Drumbeat for CBS-Viacom Reunion Grows Louder as Board Grapples With Key Decisions

CBS Corp.’s board of directors will gather in Los Angeles on Thursday morning for a regularly scheduled meeting that has spurred much speculation about movement toward a recombination with Viacom.

The board has no shortage of issues to discuss, from CBS’ ongoing search for a permanent CEO to the arbitration battle brewing with former chairman-CEO Leslie Moonves over his $120 million severance payment.

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But the most pressing issue is likely to be the question of the future of the enterprise at a moment of turmoil for traditional media. The conventional wisdom is that CBS needs to decide whether it will be a buyer or a seller.

The drumbeat around a re-merger with Viacom is getting louder because the two companies share a controlling shareholder in Shari Redstone’s National Amusements Inc. Redstone has twice in the past three years tried to nudge the boards of both companies to work toward a merger, which faced strong opposition from Moonves’ regime at CBS. With that obstacle removed, the belief among many at both companies is that a reunion is only a matter of time. Viacom acquired CBS in 2000 but the two companies were split up again in January 2006 in an effort to boost the market value of both entities.

“Putting CBS and Viacom back together would not solve all the existential issues facing both of these companies, but it would deliver scale and cost savings to build a bigger, more secure entity,” analyst Michael Nathanson, longtime CBS and Viacom watcher, wrote earlier this month. Nathanson argues that both companies would be better off together.

“As most would agree, Viacom would be able to use the CBS network’s stick to better protect Viacom’s networks from draconian price cuts and re-tiering. The combination would generate massive cost cuts which CBS could artfully deploy into more original content spend and higher NFL rights fees,” he wrote in a Jan. 17 report.

One external factor that could influence the timing of a deal is the looming negotiations with DirecTV that both companies face this year. DirecTV, now owned by AT&T, is under pressure to cut programming costs as it sheds subscribers. But it is still the nation’s largest MVPD with about 24.5 million domestic subscribers, and thus it is a big contributor to affiliate fee earnings of both CBS and Viacom.

Viacom is bracing for rate cuts for its large portfolio of cable channels in its new DirecTV deal. It already has faced a downsizing of fees with other large distributors such as Charter Communications. AT&T chairman-CEO Randall Stephenson told investors in Wednesday that DirecTV has to press for a “rationalization” of programming costs given the declining subscriber base. That was a clear message to Viacom, CBS and other programming giants.

The specter of the DirecTV negotiations has led to speculation that Viacom and CBS will pursue a combination sooner rather than later, to strengthen Viacom’s hand. But others believe the CBS board will not take any steps until Viacom has set its new deal, in order to allow the boards of both companies to gauge how big of a dent the new DirecTV pact will put in Viacom’s future earnings. CBS’ deal is believed to expire later in the year.

CBS’ search for a new CEO has unquestionably been complicated by the prospect of a Viacom reunion on the horizon. Board members are said to have spent the past few months assembling a short list of candidates. But without clarity on how much M&A is in CBS’ future — whether with Viacom or companies outside Redstone’s orbit, or both — the recruiting process is going to be challenging.

Some influential voices on Wall Street remain dead-set against a re-marriage of CBS and Viacom, given the pressures on Viacom’s core basic cable assets. Bernstein & Co. analyst Todd Juenger examined the options for CBS in a report last week and questioned why CBS’ board would vote for a merger that it unanimously rejected last year. More than half of CBS’ 11 board members have turned over in the past four months, as part of the settlement that led to Moonves’ ouster. But the fundamentals haven’t changed, in Juenger’s view.

“If the CBS independent directors conclude they must take action to acquire a company in pursuit of scale and synergies, we strongly believe they could get better quality scale with equal or better synergies by pursuing targets other than Viacom,” Juenger wrote in a Jan. 25 report. “In fact, we don’t believe CBS should be pursuing cable network groups at all. But if they are bound and determined to do so, we believe either Discovery or AMC Networks would be better targets than Viacom.”

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