CBS submitted an initial offer today to acquire Viacom in an all-stock deal that values its corporate cousin at below its current market value of $12.3 billion.

The special committee of CBS board members proposed installing CBS CEO Leslie Moonves and Joe Ianniello, the network’s chief operating officer, to run the merged companies, sources confirmed.

That sets the bar and ushers in a period of more intensive deal talks this month. From the Justice Department’s antitrust battle against a proposed AT&T-Time Warner merger, to the high-stakes bidding war over British pay TV giant Sky that threatens to spoil Disney’s planned acquisition of 21st Century Fox assets, the mash-up of two conglomerates is never a simple process.

Wall Street saw it as a sign of strength for CBS, whose shares rose 4% on the day to $52.86, while Viacom’s tumbled 4% to $29.42. The point of the planned recombination is to create scale by joining CBS’s valuable broadcast assets with Viacom’s cable networks and Paramount Pictures. But compared with all of the other major M&A deals lately, it brings complexity all its own.

Here are the major questions, going in.

Even though Viacom’s waning fortunes were self-inflicted by past management, do its shareholders deserve better than a lowball offer that has put its share price in a downward spiral since it was first revealed Monday and again today? Will the re-combining of CBS and Viacom result in layoffs at a time when the media business will be drowning in pink slips after Disney cherry-picks the pieces of Fox and rids itself of potentially thousands of people? Would the discussed two year-deal for Les Moonves to sit atop the fused CBS-Viacom afford enough time for him to re-integrate two large companies, and can the Redstones afford to lose an executive who has been a winner for so long at Warner Bros Television and CBS? Can Viacom Chief Executive Bob Bakish aid his own turnaround with the extra muscle that CBS brings? How will it help Jim Gianopulos’ efforts to restore luster to Paramount Pictures? Why is this marriage a better idea now than in 2016, when Shari Redstone explored the merger and Moonves made it clear he wasn’t in favor of it? And finally, will government regulators allow the whole thing to happen?

Mark Lennihan/AP/REX/Shutterstock
REX/Shutterstock

Investment banker Lloyd Greif says CBS’s initial below-market bid is not as crazy as it sounds.

“This is equivalent to Disney offering less in a stock-for-stock deal for Fox than Comcast was offering and yet winning the bid,” Greif told Deadline. “Just as Rupert [Murdoch] wanted Bob Iger and Disney, Shari [Redstone] wants Leslie Moonves and CBS.”

The initial offer is a signal of Moonves playing hardball, Greif says. He’s telegraphing that he’ll only do the Viacom merger on his terms, and he’ll be calling the shots if and when the deal closes. It’s also sign that he feels Viacom is overvalued in the marketplace, perhaps because of investor reaction to rumors last fall about a possible deal that drove up the company’s stock price.

“The argument that Leslie is making is, ‘I’m bringing all this value to the table, therefore my shareholders, my management team and I deserve a bigger slice of the pie,’” Greif said.

In terms of the question “why now?” the clear answer is size. Viacom’s market capitalization stands at $12.7 billion, while CBS is at $19.4 billion. Together, CBS-Viacom (one interesting matter, of course, will be what name would go on a re-merged entity) would be valued at $32 billion, a level that is dwarfed by many traditional media rivals and certainly by Silicon Valley.

“Our point of view is you can’t be a $15 billion company, the way each of CBS and Viacom are,” said Needham & Co. media analyst Laura Martin. “You must scale up to compete against a $500 billion Facebook.”

While it remains unclear whether a merger of CBS and Viacom ultimately will be consummated, analysts estimate that Viacom could fetch a 15-30% premium in an all-stock deal.

Steven Cahall at RBC Capital Markets wrote that Viacom likely will command a premium because CBS management cares more about control than price and wants to get the deal done, it would help avoid shareholder lawsuits and it would compensate Viacom for its turnaround efforts.

A hypothetical 20% premium would yield $500 million in annual cost savings, observes Bank of America Merrill Lynch analyst Jessica Reif. (The Discovery-Scripps combo netted $350 million, by comparison.) Plus, there are potentially hundreds of millions more in synergies from bundling film and television content sales, deploying more over-the-top products or tapping into Viacom’s international footprint to boost distribution of CBS shows.

While many analysts agree with Reif that some kind of premium is likely, even many bulls aren’t certain. In a report in February in which he upgraded Viacom’s stock to “sector perform” from “sector underperform,” RBC’s Cahall predicted an ultimate deal price “at or near market prices.” Despite abundant upside for Viacom in a CBS get-together, he added, “getting to long-term operating income growth is a bit of a leap of faith.”

