VIAB and CBS Review

VIAB and CBS will be merged with CBS buying VIAB in all stock issue with VIAB S/H receiving 0.59625 CBS per VIAB share.
https://www.cnbc.com/2019/08/13/cbs-and-viacom-reach-merger-deal.html

The deal is expected to be closed by end 2019 subjected to approval by the free market commission in USA. This deal also ends the several years battle within the controlling shareholder. It will be run by Shari redstone and CEO will be Bob Bashi who has a good digital strategy to transform viacomCBS. For example, they have purchased pluto.tv which is >20 MM subscribers as of now.
With its slew of content, they will be able to compete with big companies like Warner, Disney, Comcast and Netflix etc. An article by forbes reported the details of this saga.

https://www.forbes.com/sites/dawnchmielewski/2019/10/02/exclusive-for-the-first-time-shari-redstone-tells-her-side-of-the-battle-to-merge-viacom-and-cbs/#7aef3b86423c

One interesting chart shows the comparison between CBSviacom and the various competitors in terms of market valve and sales. Only CBSviacom is trading near its sales value compared to the rest which is trading a high multiples.

AT&T is at 1.6x, Net Margin = 10-12% / ROE = 10-12%
Disney at 4x   NM = 20% / ROE = 20%
Comcast at 2x NM =  10-12% / ROE =  16-18%
Netflix at 10x  NM = 6-8% / ROE = 20-25%
CBSViacom at 1x NM = 10-12% / ROE = 25-30%

Based on the above comparison, it appears CBSvia is trading at lower multiples despite being profitable with good cash flow generation and comparable net profit margin and ROE.
If market rerate it with similar multiples, it will be easily a 100-200% return from current price and with its small size, it also becomes a good take over target to be acquired by the bigger companies such as disney or AT&T.

CBS current operating interest coverage is ~6-7x , long term debt of 9B, no short term debt and cash of 216MM. average debt interest is 4.4%. Debt is spread out till 2045 with the next 5 years debt maturity of 2B to be fully funded by cash flow of $1-2B per year. Liquidity not an issue.

VIAB current operating interest coverage is ~6x, long term debt of 8.6B, current debt of 320MM and cash of 722MM. Operating cash flow is ~2B per year while dividend payout is 400M. Debt is evenly space out until 2057 with yearly maturity of 300-500MM with every 5-10 year interval of 1B repayment. The yearly cash flow generation is able to pay down the debt. Average interest rate is 5% No issue with liquidity.

Both companies balance sheet is not stretched by any nature and the cash flow generation is adequate to finance the interest expense. With the merger, there will be synergy and cost savings which will further improve the finance.

Valuation is also not compelling. VIAB P/E ratio is less than 10 indicating future potential rerating in price. with CBS merging with VIAB, it is buying a undervalued company which in turns will boost its future share price when market rerate the combined balancesheet and earning power.

CBS is of higher valuation compared to VIAB.

Estimate VIAB intrinsic value is 32-52 versus current price of 23 which indicates high level of margin of safety. good chance to buy now for future upside.

Estimate CBS intrinsic value is 40-70 versus current price of 38.5. Either way, both company appears to be undervalued.

Buy VIAB as it is over lower valuation. Post merger, combined entity will have potential price catalyst