Can Viacom Save CBS from Oblivion?

Heiress Shari Redstone hopes Viacom (NYSE: VIAB) can save CBS from oblivion.

To explain, CBS (NYSE: CBS) and Viacom will merge into one company again, The New York Times reports. Redstone’s hope is the merger can generate synergy and revenue.

In detail, CBS owns America’s top broadcast network, publisher Simon & Schuster, and the CBS All Access, CBS Sports HQ, Showtime OTT, and CBSN streaming video portals. Meanwhile, Viacom owns a historic Hollywood film studio; Paramount Pictures, and popular cable channels including MTV, Comedy Central, VH1, TV Land, the Paramount Network, and Nickelodeon. Plus Viacom is dabbling in streaming video with Noggin and Pluto TV.

Why CBS wants Viacom

My guess is Redstone; the daughter of media mogul and Viacom founder Sumner Redstone, wants to create a digital entertainment brand to protect the family fortune from Disney (NYSE: DIS), Amazon (NASDAQ: AMZN), and Netflix (NASDAQ: NFLX).  

Notably, CBS’s viewership is far smaller than Netflix’s, or Amazon’s. For instance, Statista estimates Netflix had 60.1 million U.S. subscribers in 2nd Quarter 2019. Plus, Amazon Prime Video could attract 96.5 million viewers this year, AdWeek and eMarketer estimate.

Meanwhile, Disney owns 60% Hulu which could attract 75.8 million U.S. viewers this year. Moreover, Disney plans to launch its own Disney Plus streaming service on 12 November 2019.  

In contrast, CBS attracted 8.9 million total viewers for the 2018 to 2019 television season, Deadline estimates. CBS’s viewership fell from nine million in 2017-2018 and 9.6 million in 2016-2017. In addition, CBS’s broadcast network attracted just 3.35 million total viewers on 2 September 2019.

Thus, the streaming services are winning the war for America’s eyeballs. Furthermore, EMarketer estimates 182.5 million Americans or 55% of the US population will watch a streaming video in 2019, AdWeek reports.

Basic Cable is Dying Fast

In response, CBS needs to replace its broadcast operations with streaming video fast. Additionally, Viacom needs new programming outlets to replace the fast dying cable networks.

The once mighty MTV was the 33rd ranked US basic cable network in July 2019 with between 312,000 and 426,000 US viewers, AdWeek estimates. Notably, the population of the United States was 327.096 million in August 2019, Worldometers estimates.

Meanwhile Nickelodeon’s Nick at Nite attracted between 394,000 and 551,000 American viewers in July 2019. Plus, Nickelodeon’s important Nick Jr. attracted 241,000 to 365,000 viewers in the same period.  

Thus I estimate the average Viacom’s cable network’s viewership is around .03% of the American population. Thus, it is hard to consider MTV and Nickelodeon major national entertainment brands anymore.

How CBS can Save Viacom from Streaming Video

I think the ratings show, basic cable is dead and broadcast TV is dying fast. Consequently, Shari Redstone; like Disney’s Bob Iger, is rushing to move as much of her company’s content to streaming video as possible.

The fastest way to accomplish that goal is to combine Viacom and CBS then make most of Viacom’s programming available through CBS Interactive digital video channels. Notably, Stockrow is crediting CBS with impressive revenue growth. However, CBS’s revenues fell last quarter.

Variety estimates Pluto TV; Viacom’s main streaming video portal, had 18 million subscribers in August 2019. Meanwhile, Noggin, a kid friendly streaming service has 2.5 million subscribers.

In contrast, CBS All Access had over eight million subscribers in May 2019, Forbes estimates. CBS claims All Access’s subscriber base grew by 71% in 1st Quarter 2019 thanks to series like The Twilight Zone, Star Trek: Picard, and Star Trek: Discovery.

CBS hopes All Access will counter Disney Plus with over 10,000 episodes of CBS shows, Big Brother Live, College Sports, and March Madness basketball. Plus, CBS plans to spend $8 billion on content for streaming video in 2019.

Is CBS Making Money?

CBS made money in the form of a $1.247 billion gross profit, an operating income of $702 million, and a net income of $440 million during the quarter ending on 30 June 2019.

Notably, CBS’s quarterly revenues of $3.809 billion grew at a rate of 9.9% during that quarter. However, those revenues fell from $4.167 billion on 31 March 2019.

On the other hand, CBS reported a negative free cash flow of -$157 million for the last quarter. In contrast, CBS reported an operating cash flow of $314 million, and an investing cash flow of $582 million. Yet, CBS reports a financing cash flow of -$1 billion for the same period.

