Viacom/CBS Merger Proposal Pulled; Brean Weighs In

Investors hoping for a merger between CBS Corporation CBS and Viacom, Inc. VIAB were likely disappointed on Monday following reports that the merger talks have ended.

Sumner Redstone and his daughter Shari Redstone control National Amusements, a holding company that owns a majority voting stake in both CBS and Viacom, which confirmed Monday that now is "not the right time to merge the companies."

Shares of Viacom fell more than 7 percent following the announcement, which effectively eliminated one of the few catalysts for the stock — a hefty premium on a buyout offer.

Viacom Inexpensive But Don't Buy Yet

Alan Gould of Brean Capital commented in a research report on Monday that Viacom's stock appears inexpensive on an earnings multiple basis, yet he maintained a Hold rating and $40 fair value estimate.

According to Gould, both CBS and Viacom could benefit from more scale, however, they were not the ideal merger partners. The analyst suggested CBS was not really interested in buying Viacom at any premium.

Moving forward, Gould believes Viacom could be slapped with a debt rating downgrade to below investment grade. The company's debt stood at 3.9x EBITDA at the end of September and should approach 4.2x at the end of December. Needless to say, a debt rating downgrade will result in higher interest expenses, lower earnings and a lower stock price.

Gould also stated that his view on Viacom could change if the company decides to bring in a strategic investor in Paramount. If this fails to happen, the analyst argues that Viacom needs to find a strategic partner to help co-finance a larger and more expensive film slate.

At Last Check

• CBS shares were up 0.34 percent at $62.77.
• Viacom shares were down 7.72 percent at $35.64.