Why Viacom Might Be a Drag on CBS in a Merger
As the potential for a Viacom-CBS Corp. combination heats up again, there’s speculation that Leslie Moonves might not want to run a combined entity because he doesn’t want the Viacom albatross around his neck. A look at the separate and combined financials of a theoretical CBS/Viacom tie-up confirms that he’s right to be wary.
While both brands contain similar-sized TV businesses, the companies’ overall composition is quite different: CBS rounds out its revenue with publishing and radio, while Viacom owns a sizable movie studio. Within TV, CBS has the broadcast network, as well as local stations, in addition to its cable networks. Viacom has just cable networks.
Viacom is the more profitable company; the broadcast network and publishing businesses drag down CBS’ overall profitability. However, in recent quarters, operating margins have been growing closer than in the past, as margins at CBS have stayed fairly consistent, while Viacom’s have fallen.
sources: Company Reporting, jackdaw research Analysis |
The best argument for a merger is the fact that the combined business would suddenly begin to rival the size of the largest players in the TV business. 21st Century Fox would remain the biggest player by revenue on the domestic TV scene, but a combined CBS-Viacom would be on par with Disney. That’s a significant increase in scale, which could bring it new negotiating power with pay-TV companies and lead to new bundling strategies.
The biggest downside to the merger is the divergence in the growth of the two TV businesses. Moonves’ achievement over the past few years has been to return the CBS TV business to growth by pairing winning content with better monetization of that content. Viacom’s growth, meanwhile, has trended steadily downward over the same period.
sources: Company Reporting, jackdaw research Analysis |
In each of the last three quarters, revenue has declined by 3% year on year, which doesn’t bode well for the future. This is likely the single biggest factor against a combination: Putting the two companies together would offset CBS’ healthy growth with Viacom’s declines and create a flat overall TV business. If Viacom’s revenue doesn’t turn around, consolidated revenue could end up declining, too. With Viacom’s margins also declining, this could prove a drag on the overall business.
The well-run CBS would seem to be a perfect solution to Viacom’s leadership problems. But that ignores the underlying challenges that have caused the divergence in the two companies’ fortunes: Viacom’s big networks have suffered enormously as talent has fled and younger audiences have gone elsewhere. None of that will be solved in the near term by simply bringing CBS and Viacom back under the same roof.
Jan Dawson is the founder and chief analyst at Jackdaw Research, an advisory firm for the consumer technology market.
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