Analysis: VIAB T CBS

Shortly after the opening bell, we will be buying 300 shares of Viacom (VIAB) at a bid/ask of $28.20/$28.40. Following the trade, VIAB (2100 shares) will represent 2.26% of the portfolio.

Last Friday, we discussed in our Alert here why we were interested in adding to our position in Viacom. However, the one thing that held us back was our trading restrictions, which you can read more about in our forum post here. With our restrictions cleared this morning, we are free to add to our position and will do so shortly after the opening bell.

In our aforementioned Alert, we explained how Viacom had become de-risked at these levels thanks to the company's successful contract renewal with AT&T (T) . Leading into negotiations, uncertainly in Viacom CEO Bob Bakish's ability to strike a deal with AT&T and remain on DirectTV caused a fit of volatility in the stock as it represented an overhang that many investors stood clear from. It was a win for Viacom to remain in coverage, and it was critically important for them to do so without sacrifice of revenue. Many had thought that Viacom would have to provide a sweetheart deal to AT&T to keep their channels listed, but management reaffirmed guidance for full year domestic affiliate revenue growth in a regulatory filing shortly after the announcement. Because there is less earnings risk at the company now, this event should remove an overhang that has compressed the stock's price to earnings multiple to very low levels.

We expect VIAB to recover as investors gain appreciation for the turnaround of this inexpensive media play, but we also have eyes on another way to win. We view a Viacom-CBS Corp. (CBS) tie up as an eventuality and a key catalyst event for the stock. The two media companies are frequently linked in merger talks (most recently last Monday night by the New York Post) thanks to their shared relationship with National Amusements, the Shari Redstone led company that owns a controlling interest in both companies. If Viacom and CBS merge together, the combined entity would have a much stronger position in the evolving media industry and have additional negotiation leverage in future contract talks.