are losing viewers, and ratings, and have been for a while. A new viewing platform is unlikely to stop it. And Moonves likely doesn’t want to jump onto a sinking ship that he can’t shore up.

Bottom Line for CBS Stock

The argument most CBS stock holders are making in favor of a merger aren’t entirely misguided; things are different now. History isn’t necessarily repeating itself. Cable television providers are desperate now, and they weren’t the first time the companies merged.

If a CBS/Viacom merger is hoping this pairing gives them pricing leverage, however, they’re mostly barking up the wrong tree. The new era of entertainment is one that’s largely democratized and sold directly to the consumer, or one that blurs the lines between provider and producer, which the Time Warner/AT&T deal would ultimately make happen. This is good for CBS All Access, but bad for selling to cable providers.

But if the Redstones want the deal badly enough — and it seems they do — they’ve got enough control of both organizations to make it happen.

If you’re getting the urge to shed your position in CBS stock on the mere prospect of the merger materializing, you’re not crazy. Wells Fargo has already downgraded CBS on the prospect that a deal might actually go through.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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