On the other hand, CBS reported a negative free cash flow of -$157 million for the last quarter. In contrast, CBS reported an operating cash flow of $314 million, and an investing cash flow of $582 million. Yet, CBS reports a financing cash flow of -$1 billion for the same period.

Could ViacomCBS Generate Float from Streaming Videos?

My guess is that Redstone wants to combine Viacom and CBS’s streaming video services to generate more cash from subscriptions.

Thus, CBS-Viacom could generate float instead of relying on advertising revenue. To explain, float is a steady stream of cash from regular payments like subscriptions. Perhaps, Redstone thinks the video subscriptions will function as float.

Currently, CBS All Access charges $5.99 a month for programs with limited commercials and $9.99 for a commercial free service. In contrast, Pluto TV is free, but Noggin costs $7.99 a month.

How Much Money can ViacomCBS make from Streaming Video?

Thus I calculate ViacomCBS could generate up to $79.92 million or $959.04 million a year in float – if all eight million CBS All Access subscribers pay full price.

Conversely CBS All Access could generate $47.92 million a month; or $575.04 million a year, in float – if all eight million subscribers pay $5.99 for the limited commercial subscription. In addition, ViacomCBS could make $19.975 million a month or $239.70 million a year in float from Noggin subscriptions.

Another obvious reason, for combining CBS and Viacom is to combine the administration and technological support systems of the streaming services. Theoretically, this could reduce the expense of providing streaming video services.

However, the main reason for streaming video is to generate regular cash flow or float through subscriptions. Float can make a lot of money, notably Warren Buffett used float from such diverse sources as newspaper subscriptions and insurance premiums to build Berkshire Hathaway (NYSE: BRK.B).

Is Viacom Making Money?

Viacom (NYSE: VIAB) made money during the quarter ending on 30 June 2019. In detail, Viacom reported a gross profit of $1.585 billion, an operating income of $757 million, and a net income of $544 million for that quarter.

Interestingly, Viacom generated more cash than CBS during the last quarter. Viacom had an operating cash flow of $1.103 billion, and a free cash flow of $342 million. However, Viacom reported a negative investing cash flow of -$506 million and a negative financing cash flow of -$1.429 million on 30 June 2019.

Plus, Viacom had a little more cash in the form of $722 million in cash and equivalents on June 2019. However, that was down from $929 in cash and equivalents on June 30, 2018.

Can Redstone take Viacom Digital?

A likely scenario is that Redstone plans to invest some cash Viacom generates from its movies into expanding CBS’s digital operations. Notably, acting CBS CEO Joe Ianniello and digital chief  Jim Lanzone hope to have 25 million float-producing All Access subscribers by 2022, Forbes contributor Jill Goldsmith reports.

Expanding All Access to accommodate those subscribers will cost money. Plus, paying big stars and major show runners to produce the kind of content that will attract lots of subscribers will be expensive.

Notably, Viacom can still create blockbuster entertainment. The Paramount Network’s 21st Century Western Yellowstone attracted 5.7 million viewers for its second season finale, Deadline estimates. Only time will tell if Viacom can repeat that formula on streaming video.

Plus, CBS can mine Viacom’s library of classic movies; which includes the Star Trek films, for TV show ideas.

What will ViacomCBS be worth?

ViacomCBS will become official with an all-stock deal by the end of 2019, Deadline speculates. Strangely, this is the second ViacomCBS merger the companies were one between 2000 and 2006.

Potentially, ViacomCBS could have a share price of $68.49. To clarify, I added CBS’s 5 September 2019 share price of $42.89 to Viacom’s share price of $25.60 to get that price. However, Mr. Market is likely to have a different assessment of the price so that number is a guess.

Plus ViacomCBS could pay a quarterly dividend of 38₵ if the two companies combine their dividends. CBS paid a dividend of  18₵ on June 7, 2019, while Viacom paid a dividend of 20₵ on 14 June 2019.

Shari Redstone owns a controlling interest in both companies through her family company, National Amusements Inc. The LA Times estimates National Amusements controls 80% of Viacom and CBS’s voting shares. Interestingly, Redstone will become the chairwoman of ViacomCBS and one of the most powerful women in American business, The Los Angeles Times reports.

If the merger goes through ViacomCBS could be a stock to watch because it could be a value investment for the streaming video age. In particular, I think ViacomCBS could be a cheaper alternative to the grossly-overpriced overpriced Netflix (NASDAQ: NFLX)