CBS and Viacom have agreed to merge, ending a 3-year-old drama filled with starts and stops that reunite the two companies controlled by Shari Redstone’s National Amusements holding company. Now that you’ve had five minutes to digest the deal, it’s time to think about what Redstone and Bob Bakish, the combined company’s newly named CEO, want to do next.
This may sound glib. But in this case, Redstone explicitly wants to get bigger faster, according to people familiar with the matter. Some of what caused the CBS-Viacom deal to drag along all year was figuring out which board members would stay with the combined company and getting those people focused on the new company’s direction.
CBS has a market capitalization of about $18 billion. At an agreed upon exchange ratio of .59625, Viacom is valued at about $12 billion. A combined company will have an enterprise value of about $50 billion. That still puts CBS-Viacom at a significant balance sheet disadvantage when it comes to borrowing for content spending on original programming and sports rights relative to competitors AT&T/Warner Media (enterprise value = $453 billion), Disney (enterprise value = $315 billion), and Comcast/NBC Universal (enterprise value = $305 billion).
And the legacy media companies have all bulked up to compete with technology giants Amazon (enterprise value = $924 billion), Apple ($922 billion), Alphabet/Google ($707 billion), Facebook ($495 billion) and Netflix ($143 billion). Bottom line: CBS/Viacom is still much smaller than its rivals that are also going to be bidding on the best movies and shows and, most importantly for CBS, the National Football League’s broadcast rights, which are set for renewal in 2022.
So what are Redstone’s best options to add more heft and programming?
As CNBC wrote in January, here’s strategic logic to pairing CBS/Viacom with Discovery. Redstone loves sports rights, and Discovery is a major player in European sports, owning exclusive rights to games in many European markets including pan-European television sports network EuroSport. Discovery also struck a deal with the PGA Tour for international rights and a golf streaming service last year for $2 billion.
Moreover, Discovery outbid Viacom for Scripps Networks Interactive in 2017 — a $12 billion acquisition for the owner of HGTV, Travel Channel and Food Network. Bakish’s interest in Scripps at the time may suggest he’d be interested in a combination once again.
One possible hangup to a deal would be who would run a combined company. Discovery CEO David Zaslav is only 59 and is well respected in the media industry. But Bakish would almost certainly want to keep his job as CEO after officially earning the role today. Discovery has a market valuation of about $15 billion and an enterprise value of $39 billion.
CBS held preliminary talks to buy Starz from Lions Gate earlier this year, though a deal never got to the finish line.
Starz makes some sense for CBS, which already owns rival premium video service Showtime. There’s certainly overlap between the two subscription services that could lead to synergies (i.e. cost cutting, job cuts in overlapping positions). CBS has been successful accumulating subscribers for its direct-to-consumer streaming services Showtime Anytime and CBS All Access, reaching 8 million subscribers two years before its own internal forecast and forecasting 25 paying customers by 2022. Starz is forecasting between 15 million and 25 million subscribers for its streaming service by 2024.
But while CBS Chief Executive Officer Joe Ianniello had interest in Starz, Bakish may not be in a rush to go in that direction, according to people familiar with the matter. Buying Starz or even all of Lions Gate isn’t going to drastically move the needle for CBS. Lions Gate’s entire enterprise value is just $5.7 billion. Even if Lions Gate merges with MGM, a deal that’s been speculated for years, that combined company would still be much smaller than Discovery.
In other words, if Bakish and Redstone want to get a lot bigger quickly, Starz, Lions Gate and MGM won’t do it. That may push them further down the list of priorities.
Activist investor Dan Loeb has put pressure on Sony this year to break up the $70 billion company into an electronics unit and an entertainment unit. While Sony has thus far resisted his calls for a split, Redstone has some interest in pursuing a potential deal for Sony Pictures, according to people familiar with the matter.
The problem here is twofold. One, it’s not clear Sony would be interested in losing control of Sony Pictures. While it’s possible CBS could structure a deal where Sony would actually get some of Redstone’s voting shares as a sweetener, such a structure could be complicated. And two, if Sony was willing to part with Sony Pictures, which owns movie franchises such as “Spiderman” and “Men in Black” and TV series including “Seinfeld,” “Breaking Bad,” “Jeopardy!” and “Wheel of Fortune,” there would almost certainly be multiple suitors — including bigger fish like Comcast.
Univision isn’t as clear of a fit for CBS/Viacom. But it’s for sale. So that’s something. The privately held Spanish language broadcaster has been debating going public or selling for years. Madison Dearborn Partners, Providence Equity Partners and Thomas H. Lee Partners led a buyout with Haim Saban of the company back in 2007 for $13.7 billion. Early indications from bankers suggest Univision may have to sell for less if it finds a buyer now.
Shari Redstone attended Allen & Co.’s Sun Valley conference in July — along with Saban. Whether the two discussed a deal is unclear.
Of course, Redstone could also add more heft by selling — following the footsteps of Time Warner and Twenty-First Century Fox. Redstone isn’t wedded to passing CBS-Viacom to her children, unlike her father, Sumner, according to people familiar with her thinking.
Then again, selling CBS-Viacom while her 96-year-old father is still alive may be anathema. And Sumner Redstone has declared he will live forever. So maybe that one’s moot.
Disclosure: CNBC and NBC are owned by Comcast’s NBCUniversal unit.
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