$35 billion media marriage creates showbiz powerhouse
NEW YORK — Viacom and CBS reshaped the media and entertainment landscape Tuesday, unveiling a $35 billion merger — the biggest ever in showbiz — that neatly marries vast networks of content and distribution and turns the combined company into an advertising juggernaut.
The two groups “are natural partners,” said Viacom chairman Sumner Redstone, as he and CBS head Mel Karmazin beamed at each other and assembled reporters at a packed news conference that confirmed details of a story Tuesday in Daily Variety.
The execs outlined their new empire, which they valued at $80 billion, estimated revenues next year of $24 billion and assets ranging from film and broadcasting to cable and radio, outdoor advertising and publishing.
“You can rest assured that Mel and I will put it all together,” Redstone promised. He will retain his title of chairman-CEO of Viacom, which will be folded into CBS in an all-stock deal. Karmazin will become president and chief operating officer of the new entity as well as Redstone’s successor. All Viacom divisions will report directly to Karmazin.
However, Redstone, 76, made clear he will continue to take an active role in management.
“I’m feeling pretty good and there are lots of things I want to do” at Viacom, he said. “I insisted (Mel) come with the deal. The guy is brilliant. We’re kindred spirits.”
“This is a better company with me and Sumner than with just one of us,” Karmazin chimed in. An unconfirmed report suggested Redstone agreed to a clause prohibiting him from overruling Karmazin without the support of a large majority of a new 18-member board of directors — 10 from Viacom and eight from CBS.
Dooley, Dauman out
Viacom’s current co-deputy chairmen Tom Dooley and Philippe Dauman, who had been seen as potential successors to Redstone, will leave the company once the merger becomes official. Viacom said in a statement the two will remain on the board.
Redstone will keep hold of the majority of Viacom’s so-called Class A voting shares, continuing to control the company. The merger calls for Viacom to issue CBS stockholders Viacom Class B, non-voting shares at a ratio of 1.085 Class B shares for each CBS share. Based on Friday’s closing stock prices, that works out to $48.89 per CBS share.
But as Viacom shares rose Tuesday, that value rose along with them. Karmazin noted that there is no “collar” built into the deal, meaning that CBS shareholders can ride Viacom stock higher until the partners set the final price — usually based on the average stock price of the two companies for a number of days before the shares are exchanged. The deal is expected to close in six to nine months.
Street values deal
Wall Street, which has the highest regard for both Redstone and Karmazin, applauded the announcement and agreed that in terms of assets CBS fits Viacom like a glove and vice-versa.
CBS stock rose 3.6% to $50.69, while Viacom shares jumped nearly 6% to $47.94. “We want to make Sumner’s stock worth more than Bill Gates’ stock,” Karmazin said.
The deal, according to Jill Krutick of Salomon Smith Barney, provides the new Viacom with “a free cash flow-generating behemoth” in CBS.
Redstone and Karmazin said they would use their free cash flow, basically a company’s disposable income, for buying back stock, making acquisitions or paying down debt.
Redstone pointed out that Tuesday’s agreement is debt-free. “I promised I would never leverage the company again like I did during the Paramount acquisition,” he said. Viacom paid $10 billion for the studio in 1994.
Krutick also cited “powerful vertical integration between the CBS network and Paramount, an unparalleled advertising platform for revenue enhancement, a strong management team, a crystallized succession plan and cost-savings potential.”
Karmazin, who stepped into the limelight at CBS after years as an ace radio exec, has a reputation for running a tight ship — which is one way he’s consistently achieved that “shareholder value” Wall Street so appreciates. But the radio guru was clearly making an effort Tuesday to calm fears.
It’s not about cost savings, he insisted; rather, “We are about growth and building. Our own people are our biggest assets.”
Insiders did say that one of the two corporate headquarters would go, the likelier being the CBS digs at “Black Rock” in New York’s Rockerfeller Center.
