Lately legacy media seems to be back in vogue, with Amazon buying MGM Holdings for $8.5bn, or estimated 37x annualized EBITDA in May 2021. Taking a dive into the sector, ViacomCBS stands out. The company, together with Discovery, were poster child from the fallout of Archegos Capital in April 2021. Both stocks have fallen more than 50% from their recent peaks. ViacomCBS, for example, reached a high of $100/share in March 2021 and is now settling at around $40. Since then, Discovery announced a $40+bn merger with WarnerMedia (owned by AT&T) to combine as a new entity called Warner Bros. Discovery. ViacomCBS was rumored to be an acquisition interest of Comcast.
The Business
ViacomCBS was itself a multi-billion-dollar merger between Viacom and CBS in 2019. Interestingly enough, the two pre-merger companies had been together and separated couple times already over last 50 years! The company of its current form produces premium content across TV broadcasts, cable networks and films.
In the TV segment, the company produces TV shows for entertainment, news and sports coverage, including Late Show with Stephen Colbert, 60 Minutes, Dr. Phil, Jeopardy!, CBS Sports and etc. Cable channels include Showtime, BET, Nickelodeon, MTV, Comedy Central, Paramount Network and Smithsonian Channel, as well as Pluto TV. Showtime includes some of the popular shows in recent years, like Billions and Homeland.
Film segment includes primarily Paramount Pictures and its related production studios, as well as Miramax, a consolidated JV the company acquired a stake in 2020. Paramount Pictures is a major global producer and distributor of filmed entertainment. It has extensive library consisting of over 1,200 film titles produced by Paramount, acquired rights to nearly 2,900 additional films and number of TV programs. Successful franchises include Mission Impossible, Transformers, Star Trek and SpongeBob. The film library also includes iconic Academy Award winners like Titanic, Forrest Gump and The Godfather.
Streaming
Across all the content that it has, the company is pursuing hard on the digital streaming front. The streaming service was previously known as CBS All Access, which has since re-branded as Paramount+ earlier this year. Netflix has obviously pioneered the digital streaming world. The space has also evolved into a heated race among some of the biggest players, from Disney+, Amazon Prime Video, Apple TV+, new combo of Discovery+ and HBO Max (WarnerMedia) to NBCUniversal’s Peacock (owned by Comcast). Cable networks have previously bundled all different channels together for economies of scale. Now streaming is unbundling them, leveraging the ease of access to consumers through the internet.
From what I can see, streaming is likely going to be a winners-take-most market. Paramount+, being a smaller player in the mix, will have a hard time to reach the scale to be profitable in streaming standalone. It may exist as an additional paying subscription service on top of a bigger platform, like what it is now on Amazon Prime. Either way the value is really in its content. So like what the rumor suggests, the company may indeed be better off being acquired.
Financial Performance
Revenue has been around flat at ~$25-26bn over last couple years. Company reported EBITDA declined by about a billion from $6.3bn in 2018 to $5.4bn in 2020. Meanwhile, streaming revenue has increased to $2.6bn in 2020, growing at almost 50% year over year. I speculate that the streaming service is operating at a loss. This means streaming revenue is able to offset TV and cable revenues lost from cord-cutting but not on the profitability.
Looking deeper into the EBITDA, adjusting for the programming amortization expenses versus cash spend, the “cash” EBITDA seems to be a billion dollar lower than the company reported ones, or for example ~$4.3bn in 2020. The company announced to continue to invest heavily in streaming content over next couple years. Question is if the streaming subscriber base would grow enough to at least break even on profits, given a fixed content cost.
Valuation
Assume the company adjusted EBITDA back to ~$6bn. And for conservative sake, the cash cost gap remains at $1bn so “cash” EBITDA normalizes at $5bn. As of writing, the stock is at ~low-$40s, giving it an enterprise value of ~$40bn. That’s 6.7x adjusted EBITDA or 8x the normalized “cash” EBITDA. That’s a fair multiple, without paying anything for the much higher streaming and / or content multiples. Netflix is trading at 35x, Disney at 20+x (normalized). MGM was sold for 37x. I don’t think ViacomCBS is as strong of a company or has as strong of content slate as any of the above. However, from a free cash flow perspective, this normalized EBITDA gives close to 10% FCF yield to the equity. So you are getting paid 10% a year to wait for a potential multiple appreciation. Say at 12x, the stock would be $70/share, or 65% higher. Not too bad.
Finally, the company also has a convertible preferred trading in the 70s. However, it is a mandatory convert, meaning the preferred will be mandatorily convertible into shares at maturity in 2024. As of today’s share price, the convertible preferred will only be worth around 50 cents upon conversion, plus 5.75% annual dividends. If anything, better buy on the stock. Until next time.
