By Emily Bary
Combined company is trying to replicate Disney's magic but likely won't see success, analyst says
The most dramatic move came from Bernstein's Todd Juenger, who bumped his rating on CBS shares (CBS) down by two notches, to underperform from outperform. In his view, the all-stock deal () will prompt CBS to invest more heavily in a direct-to-consumer offering, which he sees as a losing strategy due to the required spending on new original content, foregone licensing revenue, and the potential for limited appeal in a crowded market.
"We don't think it's too much of a stretch to say that CBS/Viacom (VIA), like many others, has seen the stock market's positive reaction to Disney's plans and decided 'let's do that too,'" Juenger wrote.
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He gave the example of Viacom's decision to copy Disney by taking one of its popular animated franchises and creating a live-action movie. "Viacom's Dora the Explorer (one of Nickelodeon's bigger, most important brands) just opened with an embarrassing $17 million domestic box office. Disney's The Lion King delivered $185 million (and that was just one in a long line of Disney live action remakes). We think that's a perfect corollary to how well Viacom/CBS will be able to copy Disney's overall strategy."
CBS shares are off 7.3% in Wednesday trading after gaining 1.4% in Tuesday's session. The stock is on track for its biggest single-day drop since 2011.
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BMO Capital Markets analyst downgraded the stock to market perform from outperform, writing that the year ahead is likely to be consumed by near-term content spending and possibly more merger announcements.
"Our prior stand alone thesis had been based on continued mix shift to non-advertising revenues, outsized impact of retransmission fee growth, and lack of exposure to the basic cable bundle," he wrote of CBS. "That is quite simply no longer the case."
Bank of America Merrill Lynch's Jessica Reif Ehrlich, however, sees the pending combination as reason to give CBS shares another look. She upgraded the stock to buy from neutral, citing the removal of leadership-related overhangs, the opportunity for incremental synergies, and "a fairly clear line of site on double-digit EPS accretion."
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Though MoffettNathanson's Michael Nathanson said the combined entity "will have to work extra hard to prove the financial merits of this combination," he reiterated his bullish view of CBS's stock.
"In the near term, a combined ad sales force with greater digital inventory should drive CPMs and ad revenue higher -- as we have just seen with both NBCU (CMCSA) and Discovery (DISCA) -- in next year's upfront," he wrote. "Secondly, Viacom has not been able to gain wide carriage on key MVPDs, which should be fixed as new agreements become due."
CBS shares are up about 3% so far in 2019, while Viacom shares are up 5.3%. The S&P 500 has gained 14% in that time.
-Emily Bary; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
August 14, 2019 11:33 ET (15:33 GMT)
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