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Viacom vs. vagaries

Stock slips as CBS merger euphoria dies

NEW YORK — Viacom stock lost some luster in a rocky market Wednesday as it trends lower following last week’s blockbuster merger announcement with CBS Corp.

That deal pumped Viacom shares to a 52-week high of $49.63. It’s lost nearly 11% since then, despite nearly unqualified kudos for the combination of two companies with such complementary assets and strong management.

“I’m a little surprised” at the dip, said Schroder & Co. analyst David Londoner. He and several other Wall Streeters think some Viacom investors may have been a tad disappointed that their company bought CBS instead of the other way around.

The reverse possibility had been batted about in the press with speculation fueled by the fact that CBS has a bigger market capitalization than Viacom.

In ‘limbo’

Analysts also cited “deal limbo,” where a stock trades mainly sideways until shortly before a deal actually closes — in this case, six to nine months from now. Merrill Lynch’s Jessica Reif Cohen said that’s what happened with Seagram Co., until about a month before it closed its $10.4 billion buy of Polygram late last year.

And Time Warner shares didn’t start rising until months after it closed its 1996 purchase of Turner Broadcasting. However, opinion on the Street was much more mixed about that deal at the time than it appear to be about the Viacom/CBS combo.

Big institutional holders of both Viacom and CBS also may be lightening up their positions in each. After the two companies become one, these investors would wind up with twice as much Viacom stock as they have now if they don’t unload some.

Bidding war

The threat of a bidding war can push the stock of an acquirer lower — and some noted that Viacom didn’t offer much of a premium for CBS. But it’s highly unlikely anyone would launch a counteroffer for CBS given the huge size of the all-stock deal — about $35 billion — and the $1.5 billion breakup fee. “That’s enough to make you think real hard about it,” said Dennis McAlpine of Ryan Beck & Co.

Of course, analysts pointed out, arbitragers routinely fiddle with share prices after a merger announcement to wring profits out of changes in the spread between the stocks involved. But in that case, the two stock usually move in opposite directions and in this case CBS is down from its highs as well. CBS shares dipped 4.8% Wednesday to close at $48.31.

Most media stocks have been punished lately for reasons no one seems to fathom beyond the ever convenient “sector rotation” explanation. That may have just brought to the surface any nagging doubts, however small, investors may have about the Viacom deal.

“The initial reaction to the deal was, ‘This is the best thing since sliced bread.’ But on a day like today, when everything is down, they may be asking themselves how Sumner (Redstone) and Mel (Karmazin) are really going to get along,” fund manager Alan Snyder said.

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