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Recombined Viacom-CBS could rise on several financial fronts

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Spotify’s Direct Listing Gamble Pays Off


Recombined Viacom-CBS could rise on several financial fronts

The possible recombination of Viacom Inc. and CBS Corp. is continuing to play out amidst a series of reported counteroffers and concerns about the executive leadership structure.

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Should the parties come to an agreement — more than 12 years following the split of the combined entity on Dec. 31, 2005 and after National Amusements Inc., the holding company that controls nearly 80% of the voting stock in both, abandoned a similar effort late in 2016 the reunited entity would emerge as a larger financial force in the evolving media landscape.

Gauged on if their results from 2017 were combined, CBS and Viacom would have posted higher revenue, EBITDA and net income levels than its predecessor last decade.

Together, CBS and Viacom would have generated nearly $27 billion in revenues last year. The former tallied $13.69 billion, almost $700 million more than Viacom’s $13.01 billion. During the first nine months of 2005 Viacom only reported results for nine months before the split at year-end the combined entity reported total revenue of $17.32 billion and $22.53 billion over the full year in 2004. Viacom was officially separated from CBS on Dec. 31, 2015.

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In terms of net income, Viacom scored $2.02 billion last year, versus $360 million for CBS, whose results were impacted by a net loss of $105 million from the split-off of CBS Radio and market value adjustment of $980 million recorded prior to the split-off to reduce the carrying value of the property. During 2017, CBS had EBITDA of $3.05 billion, with Viacom’s $2.93 billion. The total, approaching $6.00 billion, compared favorably with the $4.55 billion for the unified company in 2005 and was $90 million more than the old Viacom’s $5.89 billion total the prior year.

During the 2005 period, the then-combined Viacom recorded net income of $2.05 billion.

Conversely, the totals for the separate companies came up short on a cash flow basis in 2017, when CBS registered $890 million and Viacom produced $1.52 billion. Looking back to the first nine months of 2005, the combined Viacom entity posted $2.96 billion in cash flow and $3.64 billion over the course of 2004.

Despite being favored by holding company National Amusements and its president Shari Redstone, their recombination has yet to materialize.

Viacom, according to recent reports, is seeking a bid from CBS that would value the company at about $14.7 billion, about $3 billion higher than the valuation proposed by CBS. Viacom is also pushing for its current President and CEO Bob Bakish to be named second in command and be in position to succeed CBS CEO and Chairman Les Moonves when he retires. CBS prefers that longtime COO Joe Ianniello serve as No. 2 at the expanded company.

Reports have indicated that Shari Redstone would look to replace Moonves and the CBS board of directors if the broadcaster could not come to a merger agreement with Viacom. Subsequently, National Amusements and CBS submitted statements supporting Moonves.

Shari Redstone and her father, Sumner, chairman of National Amusements and founder and chairman emeritus of Viacom, had pushed for a reunion late in 2016, before determining it was not "the right time to merge the companies."

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Since then, the media landscape has changed considerably. Discovery Inc. completed its acquisition of Scripps Networks in March, a move that gives the combined company 20% of the U.S. TV audience. Walt Disney Co. is awaiting various regulatory approvals to purchase myriad international and domestic assets from 21st Century Fox Inc. The U.S. Department of Justice is seeking to block AT&T Inc.'s takeover of Time Warner Inc. Meanwhile, subscription video on demand proponents Netflix and Amazon continue to invest heavily in programming as they bolster their subscriber rolls.

Under Bakish, who has been heading Viacom’s day-to-day operations since December 2016, the company has embarked on a turnaround strategy that focuses resources on six flagship networks, inked new carriage deals and installed Jim Gianopulos to revitalize Paramount Pictures. Viacom is also gearing up for the launch of a direct-to-consumer streaming product by the end of its current fiscal year.

For its part, CBS is well down the direct-to-consumer path with streaming subscription services CBS All Access and Showtime OTT, ad-supported news service CBSN and the recently launched CBS Sports HQ news and highlight offering.

Last year, broadcaster CBS (US) again hit the $4 billion advertising sales mark and is well on its way to eclipsing its goal of ringing up $2.5 billion in retransmission-consent fees and reverse compensation revenue by 2020.

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Technology, Media & Telecommunications
Spotify’s Direct Listing Gamble Pays Off

Highlights

Spotify Technology SA shares rose 13% above its $132.00 reference price to close at $149.01 the day of the company’s IPO April 3, resulting in a public market valuation of 4.0x estimated 2018 revenue of €5.22 billion and 16.5x gross profit of €1.28 billion.

Apr. 06 2018 — The following post comes from Kagan, a research group within S&P Global Market Intelligence. To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Spotify Technology SA shares rose 13% above its $132.00 reference price to close at $149.01 the day of the company’s IPO April 3, resulting in a public market valuation of 4.0x estimated 2018 revenue of €5.22 billion and 16.5x gross profit of €1.28 billion. That compares to a trading multiple of just 1.0x revenue for Pandora as of the same date, but Spotify’s higher trading multiple is justified by its higher proportion of paying subscribers among its listeners and its growth outside the U.S.

Spotify Technology is the parent of Spotify AB, the Swedish operator of the popular Spotify streaming service.

Company guidance for full year 2018, provided in Spotify's March 26 8-K filing, is revenue of €4.9 billion to €5.3 billion, up 20% to 30% year over year, and a gross profit margin of 23% to 25%, with an operating loss of €230 million to €330 million including an estimated total cost for the direct listing of roughly €35 million to €40 million in the second quarter.

Spotify Technology S.A. share price and market capitalization

The 8-K also shows Spotify has ambitious monthly active user, or MAU, and premium subscriber growth targets for 2018, with MAUs projected to increase by 26% to 32% year-over-year to 198 million to 208 million and total premium subs growing 30% to 36% to a range of 92 million to 96 million.

At the end of 2017, Spotify had reported 157 million MAUs and 71 million premium subs. Apple Music came in second place with a reported 36 million subs as of February 2018; based on reports from the Wall Street Journal, the company is growing at a monthly rate of 5% compared to 2% at Spotify. According to a Forbes article on April 4, Apple Music just reached 40 million paid subscribers.

Amazon.com Inc. has indicated it is the third-largest on-demand streaming music company behind Spotify and Apple Inc.'s Apple Music with a reported 16 million subscribers between Prime Music and Amazon Music Unlimited. That leaves Pandora Media Inc. in fourth place with 5.5 million paid subscribers, although it has a larger ad-supported user base with 74.1 million MAUs reported at the end of 2017.

Based on reports by Music Business Worldwide on April 4, Sony Corp.'s Sony Music, which had owned 5.71% of Spotify shares prior to the first day of trading, sold 17.2% of its stake in the company, representing a little less than a 1% total share, for over $250 million based on the April 3 closing price of $149.01.

In Spotify's prospectus filed April 3, Sony Music, before the April 3 shares sale in the first day of Spotify trading, was the fifth-largest shareholder behind Spotify co-founders Daniel Ek (27.1%) and Martin Lorentzon (13.1%), followed by Tencent Holdings Ltd. (9.1%) and Tiger Global (7.2%).

As reported by Music Business Worldwide, according to a memo released by Sony, the company projects that the unrealized valuation gain and the proceeds from the sale of Spotify shares will amount to roughly 105 billion Japanese yen, approximately US$1 billion, for the first quarter of the fiscal year ending March 31, 2019.