Despite nearing a deal that many shareholders had long seen as the catalyst to carry Viacom's (VIAB) stock to higher levels, details of the company's reported deal with CBS Corp. (CBS) has investors scratching their heads.
Shares of the New York-based media conglomerate slid nearly 5% in afternoon trading, quickly reversing early morning optimism and heading for the worst day for the stock since March.
Unrecognized Opportunity?
The reason for the run downward in the stock price comes as the market is simply disappointed in the value that Viacom is reportedly receiving despite a recent turnaround on earnings.
Scoop w/@danacimilluca: $CBS and $VIAB have hashed out an exchange ratio range of between .59 and .60, though that price could still move. Deal still not reached. Short story TK.
— Ben Mullin (@BenMullin) August 12, 2019
"The immediate outcome is not what we had hoped for," Jim Cramer's Action Alerts PLUS team said. "The reported ratio certainly has investors questioning whether Viacom's Board has sold the company short, and we are a bit puzzled with it too. We all would have preferred to see Viacom get more shares in the new company and it looks like the market is expecting something closer to the 0.61 range too."
The range comes as a particular disappointment after what had been a strong story told by management in its earnings call last week, as to the sum of its parts proffered to CBS. The allure was the combination of Paramount Pictures, Viacom's myriad of cable networks such as Comedy Central, MTV, Nickelodeon and BET, South Park Studios and the capabilities of Viacom's internet-based streaming service Pluto TV -- which could be added to CBS' offerings like Showtime and numerous titles already under the CBS All Access banner.
Additionally, CBS holds rights to NFL games as well as the NCAA March Madness, piling on a treasure trove of live sports content to the catalog at Viacom as consumers continue to cut the cord.
The projected value-add Viacom holds in these assets is likely amplifying the disappointment on the day as the deal's potential details are speculated on.
"Viacom's continued turnaround efforts are impressive, led this quarter by a return to growth at domestic advertising and a strong Upfronts performance," BMO Capital Markets analyst Daniel Salmon said to clients, irrespective of the deal closing. "We remain positive on the company's faster growing initiatives, including the upcoming launch of BET+ and Paramount TV's growing slate of shows in production; and recent multichannel video programming distributor renewals bring improved visibility into affiliate trends."
He added that despite concerns on advertising trends for legacy media, figures from the company's quarterly report last week showed dramatic growth, rebounding from consecutive quarters of decline.
"Our domestic advertising revenue growth estimates come up throughout our forecast period to reflect a more positive view on pricing and advanced marketing solutions, driven by Viacom's strong Upfronts and strategy of saving more linear volume for the scatter market, as well as continued growth at Pluto," Salmon concluded.
Pluto TV, the company's online streaming platform, saw marked growth from a low base of 12 million users to start the year to 18 million by July. That growth trajectory could be undervalued by the deal, given the reported exchange price.
It is worth noting that the company's Paramount studio is also due for some revitalization, with the 2020 movie slate packed with 16 films on deck for 2020, including reboots of film classics like "Terminator" and "Top Gun."
Again, perhaps the market is moving as the value of these releases remains unrealized in the deal.
Still Nothing to Show
The other issue in the whole commotion on Monday is the fact that absolutely nothing has been confirmed by either company.
After a number of false starts in recent years just as much of the media expected an imminent announcement, there is a reason for skepticism.
Fool me once... or however George W. Bush put it.
Even amid the uncertainty, some shareholders remained steadfast in their positions, as a more agreeable deal is achievable and, if the reported deal is indeed struck.
Wait for the Show to Start
Regardless, there is no reason to sell on a down day.
"We didn't get a "pop" in VIAB as we would have hoped and we are disappointed with how the events have turned out this morning, but we are happy to see news that a deal is very likely to be consummated," Cramer's team commented. "Once combined, we think a strong argument can be made about how the new stock multiple deserves to be worth a few turns higher than what the market has priced separately."
They advised that investors should at least let management provide a rationale for the actual details of the deal once finalized, before turning the channel.
"Are a couple more dollars per share from the exchange ratio worth potentially dismantling a potentially accretive and long-term value-creating transaction? Not if you are an investor," the team concluded. "The deal is right at the finish line, it would be wrong to shoot first, then ask questions later."
Viacom is a holding in Jim Cramer's Action Alerts PLUS member club.
