(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of VZ.)
Verizon Communications Inc. (VZ) may be weighing a purchase of Walt Disney Co. (DIS) to bolster its content ownership, several news stories recently speculated. But perhaps Verizon should consider looking in another direction and grab both CBS Corp. (CBS) and Viacom Inc. (VIAB) at a fraction of what Disney would cost, without taking on the theme parks and the troubles of ESPN.
Disney has an enterprise value of about $180 billion, which means a deal to acquire Disney would likely cost $200 billion or more to get investors on board to approve a deal. CBS and Viacom together would have an enterprise value of nearly $60 billion, putting a purchase of both these companies at nearly one-third the price of Disney. It was just last fall when talks were swirling about bringing Viacom and CBS back together, and now Verizon could be in a position to make that happen.
There is something else Viacom and CBS have in common: National Amusements Inc., which owns nearly 80 percent of both Viacom and CBS. National Amusements Inc. is controlled by media mogul Sumner Redstone, which could make brokering such a deal easier – at least because of the limited number of interested parties. In December 2016, Sumner and his daughter, Shari Redstone, killed the possibility of a merger between CBS and Viacom.
Verizon's stock has performed poorly in 2017, down almost 20 percent. Over the past three years, the stock is down nearly 12.5 percent. Earnings growth is expected to be anemic as well, putting further pressure on Verizon to make a move to keep pace with competitors AT&T Inc. (T) and Comcast Corporation (CMCSA), which acquired Time Warner Inc. (TWX) and NBC Universal, respectively, to grab content.
Comcast, the cable and communications giant, is expected to grow its EPS by nearly 53 percent over the next three years, while analysts are looking for Verizon to grow its EPS by only 1 percent.
Meanwhile, CBS is expected to grow EPS by nearly 45 percent, and Viacom is expected to increase by almost 20 percent.
VIAB Annual EPS Estimates data by YCharts
Together, both CBS and Viacom could bring a combined $27 billion in projected revenue to Verizon, and perhaps spur some growth and provide synergies to Verizon.
After all, a deal would bring Verizon Showtime, the movie studio Paramount Pictures, TV stations, a line-up of shows, CBS Sports and the NFL. The NFL on CBS would perhaps be tied into Verizon mobile's NFL offering.
VIAB Annual Revenue Estimates data by YCharts
According to Comcast's most recent 10-K filing, the NBC Universal segment grew revenue by 11 percent, to $31.6 billion, while the cable communications segment grew revenue by 6.6 percent, to $50 billion. Since March 2013, when Comcast completed its acquisition of NBC, shares have risen by nearly 93 percent.
Verizon has taken on a considerable amount of debt in recent years, most notably in 2014, when it bought Vodafone's 45 percent stake in Verizon Wireless for $130 billion. Verizon's current long-term debt stands at nearly $120 billion.
Verizon needs a shot in the arm, and perhaps bringing CBS and Viacom together under the Verizon umbrella could be key to that. It will just need to remain competitive as well.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.