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CBS, Viacom reach preliminary merger agreement

Charles Gasparino

The boards of CBS Corp. and Viacom Inc. have reached what is being described as a preliminary agreement on their long-awaited merger, all but guaranteeing the combination of the two media companies controlled by the Redstone family's National Amusements Inc. will be official imminently, according to people close to the matter.

The exact timing of the merger announcement remains somewhat in flux, these people said. But the boards of both companies and their investment banks are rushing to complete the necessary paperwork to announce the deal sometime today, perhaps after the market close at 4 p.m. ET, these people add.

Both companies had worked over the weekend in an attempt to announce the merger on Monday, but two outstanding issues delayed any official announcement. First, the companies needed to reach a firm agreement on the price to take into account that CBS, with a market value of $18 billion, will technically be taking over the smaller Viacom, with a market value of around $12 billion. Under the terms of the deal, each Viacom share will be worth 0.59625 shares, these people say.

The other outstanding issue involved the future of CBS interim chief Joe Ianniello. Viacom CEO Bob Bakish will run the combined company as its CEO with Ianniello and other unit chiefs reporting to him. But board members were attempting to keep Ianniello in his job beyond the end of his contract in January 2020, these people add. Ianniello is said to be negotiating a lucrative compensation package that takes into account a possible contract extension. The status of those negotiation remains unclear at the time of publication.

Press officials from CBS and Viacom declined to comment.

The exact terms of the deal, including management structure, will likely be announced when the deal is finalized, though people close to the negotiations say, given the complex nature of the merger, the timing could slip after today’s market close.

That said, the all-but announced agreement Tuesday morning is a milestone for Shari Redstone, the daughter of ailing media mogul Sumner Redstone. While Viacom and CBS were separate companies that were spun out of National Amusements Jan. 1, 2006, Shari Redstone has been seeking to reunite them since 2016.

When Viacom and CBS split in 2006, they were significant players in the media business. Management at the time believed both could achieve broader goals of expansion using their own stock as currency for acquisitions. CBS could focus on its top-line TV broadcasting of news, sports and sitcoms, while Viacom would pursue movies and distribute its niche content through cable. At the time of the spinoff, Viacom had a market cap of roughly $26 billion and was seen as a growth engine with hot brands like Nickelodeon and MTV. CBS, with a market cap of $6 billion, was established and viewed as stable but not scalable.

Just days after the spinoff, CBS’ valuation jumped to $15 billion.

Another factor in the breakup was management issues. According to veteran media analyst Rich Greenfield, “There were two senior management teams, so the rationale was that there needed to be two separate companies.”

But industry trends in recent years took a toll on both outfits, particularly Viacom, which shrunk to a $12 billion market size while CBS stagnated, hovering round $19 billion; both were dwarfed by media giants like AT&T, the parent of Warner Brothers (formerly known as Time Warner), which has a market value of $251 billion; and Comcast, the owner of NBC Universal, which is valued at $400 billion.

They also face existential threats from deep-pocketed tech companies like Netflix and Amazon that churn out content. As media has converged and cord-cutting has sliced the television audience share, Shari Redstone sought to combine the entities to achieve synergies that will keep the two companies competitive – and possibly unload them down the road.

Redstone's efforts were initially resisted by CBS' then-CEO Les Moonves who feared that what he believed was Viacom's inferior lineup would weaken the value of CBS, and make it more difficult for the company to seek a buyer.

While the Redstone's hold what's known as the controlling shares of both outfits, CBS and Viacom have separate boards and fiduciary responsibility to separate public shareholders. Moonves sued to prevent the merger on the grounds it was bad for CBS stockholders, and strip Redstone of her voting rights. Both sides reached a settlement delaying any merger of the company for years.

But with Moonves's ouster due to allegations of sexual misconduct, deal talks began in March of this year, as FOX Business was first to report. Bakish, who had been appointed CEO of Viacom in 2016 following the ouster of Philippe Dauman, was considered a natural fit to lead the combined company given his close relationship with Redstone and his record in turning around Viacom, which just announced better-than-expected second-quarter earnings.

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When the deal gets announced, the question will turn to the future. Will Shari Redstone try to expand the combined CBS-Viacom? One potential acquisition target, media watchers say, is Discovery Inc. given its size, $15 billion, and its top-branded content like HGTV and the Food Network.

But analysts say with a market cap that should hover around $30 billion, the newly combined CBS-Viacom is still too small to effectively compete with industry behemoths. Tech giants like Amazon and Apple are now entering the media space with significant streaming services and both have market values that approach $1 trillion.

“Today media is all about scale,” Moody’s senior analyst Neil Begley said. But “even joining CBS and Viacom may not be enough . . . the big question is where does the joint company go from here?”

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