Asked whether Karmazin’s economic models fit with the high-flying Hollywood studio tradition, Karmazin and Redstone both noted that Paramount, under chief Jonathan Dolgen, has been a leader in co-financing and a stickler for keeping a tight rein on theatrical budgets.
“If (Karmazin) can cut dimes and nickels better than Dolgen does, he gets a commendation,” Redstone said.
Karmazin didn’t talk much about combining the new company’s prodigious TV production businesses, including CBS Prods., King World, Paramount Prods. and Spelling Entertainment. CBS agreed to acquire King World in April and King World shareholders were supposed to vote on that merger today. The vote was delayed for one week, but King World chairman Roger King was enthusiastic.
“It’s like we hit the winning lotto ticket,” he said. Reiterating Karmazin’s assertion that the King World-CBS marriage would be unaffected by the larger merger, he said the union with Viacom would make CBS/King World “just that much stronger.”
Justice Dept. objections
Washington sources speculated that attorneys for the Justice Dept., which also will review the proposed merger, could object to the heavy concentration of programming properties that would reside under one roof.
“The sheer size and scope of this proposed merger — the latest among large media and entertainment companies — require us to take a close look at its impact on both the antitrust landscape and the marketplace of ideas,” said a joint statement issued by Sens. Mike DeWine (R-Ohio) and Herb Kohl (D-Wis.), who are members of the Senate Anti-Trust Subcommittee.
Viacom was created during the 1970s when the Justice Dept. forced CBS to spin off some of its programming properties. The deal puts the activist Clinton Justice Dept. in the position of approving the recombination of properties that the Nixon administration forced apart.
Redstone and Karmazin stressed that Par and all Viacom’s content assets will benefit immensely from advertising and cross-promotion on CBS’ huge chain of 212 affiliated TV stations, 163 radio stations and billboards that dot the nation.
“Jon Dolgen spends a large amount of his ad budget on assets that CBS owns,” Karmazin said. Meanwhile, Viacom, through its sprawling cable networks, will give CBS the international reach it lacks and the cable presence it has not been successful in buying or building on its own.
The two companies between them also have a formidable online presence and have both expressed interest in spinning out their Internet businesses into separate publicly traded companies. Analyst Jordan Rohan of Wit Capital expects a spin-off of the combined Internet units in the second half of 2000 in an offering valued at $1 billion or more.
Karmazin said that the combined CBS and Viacom TV station group will cover 40% of the U.S., above the FCC’s legal 35% cap. The companies will lobby to get that limit raised, he said, but he indicated they will divest or swap some stations if needed in order to close the deal. He wouldn’t say which ones, but expressed a preference to preserve as many large-market properties as possible.
The deal will also give the combined companies a duopoly position, or two TV stations, in six markets. Karmazin declined to call any of the duopolies a slam-dunk, but said last month’s ruling by the FCC to allow duopolies makes it likely the pairings will stand.
The FCC will also have to decide whether to let the new Viacom retain its 50% interest in TV netlet UPN alongside CBS. Current rules forbid the Big Four networks (CBS, NBC, ABC and Fox) from owning a second national network.
The huge deal, which dwarfs all past media mergers, is likely to make other groups sit back and examine their own strategic positions.
“A lot of other people will look at the landscape to see how they can get bigger quickly,” said one insider. Other industry players and Wall Streeters agreed that the biggest question mark is NBC, owned by General Electric Corp. and the only network now lacking a studio partner. The major studios with no network attached are Sony, Universal and MGM.
Other major media and entertainment mergers have included Seagram Co.’s buy of Polygram last year for $10.4 billion; Westinghouse’s acquisitions of CBS in 1995 for $5.4 billion; Walt Disney Corp.’s purchase of Capital Cities/ABC that same year for $19 billion; Time Warner Inc. acquiring Turner, also in 1995, for $6.9 billion; and Time Inc. buying Warner Communications in 1989 for $14 billion.
(Christopher Stern in Washington contributed to this report.)