Putting Best Feet Forward Before Hooking Up

CBS and Viacom’s earnings, strategies reveal parallels between potential merger partners
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CBS and Viacom didn’t announce a combination last week. But both companies did announce earnings that exceeded Wall Street expectations and discussed strategies that showed many similarities.

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With CBS and Viacom both scheduled to face Wall Street last Thursday, there was speculation that a deadline had been established for concluding talks aimed at a merger. But both companies started their earnings calls with analysts saying they would not be commenting on “speculation regarding M&A.”

CBS and Viacom are controlled by the family of Sumner and Shari Redstone, and Shari Redstone is said to favor having one, larger media company. Some on Wall Street have deemed an eventual combination inevitable.

Some terms have reportedly been worked out, such as management, with Viacom’s CEO Bob Bakish in charge of the combined company, with CBS president and acting CEO Joe Ianniello supervising the CBS-branded properties.

Unresolved was the price tag in terms of how many CBS shares would be exchanged for Viacom shares.

“Viacom and CBS have the strongest incentive imaginable to pull out every stop to post the best possible earnings this quarter,” Sanford Bernstein media analyst Todd Juenger noted.

Both companies delivered, with CBS earnings up 10% and Viacom up 6%. Both companies reported higher revenues and higher advertising revenues. For Viacom, it was the first increase after 20 straight quarters of declines. The stocks of both companies increased on Thursday, with CBS closing up 1.64% and Viacom climbing 1.11%.

On their earnings calls, Ianniello and Bakish talked about their strategies for navigating a changing media world and moving beyond their bases in traditional broadcast and cable.

“Over the past 14 years and through massive changes in industry structure, these two companies have pursued separate paths and strategies,” MoffettNathanson senior analyst Michael Nathanson said. “With new management teams now in place, the companies are operating with similar goals in mind.”

Both companies talked about producing more programming, building their direct-to-consumer streaming platforms and pushing advanced advertising to grow ad revenues.

Ianniello noted that CBS was producing 89 shows, up from 70 a year ago. In addition to creating originals for CBS, Showtime and their streaming services, he said, CBS had Dead to Me on Netflix, BH 90210 on Fox and Kids Say the Darndest Things on ABC.

“By increasing the amount of programming we’re creating for our own content brands, while also selling our shows to third parties, we are operating at a sweet spot in the industry and setting ourselves up for continued long-term growth,” he said.

Bakish said Viacom’s Paramount TV unit now has 26 shows on order or in production, including series for TNT, Apple TV and HBO Max. “Production continues to ramp up at our other studios, too,” Bakish said. “For example, Awesomeness had a busy quarter with the releases of The Perfect Date and Trinkets on Netflix and the seasontwo debut of Hulu’s Light as a Feather in July.”

CBS announced an accelerated rollout of its CBSN local news service and said it will be adding children’s programming to CBS All Access, including new versions of Cloudy With a Chance of Meatballs and Danger Mouse. (Viacom has lots of kids programming that could be added to the service, if and when the companies combine.)

Viacom touted the growth in viewers and hours watched at Pluto TV as it added channels using content from MTV, Comedy Central and other cable properties.

“Pluto TV was a big contributor to ad-sales growth for the quarter and [in] the upfront discussions, in part, because its leadership and free streaming TV continues to grow,” Bakish said.

The similarities support the logic of combining the companies. Together, they’d be No. 2 in U.S. TV advertising, according to Nathanson. They’d also be able to challenge The Walt Disney Co., Comcast, AT&T and Netflix in terms of producing shows and attracting talent. “Taken together, the combined networks will create faster aggregate affiliate-fee growth as Viacom benefits from the big stick of the CBS Broadcast Network,” he said.

With $500 million in cost savings, Nathanson said the new company’s stock would be cheap, based on expected earnings.

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