CBS-Viacom Reunion Is Next Episode of Great Media Roll-Up
(Bloomberg Gadfly) -- Deal No. 4 of the great media roll-up is almost on the way: CBS Corp. and Viacom Inc. said Thursday that their boards set up special committees to explore a possible merger.
We've heard this before, but barring any offers from interlopers, a CBS-Viacom tie-up now seems more likely -- and necessary -- than ever before. The talks come just weeks after Walt Disney Co. agreed to buy most of 21st Century Fox Inc.'s TV and film assets for $66 billion, a deal that could put Disney in a much better position to compete with Netflix Inc. AT&T Inc. -- which happens to own DirecTV Now, another online service gaining steam -- is headed to court soon to defend its $109 billion takeover of Time Warner Inc., the parent of HBO, TBS and Warner Bros. studios. And cable-TV programmer Discovery Communications Inc. is merging with its rival, Scripps Networks Interactive Inc.
This is thus shaping up to be a crucial earnings season for the smaller CBS and Viacom businesses, as mogul Shari Redstone and her team work to determine the mechanics of a potential merger in which $37 billion of shareholder value is at stake -- most of it her family's. Viacom is scheduled to report quarterly results Feb. 8, while CBS's will hit the following week.
With respect to the Redstone empire, Viacom has always been considered the weak link. In fact, since billionaire Sumner Redstone (Shari's ailing father) split the companies apart in 2006, Viacom lost value, while CBS shares more than doubled under the leadership of Les Moonves, 68. Still, CBS isn't safe from the industry's broad ratings pressure and subscriber declines, which is why scale is important. Viacom won't provide enough of it, but it will offer substantial cost-saving opportunities. Those synergies may amount to some $500 million based on what past deals have yielded, according to Geetha Ranganathan, an analyst for Bloomberg Intelligence. That could create quite a lift for CBS's earnings.
Much has changed since 2016, when Shari Redstone first directed the companies to explore a deal and then withdrew those plans. While Viacom's not out of the woods yet, the picture is less bleak now, and credit goes to Bob Bakish, 54. Redstone promoted Bakish to CEO in December 2016 following a nasty fight with Philippe Dauman, who had gotten a bit too cozy at the helm of the wilting company. Bakish's efforts to reinvigorate Viacom -- by shaking up MTV, re-branding Spike TV as the Paramount Network and refocusing resources on the company's six most important channels -- are beginning to bear some fruit. He recently renewed a distribution deal with Charter Communications Inc., averting a blackout, and he sees affiliate-fee growth turning positive in 2019.
Furthermore, Viacom offers CBS a greater international footprint at a time when the U.S. market is losing its luster. Viacom announced on Wednesday a transaction that gives its partner in India 51 percent ownership of their Viacom18 joint venture, a move that JPMorgan Chase & Co. analysts say may speed growth there and boost Viacom's "underappreciated" international business -- the division Bakish previously ran. Viacom also has some of the most diverse TV audiences with MTV, BET, Comedy Central and Nickelodeon, and that can be appealing even if Viacom hasn't realized that potential with mobile and streaming yet.
But perhaps most intriguing to the Redstones -- because at the end of the day, a merger isn't about minority investors -- is that putting Viacom and CBS back together could solve a succession problem. Viacom's CEO is a decade younger than Moonves and he's played nicely with Shari Redstone, who seems to like what he's done with Viacom so far. Moonves is set to retire in 2021, though I wonder if that timeline could accelerate. Perhaps Moonves could be chairman and Bakish the CEO.
I'm unsure where Viacom would fit into CBS's digital platform. The company has added users to its CBS All Access and Showtime apps faster than expected and predicts $400 million of annual revenue by 2020 from CBS All Access alone. Viacom doesn't have its own over-the-top service and was left out of PlayStation Vue and YouTube TV, but some of its networks are on DirecTV Now and Sling TV's higher-priced tier.
It's also unclear whether another player -- say, Verizon Communications Inc. or Lions Gate Entertainment Corp. -- might still seek to break up these talks between CBS and Viacom. But more than likely, the next media mashup will be a reunion. Any guesses as to what megadeal No. 5 will be?
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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