Combined company would have scale and leverage

A deal that would re-combine CBS and Viacom is “probably inevitable,” according to a report from Moody’s Investor Service analyst Neil Begley.

Merging the companies would fit in with industry trends in which media companies aim to get bigger in order to have leverage with distributors and scale to be able to launch streaming services that would have enough content to attract subscribers, the credit rating agency said.

“A combined CBS-Viacom would have many positive attributes including cost synergies, dramatically improved leverage with distributors for the Viacom networks, and greater scale of content production, diversity and distribution,” Begley said. “The potential merger is a sign that major media companies are stepping up their direct-to-consumer efforts to compete with new ‘Big Box’ on-demand subscription TV services for viewers.”

Related: Viacom Set to Launch NickX eSports Platform

Both CBS and Viacom are controlled by the Redstone family’s investment company National Amusements, and Shari Redstone, the vice chairman of both media companies, is reportedly in favor of the combination.

Standing in the way of a deal are ironing out differences between the two companies on price and management.

Moody’s notes that the primary concern for bond investors would be what the financial policy and credit rating of the new company would be.

A CBS-Viacom combination would have substantial cash flow but from a credit standpoint, it would be better if it adopted Viacom’s priority of sending money to shareholders, rather than CBS’s heavier investment in content, the analyst said.

Begley said the credit rating will be determined by the structure of the new combined company. Best case is if CBS and Viacom are combined into a single debt issuer with a unified credit rating.

The worst case scenario would have CBS giving Viacom a downstream-only guarantee. That would give Viacom bondholders first-priority claim on the Viacom assets. Begley called that scenario unlikely.