ViacomCBS Shares Tumble Due to Equity Raise

ViacomCBS VIAC capped a tumultuous week with a 25%-plus share price decline on March 26, resulting in a five-day drop of more than 50%. The decline was sparked by the March 22 announcement of an equity raise in the form of Class B common shares and mandatory convertible preferred shares. The offering priced on March 24 for total proceeds of roughly $2.6 billion to the firm in exchange for a total number of shares equal to about 5% of those currently outstanding. The instant arrival of 20 million new shares appears to have sparked an investor sell-off as the likelihood of a short squeeze has decreased. We applaud management's foresight to raise capital by selling at what we viewed as inflated prices. We are maintaining our narrow moat rating and $57 fair value estimate. The new Class B shares priced at $85 per share. The convertible shares will mandatorily convert on April 1, 2024, for 1.0013 to 1.1765 Class B shares, implying a price of $85 to $100. With a 5.75% annual dividend rate, the lowest implied issue price of the convertible after accounting for the dividends is $67.75, still well above where the stock closed on March 26 and our fair value estimate. ViacomCBS doesn't necessarily need the cash, as it should generate more cash flow in 2021 than it pays out in dividends. Management can use the proceeds to accelerate investment in its streaming efforts without worrying about near-term cash flow or debt maturities. We think this is of one the best uses for the capital as Paramount+ is the most likely candidate to drive top-line growth over the next five years for the firm. While the space is increasingly competitive, the combined libraries of CBS and Viacom contain some very popular franchises like SpongeBob, NCIS, Star Trek, and Mission: Impossible that could help the new service gain and retain subscribers. CBS recently renewed its NFL rights deal at a higher annual rate, which could have meant less cash for the streaming service before the equity raise.

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