CBS’s aggressive posturing is said to disappoint Shari Redstone, who is pushing for the merger. She believes that combining CBS and Viacom makes the most sense for the future, especially at a time when the media landscape dominated by giants.
Any deal that gets done must benefit both sets of shareholders.
The Redstone family’s holding company, National Amusements, might not back a deal that tilts too heavily in favor of CBS, or hands over control solely to the network’s top executives — as CBS’s initial offer proposes. The combined company won’t look like a broadcast network, but rather a media conglomerate with diversified holdings in film, television and online. The executive team should have the expertise in leveraging all the company’s assets, the thinking goes.
Associated Press

At 94, Sumner Redstone has kept the faith for many a decade. Since building a global media operation out of a handful of movie theaters still run by Boston-based holding company, National Amusements, the Redstone family controls CBS and Viacom with a nearly 80% share of voting stock. The media mogul, who is in failing health, will cast only one vote among the seven National Amusements directors in deciding the fate of CBS and Viacom, The Wall Street Journal reported.

The Department of Justice and Federal Communications Commission treat the two media companies as if they are the same, from the point of view of granting broadcast licenses and cross-ownership restrictions, Martin notes.

“The good news here is that if CBS and Viacom decide to merge, we foresee no regulatory hurdles,” Martin wrote in a recent analyst note.

Reporters don’t interact these days with the senior Redstone, whose title has been chairman emeritus since an epic legal struggle over control of the companies that put cringe-inducing details about Redstone’s mistresses and medical condition out in the open. Sources who do talk to him frequently today insist he is aware of the latest discussions about his onetime empire. He now communicates with the aid of an iPad loaded with short responses — “yes,” “no” and “f— you” — recorded in his voice, the Journal reports. Shari Redstone, his once-estranged daughter, has reconciled and focused on leading the charge to get the companies back together.

The key motivation, as Martin noted, is how dramatically the media landscape has changed since the last time these two companies were last at the altar in 2016.

The industry is undergoing a dramatic period of consolidation. AT&T is pursuing an $85 billion merger with Time Warner. The Walt Disney Co. proposed a $52.4 billion deal for 21st Century Fox film and TV assets. Discovery Communications just closed its $14.8 billion acquisition of Scripps Networks interactive.

Meanwhile, technology companies like Netflix, Amazon, Hulu and Facebook are investing billions of dollars in original content that competes directly with television programming. Skinny-bundle services, beginning at $20 a month for an array of channels with no annual contract, are allowing consumers new choices in terms of how much they watch and pay. Traditional video subscriptions, which have been called “the cash cow” by many distributors testifying and email evidence introduced in Washington in the AT&T-Department of Justice trial, are dropping as a result. It’s now a race to see who can most effectively make up the difference on the streaming side.

CBS

Martin said a CBS acquisition of Viacom would advance the network’s aggressive streaming strategy. CBS already has attracted 5 million subscribers to its CBS All Access and Showtime streaming services, and expanded its portfolio of digital offerings to include CBS News, CBS Sports HQ and a celebrity-rich Entertainment Tonight product to launch this fall.

Paramount Pictures’ deep, rich film library, which includes such classics as the The African Queen and It’s a Wonderful Life and poplar franchises like Mission Impossible—would increase the popularity of these streaming services. Some analysts have appraised it at north of $1 billion given the streaming economy and the lack of comparable assets. Paramount Television has grown its production output dramatically by tapping into the library with shows like Shooter for USA or Jack Ryan for Amazon.

“You’re going to have better over-the-top subscription adoption if you have deep libraries,” Martin said. “Another thing that adds value: if you have a hit movie and you put it on CBS. That’s a cool thing.”

Combining CBS’s top-rated broadcast network with Viacom’s two-dozen cable networks would strengthen its negotiating position with traditional pay TV distributors, as well as with the new crop of internet TV providers.

“If there’s an anchor tenant called CBS that everybody must carry, CBS is going to be in every skinny bundle,” Martin said. “Every skinny bundle, they’re going to say, ‘If you want us in the bundle you’ve got to talk to us about the other 24 channels.”

The long, tangled saga of the two Redstone-controlled entities would provide more than enough material for a long-running serialized drama on CBS. Or at times, maybe Paramount’s Friday the 13th slasher-movie franchise.

In 2005, after the company had operated as one large entity for five years, Sumner Redstone decided to split it in two. The move was seen as a way to appease investors and Wall Street analysts, who saw AOL’s disastrous combination with Time Warner as a cautionary tale. Bigger, the feeling was then, wasn’t necessarily better.

A funny thing happened soon after the conscious uncoupling—Viacom’s fortunes drifted south while CBS kept powering its way to more broadcast TV dominance and a more cohesive story for investors.

