Advertising Headwinds, Stalled Asset Sale Weigh on ViacomCBS's Outlook
CBS and Viacom completed their merger in December 2019 to form ViacomCBS (VIAC). The global media and entertainment company creates content and owns a variety of cable and broadcasting networks.
Source: ViacomCBS Investor Presentation
The coronavirus outbreak has created several headaches for ViacomCBS which seem likely to slow the company's progress in reaching its deleveraging target. As a result, we are downgrading ViacomCBS's Dividend Safety Score to Borderline Safe.
A sharp slump in advertising represents the first issue facing the company. Advertising accounts for about 40% of ViacomCBS's revenue.
Earlier this week U.K. TV giant ITV announced a slew of cost-cutting measures to preserve cash as businesses reduce their ad spending in response to temporary shutdowns. ITV noted the environment has deteriorated further over the last week:
The additional measures implemented by [the U.K.] government, which have led to the closure of shops, factories and entertainment facilities, have had an increasing impact on our advertising revenues, and therefore forecasts for March and April have deteriorated since we last updated the market on March 16.
We have seen further deferrals in advertising, which are now coming from across the advertiser categories rather than just in travel and we are staying in close contact and working constructively with our client and agency partners. The situation remains dynamic and therefore we are not in a position today to give guidance for March or April.
Needless to say, this doesn't bode well for ViacomCBS's biggest source of revenue.
ViacomCBS's ad business is also hurting from the cancellation of certain sporting events like the NCAA tournament. In 2010, CBS and TNT paid $8.8 billion for rights to the tournament from 2010-2024. In 2016, they extended the deal through 2032 for $8.8 billion. Without games, no advertising revenue will be generated this year.
CBS and rival networks NBC and Fox also own broadcasting rights for Sunday NFL games through 2022. It's too soon to say if the NFL season could also be at risk of being canceled due to coronavirus related restrictions.
However, ViacomCBS certainly appears eager to retain its rights to broadcast NFL games once its current agreement expires. For example, CBS recently signed NFL analyst Tony Romo to a deal that runs beyond 2022 and is worth $17 million annually.
Competition is expected to be fierce for broadcasting rights as numerous media companies bid on unique content that can be distributed across multiple devices and bolster the appeal of certain streaming services.
The bottom line is that ViacomCBS needs to be prepared for higher programming costs in some of the key markets it competes in, and the current advertising environment, while potentially short-lived, is not helpful for building cash.
The other recent development that puts ViacomCBS in a more challenging environment is the slowdown in making deals. More specifically, ViacomCBS was looking to sell CBS's old headquarters building.
Known as Black Rock, this skyscraper has potential to fetch more than $1 billion. On March 18, ViacomCBS announced the temporary suspension of its efforts to sell this property, citing "safety precautions related to COVID-19"; interested parties could not visit the building in person.
ViacomCBS still hopes to sell the property later this year, but businesses may be less willing to splash cash on commercial real estate given the amount of turmoil rippling through financial markets.
The company had planned to use most of the sale proceeds to reduce debt. ViacomCBS ended 2019 with $18.7 billion of debt, representing a debt-to-adjusted OIBDA (operating income before depreciation and amortization) ratio of 3.4x.
Management wants to get leverage down to 2.75x. The company sees a path to unlock $750 million of synergies (upped recently from a previous target of $500 million), which if realized would reduce leverage to 3.0x on its own.
However, with advertising revenue falling, content costs rising, and non-core asset divestitures potentially harder to come by in this uncertain environment, ViacomCBS may struggle to improve its balance sheet. If nothing else, pressure has increased for management to hit the firm's merger synergy targets.
On the bright side, management likely wants to prove the new combined entity is healthy and stable. Avoiding a dividend cut shortly after the merger would help on that front. At an investor conference on March 4, the firm's CEO emphasized that priority:
"Our use of cash essentially follows a waterfall. It starts with our dividend. We are a dividend payer. That's important to us." – CEO Bob Bakish
ViacomCBS's adjusted free cash flow totaled $1.2 billion in 2019 and was expected to increase to $1.8 billion to $2 billion in 2020. That guidance seems increasingly unlikely to be met, but the firm's cash flow should still comfortably cover its $600 million dividend. There just won't be as much flexibility to deleverage and invest.
Source: ViacomCBS Investor Presentation
Overall, we think a dividend could would still be surprising at this stage, but pressure on the business has increased, even if the firm's long-term outlook and status as a cash cow haven't changed much.
If ViacomCBS is able to improve its balance sheet, realize expected cost synergies, and prove that the challenges created by coronavirus-related advertising cuts won't materially interfere with management's capital allocation plans, then ViacomCBS's Dividend Safety Score could be upgraded.
