No one would be surprised to see Sumner Redstone, the 86-year-old head of Viacom (NYSE:VIA), and Jeff Bewkes, CEO of Time Warner (NYSE:TWX), wearing disguises to their private meetings in coffee shops around Manhattan. The “merger” of GE’s (NYSE:GE) NBCU with the content assets of Comcast (NASDAQ:CMCSA) is likely to have investment bankers looking at the logical combinations of other big media companies.
Time Warner and Viacom are particularly well matched. Each has a movie studio, and the flagship businesses of both companies are extremely successful cable channels.
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Viacom’s cable content brands include MTV, Spike, Comedy Central, VH1, and Nickelodeon. In the quarter ending September 30, Viacom’s Media Networks business had revenue of $2.1 billion and operating income of $773 million. During the same period, Time Warner’s Networks operation which includes HBO, Turner, and CNN had revenue of $2.9 billlion and operating income of $938 million.
The Time Warner movie studio operation which includes Warner Bros. had revenue of $2.8 billion and operating income of $291 million in the last reported quarter. Viacom’s film business, which includes Paramount, had revenue of $1.2 billion and operating income of $69 million.
Combining the two companies would increase the sizes of the Time Warner network and studio business and would allow for tens of millions of dollars in annual savings. A merged operation would have quarterly revenue of about $10 billion and operating income of $2 billion (after AOL numbers are backed out), which would probably make the new entity the largest entertainment company in the world.
Viacom has $6.8 billion in long-term debt. Time Warner would probably not eliminate that, but it does have $7.1 billion in cash, mostly from a special dividend related to the spin-off of Time Warner Cable (NYSE:TWC).
Viacom would be expensive. Leaving aside debt, with a 20% premium it current share price Time Warner would probably have to pay $25 billion for the company. Viacom will have net income of only about $1.2 billion, so Bewkes would have to believe strongly in the “synergies” between the two companies, and the power of branding in the long-term value of cable networks.
Cable programming is at the core of Time Warner’s earnings and future success. By buying Viacom, it can double down on that bet. Redstone probably has the power to sell his company without regard for other shareholders. He might even be allowed to stay on as chairman of the merged operation–Time Warner Viacom.
Douglas A. McIntyre
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