By Keach Hagey and Joe Flint
Weeks after cementing a powerful role in her family's $40
billion media empire, Shari Redstone is moving to potentially undo
the last big strategic move of her ailing father, Sumner
Redstone.
National Amusements Inc., the Redstone family's holding company,
is poised to urge the boards of the companies it controls -- Viacom
Inc. and CBS Corp. -- to explore a merger, according to people
familiar with the matter. It plans to send its message in a letter
delivered before the market opens Thursday, they said.
Coming a decade after Mr. Redstone split the two companies from
each other, the proposed reunion would be effectively an admission
that the divorce, which was originally intended to free Viacom's
then fast-growing cable channels from the drag of CBS's old-school
broadcast assets, didn't pan out as intended.
Viacom's 26 U.S. cable networks -- many of which are small or
have had significant viewership declines -- now look vulnerable in
an era when consumers are cutting the pay-TV cord and signing up
for slimmed-down bundles of cable channels. CBS, meanwhile, has
been a prime-time ratings juggernaut and has boosted its position
in the market by carrying big sports events like professional
football and college basketball.
"We never thought they should ever be separated," said Michael
Nathanson, an analyst at MoffettNathanson, adding the 2006 split
"destroyed tons of [Redstone] family value over a decade."
Ms. Redstone rose to power in her father's empire after a
bruising power struggle that played out this summer. She is
president of National Amusements, and recently ousted her longtime
rival, former Viacom Chief Executive Philippe Dauman, from the
boards of both the family holding company and Viacom.
Mr. Redstone, who is 93 years old and in ill health, remains on
the board of National Amusements, though he stepped down from his
role as chairman of both CBS and Viacom earlier this year amid
questions about his mental capacity.
Viacom has been struggling with underperforming assets like its
Paramount Pictures studio and cable channels MTV and Comedy
Central, which has led to a slide in its stock price. The company
has $12 billion in debt and has been under pressure to improve its
operating performance. Moody's Investors Service recently
downgraded its credit rating to the lowest level of investment
grade.
Viacom said last week that its interim CEO, Tom Dooley, was
planning to leave in November. It also halved its dividend, and
said it planned to tap the bond markets.
On Wednesday, after Reuters reported news of National
Amusements' plans to urge the companies to consider a merger,
Viacom shares rose 3.1% to $36.56, while CBS shares rose 4% to
$54.15.
A merger could provide a strong leader for Viacom in the form of
CBS CEO Leslie Moonves, a favorite of media investors.
Ms. Redstone broached the topic of a Viacom-CBS merger with Mr.
Moonves several months ago, a person familiar with the matter said.
However, there have been no serious talks since then or since Mr.
Dauman agreed in August to step down as Viacom's chairman and
CEO.
CBS said Wednesday that, "As we've said before, the CBS Corp.
will always act in the best interest of all of its
shareholders."
Mr. Moonves has previously expressed skepticism about a merger
of the companies, and he said at a recent investor conference that
there were no active talks between CBS and Viacom.
People close to Viacom and CBS think Mr. Moonves won't be sold
on a deal unless CBS is valued at a premium to Viacom and he has
the same level of autonomy he currently enjoys at CBS. His contract
allows him to leave if the composition of the board changes.
With a popular broadcast network, CBS feels like it has a strong
hand, its executives say, and worries its leverage with cable and
satellite-TV distributors would be weakened if it had to use its
assets to cut deals for Viacom's channels, many of which are in
ratings slumps.
At the same time, however, a deal with CBS would give Mr.
Moonves, who is known for his programming acumen, a chance to
revitalize Viacom's assets.
Moreover, there would be some synergies between the two
companies. CBS could use the Viacom channels as a second home for
some of its content.
There could also be advantages internationally for CBS, as
Viacom has been building is presence abroad not only through
distributing its programming but also by acquiring or creating its
own channels.
Investors were taking a wait-and-see attitude. "We've been a
very frustrated shareholder of Viacom and a relatively happy one in
CBS," said Michael Cuggino, president of Permanent Portfolio Fund,
which owns both stocks. A merger "makes sense on a lot of levels,
but there has to be more to the story because Viacom would be a
potential drag on the performance of CBS."
Mario Gabelli, whose fund owns the largest stake of voting
shares of both companies outside the Redstone family, said the
level of his enthusiasm would come down to the "terms of the
trade." He said enticing Mr. Moonves to lead both companies would
be crucial for such a deal.
"Shari has a great relationship with Les, so the logical choice
is [asking] Les, 'Do you want to go global? Do you want a studio?
And do you want some interesting challenges?" Mr. Gabelli said.
Analysts have been running the numbers on a possible merger in
recent months, often concluding that under most scenarios a
combination would be more beneficial to Viacom shareholders than
those of CBS.
CBS shareholders are only likely to see an upside if an
all-stock transaction includes synergies of more than $500 million
and the combined company is valued at 8.5 times 2017 earnings
before interest, taxes, depreciation and amortization, or higher,
according to an analysis from Barclays.
Minimizing the premium placed on Viacom and selling assets would
boost the upside for CBS's minority owners, Barclays analyst Kannan
Venkateshwar wrote in a note this week.
--Shalini Ramachandran contributed to this article.
Write to Keach Hagey at keach.hagey@wsj.com and Joe Flint at
joe.flint@wsj.com
(END) Dow Jones Newswires
September 29, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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