CBS Corporation (NYSE:CBS) is an awkward position. CBS stock is held captive by the legal maneuvering of the heir to a still-living 95-year-old business magnate, Sumner Redstone. A flurry of lawsuits and bad blood has left CBS stockholders in a state of confusion.
What will become of CBS following its drawn-out fight with the Redstone family’s holding company and the long-running merger talks with Viacom, Inc. (NASDAQ:VIAB)? CBS stock is clearly cheap today. But when will shareholders finally get rewarded?
Here’s what you need to know:
A Family Feud
After ABC dropped the Family Feud game show in 1985, CBS picked it back up for its second run starting in 1988. It’s gone on to become one of TV’s longest-running quiz shows. Unfortunately for CBS stock, the company is hosting a different sort of feud nowadays.
The issue is a classic one. A disagreement between a father and his daughter has threatened to rip at the fabric of the CBS Corporation. Mr. Redstone built his media empire. In 2006, he split his business into two. That resulted in the CBS broadcasting network and Viacom. Viacom got the cable channels and the Paramount movie studio. Unfortunately, those cable channels, such as MTV and Nickelodeon, have failed to evolve with the times. Viacom has become a major bust, while CBS has continued to prosper since 2006.
This has led to resentment. Shari Redstone, Sumner’s daughter and heir apparent, disagrees with her father’s approach. She said in 2016 that, “I was never a great proponent of the split of the two companies. I think the path each company took could have been different under different leadership and this is why a combination should be explored now.”
Shari insists on reuniting the two companies. And the Redstones’ holding company, National Amusements, controls the majority of both CBS and Viacom’s voting stock. So, in theory, the family should be able to force the two to merge. But it’s unclear if the elder wants that. And besides, CBS is suing Shari, trying to block her from forcing CBS into a merger that could be disadvantageous to shareholders.
CBS Still Has a Great Core Business
It’s easy to see all other TV and cable players as losers in the post-Netflix, Inc. (NASDAQ:NFLX) era. But that’s a mistake. Older technologies don’t die off the moment a new player arrive. Given the ongoing problems Pandora Media Inc (NYSE:P) is having, for example, it seems likely that terrestrial radio will outlive the first wave of digital competition. Similarly, free broadcast TV survived a massive onslaught from traditional cable. While consumers are defecting from both broadcast TV and paid cable, there’s little sign that the broadcast players are in particularly bad shape.
CBS, for example, still has a massive position in live sports TV. This content, unlike most, is largely immune from both DVR/time-shifting and digital competition such as Netflix. The young male audience is one of advertisers’ favorites. And with the NFL, college basketball and college football, CBS has a lock on some of the best content that appeals to that key market. Think of it this way — if a cable operator tried to cut CBS out of their package, there’d be broad outrage after people missed March Madness or a week of NFL playoffs.
And live sports is hardly the only thing CBS is good at. The company’s traditional broadcast TV lineup continues to garner huge ratings, particularly in comparison with competition from cable. In fact, a big obstacle to a merger would be just how badly Viacom’s cable channels are doing. CBS’ traditional broadcasting has far more mass appeal than the sort of stuff that Viacom’s MTV or Comedy Central airs nowadays.
What Happens If They Merge?
According to Shari Redstone, a merger is the best option for CBS stock. By reuniting the two companies, CBS and Viacom together would be a much stronger partnership. In theory, the broadcast network’s must-have programming would help negotiations for stronger rates from the cable providers on its ailing cable channels. And the combined entity would have stronger distribution internationally, potentially helping Paramount in particular.
As far as CBS stock in particular goes, however, much would come down to the price it had to pay for Viacom. CBS wanted to recombine with Viacom at a very low offering price for the latter. Shareholders objected, and rightly so. VIAB stock is down from as high as $90 in 2014 to just $27 now. Any takeover for Viacom near that price would be an insult. Viacom stock is trading at just 6x trailing and 6x forward earnings. That’s pretty amazing in 2018’s market. If CBS gets to reunite with Viacom near that valuation ratio, the combined entity would be exceptionally cheap.
CBS Stock: Cheap Either Way
The two biggest risks to CBS stock are that the legal fight gets dragged on much longer, and that CBS may have to pay way more to acquire Viacom. Minority shareholders will argue that CBS is trying to steal Viacom, and that it should have to offer a better deal. If a judge agrees, CBS might have to up its consideration pretty dramatically.
That could be bad news, since CBS stock, while not at 6x earnings, is cheap itself. CBS is at 11x trailing earnings, and 8.6x forward earnings. As a result, it doesn’t need to merge to deliver strong shareholder returns. Merely trading up to a more reasonable price-to-earnings ratio should get the stock back into the 70s without a merger.
For now, CBS stock could remain stuck in a quagmire. There’s no clear precedent for this sort of shareholder squabble. The longer CBS and Viacom’s fate is left up to the lawyers, the longer CBS stock will flail about. Eventually though, value should carry the day. Whether CBS, under 10x earnings, carries on by itself or adds an even cheaper partner, the stock seems clearly undervalued. That doesn’t mean a rally has to come this summer, however.
At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.