The prospect of a CBS-Viacom reunion moved a small step closer to reality today as the companies announced that their respective boards of directors have formed special committees to evaluate a potential merger.
Both companies cautioned investors that there can be no assurance that a transaction between the former corporate office mates will occur, and both companies’ independent boards and shareholders would have to approve. But Shari Redstone has been working behind the scenes to push for talks to re-unite the companies, in hopes of positioning the media properties for the future.
Redstone’s National Amusements, which owns a controlling stake in both media companies and 80% of their Class A shares, applauded the start of formal start of merger talks. “National Amusements supports the processes announced by CBS and Viacom to evaluate a combination of the two companies, which we believe has the potential to drive significant, long-term shareholder value,” the company said in a statement. “National Amusements does not currently intend to make any further comments regarding the process.”
CBS and Viacom called off merger talks in 2016. But the media landscape has evolved dramatically since then, amid to the proposed mega-mergers of AT&T and Time Warner and Disney and Fox. Industry observers believe that size and heft are essential for media companies hold their own — especially as tech giants increasingly make inroads in entertainment.
Veteran media analyst Rich Greenfield of BTIG sees CBS having little choice but to bulk up to have the financial wherewithal to successfully compete for professional sports rights, the linchpin of the traditional TV bundle.
“Unless CBS scales up meaningfully in the next couple of years, [CBS CEO Leslie] Moonves may have to start facing up to the reality of what he currently sees as unimaginable – the loss of NFL programming (current contract expires in 2022),” Greenfield wrote. “And without Sunday afternoon NFL programming, it is very hard to envision CBS maintaining its retransmission consent fees at a level anywhere near where they are today, let alone the growth investors are expecting in retrans over the next several years.”
Greenfield notes that it’s not hard to imagine a combined AT&T-Time Warner making a bid for Monday Night Football; or NBC trying to lay claim to Sunday afternoon games. Disney, Comcast and AT&T would all dwarf a standalone CBS in terms of scale. And then there are the digital goliaths such as YouTube, which this week announced it had secured rights to carry live professional soccer games for the newly formed Los Angeles MLS team.
The most likely dance partner, Greenfield concludes, is its former corporate spouse, Viacom, with its complimentary media holdings.
“I think the odds that this doesn’t happen are very slim,” Greenfield said in an interview. “There’s just too much compelling logic to it.”
The two companies initially got together in a historic combination in 2000, parting ways again in 2006, having witnessed the downside of massive roll-ups that went south, the classic case being AOL Time Warner.
Since then, their fortunes have diverged, with CBS running the dominant broadcast network, a profitable studio business and group of local stations, among other assets. Viacom’s cable portfolio, while full of household names like Nickelodeon and MTV, remains widely carried but has seen secular declines in ratings in recent years as consumers enjoy an array of competing entertainment options.
Viacom also has faced extra turmoil this decade, ousting former CEO Philippe Dauman, who was once the protege of Redstone’s father, Sumner. Dauman’s 2016 exit came amid a blitz of legal acrimony and scandal surrounding Redstone, who is now 94.
Bob Bakish, a low-key international exec who took the reins as CEO in December 2016, has been widely credited with stabilizing Viacom and appears to be in position to become a top executive of a recombined entity should a deal come to pass. The presumed uber-boss of a reunified company, however, would still be Moonves, who has compiled one of the most impressive track records in media over the past several decades.
Sentiment on Wall Street has been building toward a deal ever since word surfaced in January that Shari Redstone was encouraging a restart to talks.
As rumors swirled about merger discussions, analyst Michael Nathanson of MoffettNathanson Research weighed in with a report saying that CBS and Viacom would be more valuable together. He said the arguments for merging were clear: the combined companies would have greater leverage in negotiations with pay TV distributors, and they would realize cost savings. Moreover, the world around CBS and Viacom will soon be inhabited by giant companies with endless balance sheets — a dawning reality that is dragging on the smaller media companies’ stock.
Moonves, who was cool to the prospect in 2016, appears to be open to the possibility now, Nathanson notes, citing comments the CBS executive made last fall on CNBC about the need for scale. “Now we’re competing against monstrous companies,” Moonves said at the time. “Disney is six times as big as we are. Comcast is six times as big as we are. Netflix’s market cap is huge. Now Amazon, the No. 1 company in the world, is producing content.”
This morning, UBS analyst John Hodulik issued a report including models for what the combined entity would look like.
“We believe there would be opportunities for operational synergies, including CBS’s strong affiliate leverage (#1 network on TV in total viewers) helping to increase Viacom’s distribution and incorporating Viacom’s advanced advertising capabilities across CBS properties,” he wrote. “Content produced by CBS and Viacom is also complimentary (Viacom’s younger audience and film studio with CBS’s older audiences and TV production), giving the combined entity more scale and breadth of content offerings.”
Moody’s Senior Vice President Neil Begley concurred.
“The potential of a recombination of CBS and Viacom would provide CBS with increased scale, more diverse assets, a major studio, while it would bring many of those same benefits to Viacom, the most important would be to put a surer footing beneath Viacom while it continues to turn around its media networks and Paramount,” said Begley.