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Cable Net Valuation Benchmarks Hit Recent Low In CBS-Viacom Deal

CBS Corp.'s proposed acquisition of Viacom Inc. was big in dollars, but low in valuation benchmarks. The 5.6x calendar year estimated 2019 cash flow multiple for the buyer, including $500 million in synergies, and a 6.5x multiple for the seller each came in low compared to the bar for cable networks.

On a per-sub basis, the valuation is also slight. We estimate that CBS is paying just $7.26 per sub for Viacom's massive portfolio of channels, which have more than a combined 1.2 billion in subs. The deal values Viacom's cable networks at $8.87 billion. The last time we had a sale of a group of networks this large was in 2013 when Comcast Corp. bought the remaining 49% of NBCUniversal Media LLC for $12.10 billion — a valuation of $24.70 billion, or $19.34 per sub.

Year-to-date 2019 deal activity puts the year on track to hit about $14 per sub, well below the near $30 benchmark hit in 2018 and well below the $22.63 level posted in 2017.

Looking at the cable network deals database by date, you can clearly see the trend of more single-digit multiples in recent years compared to 2014, 2015 and 2016 when most of the deals were in the double digits. For our tracking of cable network M&A transactions going all the way back to 1990, click here (client-only access).

Clearly, we are entering new territory. Cord cutting and cord shaving accelerated in the second quarter, as shown by the subscriber losses posted by various multichannel operators. With Walt Disney Co.'s Disney+ and other direct-to-consumer platforms on the way from NBCUniversal, AT&T Inc.'s Warner Media and potentially others, the outlook for cable networks is becoming increasingly negative.

Granted, cable networks have been quick to react to this competition by cost cutting, with the publicly traded owners of large channel groups reporting better than expected margins given the downturn in subs. CBS and Viacom, which has already cut significant costs, have announced they expect to achieve $500 million in synergies in the first 12-24 months. This is sure to mean that there will be plenty of pink slips going out shortly after the merger closes.

In addition, we believe that a number of Viacom channels will be shut down in the coming years as well. Although NBCUniversal has shut down some channels which still had significant subscriber bases, Viacom has favored rebrands, which has not been very successful in recent years.

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