ViacomCBS’ wild stock slide and what’s behind it

ViacomCBS has faced its share of calamities: boardroom battles, epic sex scandals and turbulence over its high-stakes merger.

But there’s been nothing quite like the wild swings in the entertainment giant’s stock value.

A year ago, ViacomCBS was trading at $13 a share. But reservations over the 2019 merger of Viacom and CBS had eased by last fall and stock in the combined company began to soar. On March 23, ViacomCBS topped $100 a share, which valued the parent of CBS, Nickelodeon, MTV, Comedy Central, Showtime and Paramount Pictures at $60 billion.

Late last week, the stock collapsed. The rout continued Monday, resulting in a five-day sell-off that erased more than $30 billion in market value. Since then, ViacomCBS’ stock has largely stabilized, closing Thursday down 1% to $44.64 a share.

Why such volatility?

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ViacomCBS, as one of the smallest of the major media companies, has unique challenges. It spooked the market last week with a $3-billion stock offering, which some investors took as an admission that ViacomCBS lacked the financial firepower to compete in the streaming world against deep-pocketed rivals Netflix, Walt Disney Co. and Amazon Prime Video.

The stock offering put in motion a chain of events that has shaken Wall Street. Bets made by a little-known hedge fund, Archegos Capital Management, and backed by some of the world’s biggest banks spectacularly unraveled. Stocks of ViacomCBS and cable programming company Discovery took a hit.

Media company executives didn’t know who was behind the massive run-up in their shares, according to two people close to the companies who were not authorized to comment.

But with its stock in the stratosphere, ViacomCBS saw an opportunity to generate some much-needed cash to help finance its streaming ambitions.

CBS in 2014 had launched its own streaming service, CBS All Access, but ViacomCBS wanted to turbocharge the effort. It renamed the service Paramount+, which launched last month with riches of the legendary movie studio, Paramount Pictures, and other popular Viacom and CBS TV shows, including “SpongeBob Square Pants� and “Star Trek.�

ViacomCBS announced the stock offering after markets closed March 23. The next day, with the company flooding the market with millions of new shares priced at $85, the stock began to fall. The offering raised $2.65 billion.

“Management believes the company can now pursue a more aggressive shift to streaming without adding leverage to the balance sheet, which they believe could have constrained VIAC’s ability to invest over the long-term,� Goldman Sachs media analysts wrote Thursday in a research report.

Viacom has spent years trying to recover from management missteps dating back a decade when previous managers sold the company’s valuable Nickelodeon shows to Netflix, which in turned helped build the streaming company into a juggernaut. That management group also spent billions of dollars buying back Viacom stock at inflated prices rather than prepare for the dawning of the streaming era.

Shari Redstone stepped in to assist her ailing father, the late media tycoon Sumner Redstone, after a tumultuous period and a high-profile legal battle waged with his former female companions. In the aftermath, the Redstone family ousted Viacom’s longtime chief and his allies on the board. In 2018, there was drama at CBS amid allegations of sexual harassment and assault by former CEO Leslie Moonves. He denied the allegations and was forced out along with other high-level managers.

Then came the drama of the last week.

“It was clear to us the stock had run too fast,� media analyst Michael Nathanson wrote in a recent report.

By early last week, huge blocks of ViacomCBS and Discovery stock had been amassed by banks representing Archegos Capital Management, a little-known $10-billion hedge fund led by former star trader Bill Hwang.

In 2012, the U.S. Securities and Exchange Commission reached a settlement with Hwang after accusing him of making illicit profits through insider trading schemes involving Chinese bank stocks. Hwang and his firms agreed to pay $44 million to settle the SEC’s charges.

It’s not clear when Hwang’s Archegos Capital Management took its large positions in Chinese internet companies, including Tencent Music Entertainment Group, and U.S. media companies ViacomCBS and Discovery. Archegos relied on so-called “total return swaps,� which are brokered by Wall Street banks for a fee and allow investors to collect profits (or sustain losses) on a stock portfolio.

A spokesman for Archegos declined to comment.

But it wasn’t the Archegos hedge fund but, rather, some of the world’s biggest banks — including Goldman Sachs, Morgan Stanley, Germany’s Deutsche Bank, Switzerland’s Credit Suisse and Japan’s Nomura Holdings — that were buying up the shares on behalf of Archegos.

Traditionally, such information would be made public. Investors that hold more than 10% of a company’s securities are considered company insiders by the SEC, but because of the unusual arrangement behind the stock trades, information about the size of the stakes Archegos was taking in the companies was not revealed.

Last week, when ViacomCBS’ stock fell amid its offering, the major banks quickly realized they were at risk of losing big money. Three groups of media analysts downgraded ViacomCBS’ stock, prompting other investors to sell.

The banks reportedly issued margin calls, demanding that Archegos come up with the cash to cover its bets. But Archegos defaulted. By last Friday, the banks dumped their holdings in ViacomCBS and Discovery, pushing the prices down even further.

On Thursday, ViacomCBS’ market value was $28.7 billion.

And Discovery — the company behind Food Network, HGTV, TLC and Animal Planet — closed at $43.31 a share, a significant pullback from its high of $77.27 a share on March 15. Discovery’s market value is now at $19.6 billion.