(Bloomberg Opinion) -- Soon, CBS may be saying “welcome home” to MTV and Paramount Pictures. The businesses’ latest quarterly results show why they would be better off back under the same roof.
CBS Corp., the $19 billion broadcaster, is said to be nearing an agreement to merge with its $13 billion corporate sibling, Viacom Inc., which owns cable networks such as MTV, VH1, BET and Comedy Central, as well as the Paramount Pictures film studio. Fourteen years ago, they all one made up one company, a collection of media assets assembled by billionaire Sumner Redstone through his legendary takeover battles. He’s 96 and ailing now, so control of CBS and Viacom has shifted to his daughter, Shari Redstone, who is behind the plan to put them back together.
Both companies posted earnings on Thursday, but neither would comment on the status of their negotiations. They didn’t have to – the earnings reports are enough to see that each has what the other needs. And after previous false starts, a deal seems likely this time around. To the extent CBS’s disgraced former leader, Les Moonves, had been one of the main obstacles, he’s out of the picture, following a series of sexual-harassment allegations last year. After all, the potential merger was always about the personalities involved, as much as it was about preserving some of Hollywood’s most iconic institutions.
Viacom CEO Bob Bakish, who would run the combined entity, is comparatively less of a suave personality and more of a roll-your-sleeves-up manager – that’s a good thing. The company has come a long way from the corporate infighting that toppled the prior regime, led by Philippe Dauman. Since Bakish was installed less than three years ago, parts of Viacom have been staging a turnaround almost no one thought possible. In fact, both CBS and Viacom have now moved on from having somewhat celebrity CEOs and cultures that were toxic to their businesses. (Unfortunately, it took exposing Moonves’s alleged misbehavior to bring about that change at CBS). It’s a positive sign that CBS’s acting chief, Joe Ianniello, a former Moonves lieutenant, is reportedly willing to work under Bakish if the merger goes through.
Bakish brought the focus back to Viacom’s finances, which were entering dangerous territory. He’s methodically worked to improve each of its lines of business, starting with MTV and then Paramount, and his efforts resulted in a much-needed boost to internal morale. Bakish did this while managing to pay down about $4 billion of debt. Viacom’s results Thursday exceeded analysts’ expectations, as the company invested in new areas of growth to counter the effect of viewers switching from cable-TV packages to online streaming services. While Moonves turned CBS into the most-watched network on U.S. television, mastering the art of TV programming, Bakish may help it weather a more competitive market in which navigating tighter profit margins will be both art and science.
All that said, Bakish has probably taken Viacom about as far as it can go on its own; the biggest, most immediate benefit of a merger will be further cost savings. Combining with CBS also offers more scale, something media companies need when going into negotiations with pay-TV providers that are looking to cut back on programming costs. Viacom had to put up a fight earlier this year to keep its networks on DirecTV and DirecTV Now, services owned by AT&T Inc., which gets to push its weight around now that it has its own media properties, including the industry crown jewel HBO. CBS has Showtime, an asset with HBO-like potential. As for CBS’s other direct-to-consumer offering, CBS All Access, the long-term viability of that $5.99-a-month app is in question when Walt Disney Co.’s Disney+ service, which costs just one dollar more, and AT&T’s HBO Max are about to hit the marketplace.
Viacom noted on Thursday’s call that it’s been able to reduce selling, general and administrative costs, enabling it to invest in growth opportunities such as Pluto TV, a free, ad-supported streaming service it bought in March. The company’s decision to tie itself more closely to advertising earned some respect on Thursday. Its Advanced Marketing Solutions program – which seeks to offer more expensive “targeted” commercials to advertisers, who eat that kind of pitch right up – helped drive a 6% increase in domestic ad revenue. CBS also boosted sales more than analysts predicted. As my Bloomberg News colleague noted, it’s had the advantage of live sporting events such as the Super Bowl, March Madness, the PGA Championship and the Masters.
There’s strong strategic and financial rationale to a deal, just as there always was. CBS and Viacom should try not to stand in their own way this time. It’s show time.
DirecTV also got into a contract dispute with CBS that resulted in an almost three-week blackout of the broadcast network, but they reached a deal this week.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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