ViacomCBS has disclosed plans for a $2.5 billion debt offering, an effort that comes as the newly merged company faces tough scrutiny of its growth strategy and balance sheet amid the coronavirus-related economic crisis.
ViacomCBS said it would seek to raise $2.5 billion for cash that may be used to help pay down some of the company’s looming debt obligations. The money is to be used for “general corporate purposes, which may include repayment of outstanding indebtedness,” ViacomCBS said.
News of the offering makes ViacomCBS the latest media conglomerate to seek to raise quick cash amid the worsening economic crisis caused by the spread of the Covid-19 outbreak across the U.S. and around the world. Disney and Comcast have also tapped debt markets in recent days.
For ViacomCBS, however, the move comes at a time when investors are questioning the company’s long-term prospects following the long-awaited merger of Viacom and CBS Corp. that closed in early December.
Analysts have been mostly lukewarm on the company’s strategy of building up its streaming assets and ramping up content production for internal platforms and external buyers. That’s been seen by a number of prominent analysts as a neither-fish-nor-fowl strategy that is risky in the current climate. The company’s shares have been battered since delivering its first post-merger earnings report on Feb. 20. In the rout of the past two weeks, ViacomCBS shares have been driven to near-historic lows. On Friday, shares were down 8.5% to close at $12.79.
On one hand, the debt offering underwritten by some of the nation’s largest banks — Bank of America, Goldman Sachs & Co., J.P. Morgan Securities and Morgan Stanley & Co. — indicates that institutional Wall Street has confidence in their ability to sell senior notes for the company. On the other, ViacomCBS’ diminished credit rating makes the cost of borrowing higher than its larger media rivals. Comcast is committing to 3.1% interest on $800 million in notes due in 2025. ViacomCBS is paying 4.7% interest on $1.25 billion due the same year.
ViacomCBS shares ticked up about 1% in after-hours trading on the debt news, which came after the market close. Also Friday, ViacomCBS joined other media companies in formally withdrawing its 2020 financial guidance issued before the coronavirus upheaval brought so much of media and entertainment to a screeching, stay-at-home halt. The widespread shutdown of movie theaters, sports leagues, film and TV productions and live events is sure to take a huge toll for months if not years to come on media giants in lost ratings and advertising revenue. The promise of a recession on the horizon could also hurt consumer spending at a time when the industry is more focused than ever on pulling in subscription fees for TV services.
Michael Nathanson, longtime Viacom and CBS watcher and partner at MoffettNathanson, published a lengthy report on Friday that took a harsh look at the company’s cash flow and profit-generating potential. He said the company is shouldering too much debt and not delivering enough free cash flow to compete effectively as has been laid out by CEO Bob Bakish. He went so far as to suggest the company try to sell major pieces such as Showtime Networks or Paramount Pictures and focus in producing content for third-party buyers.
“ViacomCBS no longer has the cash flow required to make its strategic pivot, or a big enough lifeboat like the ‘go big or go home’ plans of Disney,” Nathanson wrote. “As such, ViacomCBS is saddled with an overabundance of structurally pressured assets like Showtime and legacy Viacom’s cable networks and faces an incredibly more competitive market for premium scripted content. In light of the recent rapid changes to the macro environment, the new management team even more so needs to explain why its current strategy is optimal rather than pressuring free cash flow conversion in the years to come.”
Given the stock slump and operational questions, ViacomCBS would likely be seen as an acquisition target for a larger entity looking for bargain content opportunities but for the fact that it has a controlling shareholder in Shari Redstone. Redstone, who is chairman of ViacomCBS and president of parent company National Amusements, has not wavered in her faith in Bakish and the course for enlarged entity.
ViacomCBS declined to comment on Friday’s developments. Bakish made the case for the company’s future in a Q&A held March 4 at the Morgan Stanley Technology, Media and Telecom conference — before the severe coronavirus response measures were implemented. Bakish said his confidence comes from the value of ViacomCBS’ combined content assets and the high demand for original content around the globe. Whether that demand curve takes a dive in the coming months is a huge question facing every Hollywood CEO.
“In a world where we’re seeing continued growth in both consumer demand for content as well as third-party demand for content, the content assets that we own … (are) tremendously valuable as we serve both our owned platforms and generate economics on that as well as third-party platforms,” Bakish said. “We do have very strong momentum and early scale in streaming. I’m tremendously excited about the evolution of where that’s going.”