Friday, November 25, 2016

(TV) Viacom: Why a merger with CBS is the only play Viacom have left

With the end of the disastrous decade long reign of Phillippe Dauman over, there has been a lot of talk of Viacom's next move which seems quite strange since the company only has one option worth contemplating, merging with CBS as quickly as possible. 

With surely no one crazy enough to risk their reputation turning around a company that owns increasingly irrelevant and underperfoming media networks, low on cash and is $12 billion in debtViacom not merging with CBS is suicideUnderstandably, highly respected CBS CEO Les Moonves is less than thrilled with the prospect of  his company merging with Viacom which currently, for the lack of better words, looks like a shit sandwich. Unfortunately, for Moonves at least, the decision to merge with Viacom isn't entirely up to him.   

The decision to merge the two would largely depend on redstone family (principally Sumner and daughter Shari Redstone) who own 80% of both companies through the company National Amusements. Both Redstones are in favour of merging both companies which split over a decade ago and have already made moves to see it through. 

With both companies boards stacked with members loyal to the redstones, the merger looks like a matter of time. In truth, Viacom would not be in this position if the company would have got rid of now former CEO Philippe Dauman five years ago instead of last August as the Frenchman is largely responsible for the glaring weaknesses that beset the company. Much of Viacom can be laid at Dauman's feet as he oversaw arguably the dumbest capital allocation strategy ever pursued by a media company and failed to respond to glaring market trends particularly the rise of SVOD companies such as Netflix and Hulu and the increasing maturity of Pay TV market. 

Because of Dauman criminally negligible mistakes, Viacom  are alarmingly vulnerable as they own media networks in an age where the market for them is shrinking rapidly. The upshot of this trend is that it affects their two biggest markets, TV and advertising. Viacom for years made their crust bullying cable and satellite pay TV operators into paying  large carriage fees by leveraging  their popular networks such MTV and Comedy Central forcing pay TV operators to cough up for less popular networks in their portfolio and then sell airtime to marketers and agencies during commercial breaks which has made Viacom one of the most powerful media conglomerates in the world.  

However, this business model had dangerous weaknesses as it made Viacom unhealthy dependent on the pay TV market for their daily bread. Thanks to rise of Netflix and SVOD in general and pay TV operators losing subscribers every quarter for the last five years, Viacom's pay TV dependent business model has blown up in their faces and nobody knows just how to pick up the pieces. 

The only way out of the mess Viacom finds themselves in is merging with CBS who have negotiated the maturity of pay TV and the rapid rise of SVOD better than most media companies. CBS, unlike Viacom, has some footing in the SVOD market with Showtime anytime and thanks to its content deal with the NFL, it has its hands on the most important content in the TV business, sports. However, CBS, like Viacom, is low on cash and is $8 billion in debt. Nonetheless, CBS are still in a better position than Viacom which despite some downsides, makes a merger viable. 

In sum, Viacom can thank their lucky stars  they're part of the Redstone universe as if they weren't, one could only imagine where Viacom would be.                  

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