Viacom/CBS: Major investor sees Moonves key to merger, source says

Provided exclusively by Mergermarket

Retaining CBS [NYSE:CBS] CEO Les Moonves is the most important factor in merging CBS and Viacom [NASDAQ:VIA.B], said a person familiar with a top independent investor in the two media groups.

In February, the two New York-based companies controlled by National Amusements formed committees to explore a potential recombination. CBS reportedly offered Viacom 0.55 shares of CBS stock for each share of Viacom Class B stock in late March. Viacom immediately rejected the bid that came in below its USD 12.5bn market cap, according to media reports.

Viacom, an operator of cable networks and the Paramount Pictures movie studio, recently made a counterproposal to CBS that valued the company at USD 14.7bn, according to Reuters. A person familiar with CBS said it has received Viacom’s counteroffer and will respond in due course.

A person familiar with Viacom’s thinking said the company’s board takes the view that Viacom’s public market valuation is only reflective of the company’s US cable TV channels, which are only just starting to show signs of a turnaround after more than 10 years of lackluster results. The shares are not indicative of results at Paramount or the company’s international operations, the person said. Viacom shares have fallen by 50% over the past five years as revenue growth has stagnated.

From National Amusements’ perspective, though, it should not matter if Viacom is valued at a premium in a deal since the merger would be an all-stock transaction, said the person familiar with the independent investor in the media groups. Shari Redstone, the daughter of 94-year-old mogul Sumner Redstone, has super-voting control of Viacom and CBS through National Amusements.

When the Redstones tried to recombine the companies in December 2016, that proposal fell apart due to Moonves’ reluctance to run the combined entity.

Media reports last week said Moonves has agreed to run CBS post-merger for two years, but that there is disagreement over who should be his second-in-command. Moonves wants his chief operating officer, Joseph Ianniello, to be number two, while Shari Redstone may want Bob Bakish, CEO of Viacom, to assume that role, said the person familiar with Viacom’s thinking.

However the situation is resolved, it is imperative that Moonves be CEO, said the person familiar with the top investor. CBS shares have risen 30% from their September 2015 lows, largely due to Moonves’ efforts, added Tuna Amobi, a media and entertainment analyst at CFRA Research.

The person familiar with the investor’s view said it strikes him as silly that contention over Ianniello and Bakish could scuttle the deal, but added that it does make sense that Moonves would want to remain loyal to his trusted lieutenant. Still, this person said, Shari Redstone appears determined to have Bakish be the combined entity’s president.

Bakish has been done an admirable job leading Viacom since he permanently took over the CEO role in December 2016, the person familiar with the investor said, particularly in the international arena.

The person familiar with Viacom’s thinking said the company’s board takes the view that giving Bakish a role as president of the combined entity would mean having an executive in one of the two most senior roles who understands Viacom’s assets. Further, this person explained, Viacom shareholders must be secure in the knowledge that one of the most important executives in the combine company is looking after their interests.

Bakish’s strategy at Viacom, Amobi said, is considered to be “well thought out,” especially considering the mess he inherited from former CEO Phillipe Dauman, who was ousted in the fall of 2016. It is not clear whether Moonves is ideally suited to continue overseeing Viacom’s turnaround strategy, Amobi pointed out, because of the skepticism of Viacom he has telegraphed to Wall Street.

The hallmark of Moonves’ achievement at CBS has been his ability to diversify the company’s revenue base, said Amobi. When he assumed command of the company in 2005, the CBS television network was almost entirely dependent upon advertising, which meant the stock was cyclical, Amobi said.

Moonves has been able to add new revenue streams, including over-the-top (OTT) video streaming and – perhaps most importantly – by securing significant increases in the fees paid by cable and satellite companies to retransmit the signals of CBS’ owned-and-operated television stations, Amobi said.

The network has also been aggressive in demanding reverse compensation from CBS affiliates, Amobi added, noting that CBS’ stances in both areas were initially met with skepticism on the part of rival broadcasters and Wall Street. Over the course of a few years, both of those constituencies have seen the effectiveness of both strategies, the analyst said.

CBS took in more than USD 1bn in retransmission revenues in 2016, and overall revenues rose 4% in 2017 to a record USD 4.4bn, led by a 27% increase in fees from affiliates and retransmission deals.

Notably, Ianniello has been instrumental in securing CBS’ retrans and reverse compensation deals, Amobi and an industry banker said. For this reason, Moonves can make the case that Ianniello is indispensable, Amobi said, especially as these revenue streams have been so important to the company’s move away from dependence on ads.

Ianniello’s tough tactics are also important, the banker said, because OTT has yet to be significantly monetized, and CBS has to get all it can from reverse compensation.

However, because Moonves is so important to the Redstones’ plans, a second industry banker said, Ianniello is likely to assume the number two position at the combined entity. While Bakish is competent, the banker explained, he simply does not have the “clout in the industry to attract talent that Moonves does.”

Viacom and CBS declined to comment. National Amusements did not immediately respond to request for comment.

by David B. Wilkerson in Chicago and Jonathan Guilford in New York

As seen in the Mergermarket newsletter, an Acuris company, on 9/04/2017

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