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CBS-Viacom Combo Looks Better to Analyst

New company would generate additional cash, Ryvicker says

Analyst Marci Ryvicker or Wells Fargo, who originally had doubts about combining CBS with Viacom, now says the combination looks better to her than she thought.

Ryvicker, noting that it looks like a deal might really happen, has put together three scenarios for how CBS would deal with Viacom’s assets and all of them result in significant generation of free cash flow.

In Ryvicker’s first scenario, CBS keeps all of Viacom’s assets. Even with CBS spending $250 million a year more on programming for the troubled Viacom cable nets and $500 million to put Paramount back on its feet, she figures cash flow rises to $3.7 billion versus CBS’ current cash flow of $1.8 billion. She pegs the new, larger CBS as a $73 stock.

The second case has CBS CEO Les Moonves selling Paramount (even though it is one of Sumner Redstone’s most prized possessions).  Ryvicker figures Paramount could fetch $6.4 billion from an international player. That would enable CBS to raise its dividend and accelerate its stock buyback and still have about $6 billion in excess cash. “Les can turn the Viacom nets around faster and better than we could ever hope to model,” she adds.

The third scenario involves CBS selling Paramount and most of the cable networks. Ryvicker concedes that she’s doesn’t know who would want to buy the cable nets. She sees CBS holding onto Comedy Central and Spike because they’re good fits with CBS and Showtime programming. The remaining nets are worth between $15 billion and 21 billion, net of tax. If they are sold, CBS would look like the current company but be able to manage a 3% dividend yield, $5 billion in annual stock buybacks and still have $10 billion in leftover cash.

Ryvicker says she continues to rate CBS Stock as “outperform,” with significant upside after a Viacom deal.