(Bloomberg) -- While there may be some relief now that CBS Corp. and Viacom Inc. have finally settled on a merger plan, Wall Street’s attention has turned to whether the deal is enough to stem the bleeding subscriber declines plaguing the pay-TV industry.
Some analysts question if the estimated synergies of $500 million will be enough to compete with a market turning to streaming services. But “scale, after all, is a necessary (but not sufficient) first step to a robust [direct-to-consumer] offering,” Citigroup analyst Jason Bazinet wrote in a note to clients.
CBS fell as much as 7.7% Wednesday, the most since August 2015, while Viacom shares dropped as much as 7.9% to the lowest since March.
Still, there may be reasons to be optimistic. Bob Bakish -- crowned as ViacomCBS’s chief executive officer by Shari Redstone -- said Wednesday in a Bloomberg TV interview that the companies’ combined content library will be enough to join the ranks of Netflix Inc., Walt Disney Co., and others entering the streaming battle.
Read more: Shari Redstone Prepares for Streaming Wars With Viacom-CBS Union
Here’s what analysts are saying:
Wolfe Research, Marci Ryvicker
Maintains outperform ratings with ViacomCBS price target at $63; cuts Viacom PT to $38 from $42.
“We feel the most underappreciated part of this deal is where ViacomCBS fits in the TV ecosystem. Most important, as all other content providers are pulling their libraries inhouse, ViacomCBS will remain a global provider of content.”
According to Ryvicker, the “two surprises relative to our expectations” were the name ViacomCBS as the presumed name was simply CBS, and also the exchange ratio given the thought that Viacom “would get some level of a premium.”
The exchange ratio was lower than expected, likely “to stave off shareholder lawsuits.”
Bank of America, Jessica Reif Ehrlich
The firm raises CBS to buy from neutral and lifts price target to $63 from $58. Maintains Viacom buy rating; lowers target by $1 to $38.
“We see limited hurdles to the deal being completed” as National Amusements Inc. “has already consented to the deal and there appears to be limited potential competitive impact.”
The anticipated deal close time, slated for year-end 2019, is “arguably the only surprise in yesterday’s announcement.”
While the merger “does not fully address the long-term uncertainties” confronting CBS and Viacom’s assets centered around pay-TV, the deal offers a number of benefits from greater scale in content production to cost savings and improved negotiation leverage.
Citigroup, Jason Bazinet
Rates CBS a buy, lowers price target to $57 from $60.
“We see scant regulatory risks” to this deal, according to Bazinet, who anticipates a deal close by year’s end.
“As the pay-TV market slowly pivots to cloud-based direct-to-consumer offers, this deal makes sense.”
But in order for ViacomCBS “to benefit from multiple expansion, the management team will need to take bolder steps by, for example, putting the lion’s share of the content on a single, unified app.”
Loop Capital, Alan Gould
Buy, price target $65.
While Gould views the merger as “very attractive,” he says “the biggest question will be whether or not the combined company is big enough, or needs to make further acquisitions.”
“There are no surprises regarding management, economics or synergies. We continue to believe the pro forma 2020 estimated EPS will be approximately $7.25 assuming all synergies.”
“Shareholder litigation is the most likely issue that could slow down the deal.”
Benchmark, Daniel Kurnos
Buy rating, lowers price target to $68 from $71.
“After what felt like years in the making, CBS and Viacom finally announced that the band was, indeed, getting back together.”
“Given the amount of media attention surrounding the potential recombination, the big reveal was met with little fanfare and perhaps even a touch of disappointment at the initial synergy forecast of $500 million, although the latter will likely prove materially conservative as it contains no revenue, content or marketing benefits.”
Bernstein, Todd Juenger
CBS lowered to underperform from outperform as the thesis changes, cuts target to $46 from $62. Viacom also rated underperform with $27 price target.
“We believe whatever synergies are produced will pale in comparison to CBS shareholders inheriting Viacom’s structural problems.”
“More likely, we believe the pro forma company will invest the synergies in pursuit of some version of a DTC product – which we don’t believe would have meaningful consumer appeal.”
BMO Capital, Daniel Salmon
Downgrades to market perform from outperform, and lowers price target to $51 from $60.
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