The drags on Viacom then, as now, were faltering cable network ratings. Plus, while many would associate this knock with the era of Philippe Dauman, compensation started raising questions about Dauman’s predecessor, Tom Freston. Despite Freston’s bona fides as one of the principal architects of MTV and a magnet for creative people, some critics felt the CEO was lining his pockets even as the company was floundering.

Freston’s 25-year run at Viacom ended in a bizarre Labor Day episode in 2006, when he was summoned to Redstone’s Beverly Hills mansion and summarily fired. Ironically, one cause of the shocking move was Freston “missing out” on buying MySpace, which Rupert Murdoch had swooped in to acquire (much to his later regret). The ouster followed soon after Redstone ended Tom Cruise’s long and fruitful association with the studio due to an array of factors, but not helped by his “couch jumping” episode with Oprah Winfrey. (They later patched things up.)

Former Viacom executives recall the rationale for the split, which became official in 2006. Internally, CBS was viewed as the value stock, the stodgier of the two media companies, one that would grow slowly and pay predictable dividends. Viacom, with its youth-focused cable networks, was considered the growth play. Insiders expected it would grow like mad, fueled by such buzzy shows as MTV’s Laguna Beach: The Real Orange County.

With turmoil marking Viacom’s first year as a stand-alone business (turmoil that would reach operatic levels in the years to come), CBS got on a hot streak and turned the tables, becoming the more appealing stock to Wall Street.

Under Moonves, a onetime actor and producer known for his programming savvy, CBS launched a string of hits including The Big Bang Theory, How I Met Your Mother, NCIS: Los Angeles and The Good Wife and profited around the world from its productions. It also invested $1.8 billion building a web presence with its acquisition of CNET, started its own film studio and, eventually, adapted to changing consumer viewing habits with the introduction of streaming subscription services, starting with CBS All Access. Along the way, it shed non-core assets like outdoor advertising and radio to become even more of a pure-play operation.

Viacom, meanwhile, became the conservative player under Dauman, who rose to power as Redstone’s personal attorney. It emphasized stock buybacks over acquiring assets that could grow the studio’s business, taking a pass on Marvel Entertainment even through its Paramount Pictures unit distributed Marvel’s first four films (it sold the rights to The Avengers and Iron Man 3 to Disney).

The film studio was further hampered by severed ties with CBS-owned Showtime. Without a lucrative premium-cable output deal, Paramount teamed with Lionsgate and MGM on the launch of Epix, an enterprise that came out of the gate slowly, though it has since matured. Dauman, meanwhile, was widely seen as enriching himself (he commanded some of the top paydays of any corporate CEO earlier this decade) while starving the film studio and cable television networks of resources needed to develop fresh programming or innovate online.

Talent also started a mass exodus—first top executives and then on-air talent like John Oliver and Stephen Colbert (who, with an extra twist of the knife, decamped Comedy Central for a top-rated run as David Letterman’s successor on CBS). Jon Stewart, probably the biggest star who ever walked on a Viacom set during his run at The Daily Show, has described feeling that Dauman treated him indifferently. Soon after Trevor Noah was named the show’s host, Stewart announced a new animated project at HBO. That show later fizzled but in any case a cornerstone star had officially left the Viacom fold, making a statement about Viacom’s culture at the time.

“Culture is everything in a media company,” former MTV executive Jason Hirshhorn once told Vanity Fair, in a profile of Dauman. “Because what culture breeds is a subconscious sense of working harder, because you care. When you don’t like your C.E.O., when you don’t hear from him, when you read all these terrible things, when your friends get fired, when you don’t get the bonuses, when the stock has dropped . . . and you have a guy that doesn’t even talk about the programming . . .” At that point, according to the story, Hirschhorn’s voice trailed off in disgust.

Bakish, the seasoned company veteran who has been CEO of Viacom since December 2016, is well regarded internally and on Wall Street. One area where he has stabilized things is distribution. Dauman alienated many MVPDs by pushing hard for increased carriage fees and found some big players – like Suddenlink, now owned by Altice USA – dropping Viacom channels. Bakish has worked to mend a lot of fences, negotiating a peace treaty with Altice and ending the Suddenlink outage after nearly two years of darkness.

With former Fox Studio chairman Gianopulos setting Paramount on a more promising course (at least by 2019, the studio vows) and some upticks in ratings at MTV and VH1, “People are excited to work there again,” said one former executive said.

Still, there is plenty of work to be done. During the AT&T trial in Washington, Warren Schlichting, head of Dish Network’s Sling TV skinny bundle service, was asked which network groups offered “must-have” programming. He rattled off the names of those he considered “the five families” – Turner, Disney-ABC, NBCUniversal, CBS and 21st Century Fox.

A government lawyer asked him why Viacom wasn’t on the list. “They would have been considered ‘must-have’ 5-6-7 years ago,” he replied. “But they generally stopped investing in their product.”