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CBS/VIA merger speculation heats up
admin | May 31, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
News reports suggest CBS and VIA may resume merger talks by mid-June. Improved operating performance, a stronger balance sheet, and active debt reduction at VIA led to S&P revising the company’s outlook from negative to stable. A combined CBS/VIA with no additional debt would likely stay investment grade rated with the potential to be rated mid-BBB. Presuming an all-stock transaction, the cheapest way to position for a potential CBS/VIA combination would be to overweight VIA 6.875% 2036 bonds.
Renewed speculation about a CBS and VIA merger
Speculation that a merger between CBS (Baa2/BBB (n)/BBB) and VIA (Baa3/BBB-/BBB) could be back on the table re-emerged this week. News reports have the two companies looking to resume merger talks sometime in mid-June. While CBS and National Amusements agreed back in September 2018 that a merger could not happen between the two companies for two years, there seems to be some potential that the deal could get done should the independent CBS board members propose the link up. The deal would give the companies some much needed scale and comes at a time when VIA has not only demonstrated improved operating performance but has taken much needed steps to shore up the balance sheet. In fact, at quarter end (3/31/19) VIA’s last twelve months (LTM) EBITDA margin, FCF/sales and leverage all came in stronger than those of CBS.
Exhibit 1: CBS/VIA LTM key measures (LTM 3/3/19)
Source: Company reports, Amherst Pierpont Securities
S&P revises VIA’s outlook to stable
Shortly after VIA reported fiscal 2Q19 results, S&P revised the company’s outlook to stable from negative. The outlook change reflected VIA’s active debt reduction and improved free cash flow over the past few years which enabled VIA to bring S&P adjusted leverage to 3.2x at quarter end. This is down from 3.6x in the year ago period and below S&P’s 3.25x leverage threshold for the rating. Estimated leverage of VIA is closer to 3.0x as indicated in Exhibit 1. Furthermore, VIA has successfully stabilized EBITDA which has led to year-over-year EBITDA margin growth over the past three consecutive quarters. The EBITDA performance has stemmed from the company’s transformation strategy which has led to advertising revenue growth, improved relationships with its existing distributors as well as a return to profitability at Paramount.
Potential deal structure
While talks have yet to begin and there has been virtually no speculation in the press as to how a deal would be structured, a merger would likely be structured as an all-stock transaction. Given the improved operating performance and balance sheet at VIA, a combined CBS/VIA with no additional debt would likely stay investment grade rated with the potential to be rated mid-BBB. This view is based on some synergies stemming from corporate overhead as well as minimal integration risk. The combined cash flow profile could provide for further debt reduction as well as share buybacks to reduce dilution. A mid-BBB ratings profile would help the combined entity also keep P2/A2 commercial paper ratings. Furthermore, CBS would not want to fall below investment grade as most of VIA’s bonds contain a $101 change of control (COC) put that is ratings based.
Exhibit 2: CBS curve vs VIA curve
Source: Bloomberg, Amherst Pierpont Securities
Relative Value
The cheapest way to position for a potential CBS/VIA combination would be to overweight VIA 6.875% 2036 bonds. These bonds trade wide on a g-spread basis to both the CBS and VIA curves. While the particular issue does not contain a $101 COC put, there is little value in the put covenant presuming the deal will be structured to preserve investment grade ratings. The g-spread differential between CBS 5.5% 2033 and VIA 6.875% 2036 bonds is roughly 65 bp. This compares to VIA trading flat to CBS in the 5-year part of the curve and roughly 30 bp behind CBS in 2044 paper.
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