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After Philippe Dauman’s Exit, Will Viacom and CBS Merge Again?

When Viacom chief Sumner Redstone unveiled a nearly $37 billion bid for CBS Corp. in 1999, it seemed like the most natural combination in the world. “We will be global leaders in every facet of the media and entertainment industry,” Redstone crowed as he scooped up the company that broadcast TV favorites like “60 Minutes” and “Everybody Loves Raymond.” “Our union will be king — not just in content, but in its distribution, marketing, and packaging.”

If only things seemed as clear today.

Many Wall Streeters feel a second marriage between the two companies is the obvious end for both. Though Viacom and CBS split in 2006, they are still both majority-owned by Redstone’s National Amusements movie-exhibition company, which marked a major victory over the weekend by announcing the official ouster of Philippe Dauman as Viacom CEO.

The 62-year-old son of French immigrants maintains his chairman’s post through Sept. 13. That will give him a chance to push the Viacom board to continue to explore the possible sale of a minority stake in Paramount, the conglomerate’s embattled studio.

It’s unlikely that Dauman would win that fight. Redstone and his daughter, Shari, have said they are not prepared to sell. But with Chinese giant Dalian Wanda saying it may be prepared to pay as much as $10 billion, many shareholders and analysts believe a Paramount sale would unleash maximum value for shareholders.

Meanwhile, Dauman’s long-time lieutenant, Thomas Dooley, 59, replaced him as CEO and will take over the chairmanship on Sept. 13. A Viacom lifer who rose to become COO in 2010, Dooley will operate on a short leash — the legal settlement that ousted Dauman puts his No. 2 in charge only through Sept. 30; the agreement calls for Dooley and the rest of the Viacom board to name the next CEO by that date. The settlement makes Dooley eligible to stay on in the top job, but he clearly will not score points in many quarters from his loyalty to Dauman.

Unimpressed, investors sent Viacom stock down nearly 4% at the beginning of the week, in what some viewed as a signal that the Dooley era was a change in name only.

Over at CBS, chairman and CEO Leslie Moonves was able to stave off the stock plunge that put a target on Dauman’s back. Moonves launched a digital content play — the paid-subscription service CBS All Access — and kept the content pipeline filled with original programs. →

With Redstone, 93, in frail health, and his daughter, Shari, taking more of the responsibilities her father once held, a new merger with CBS might seem a fait accompli. The younger Redstone has made no secret of her admiration of Moonves’ skills. And yet, the road to such a merger is a bumpy one.

When Redstone initially combined Viacom and CBS 16 years ago, Viacom’s cable networks were viewed as blue-chip properties that reliably threw off advertising revenue and lucrative affiliate fees from cable and satellite distributors. CBS was the sleepier company, with success that hinged largely on the performance of its popular broadcast network. In 2016, the situation is reversed: CBS, albeit smaller than its peers, has gained traction in the digital world, while Viacom has worked furiously to find its balance.

That distinction could make CBS executives wary of taking on Viacom. “We believe any potential reunification would have to be underpinned with solid industrial logic, and would be required to be accretive to CBS’ financials,” Anthony DiClemente, a media-industry analyst with Nomura, said in a research note. “We are of the opinion that CBS and its board should do its best to maintain its independence from Viacom.”

Viacom has a lot to do to get its ship in working order. Two of its crown jewels, MTV and Comedy Central, have suffered ratings declines. New executives have been placed in charge of each. Meanwhile, the company has seen an exodus of top talent. Jeff Lucas, who was placed in charge of ad sales in 2015, left just a few weeks ago to take up a similar function at social-media player Snapchat. Nickelodeon, which has notched ratings gains in recent months, recently bid farewell to Russell Hicks, its president of content development, after 18 years. The growing march of Jon Stewart protégés from Comedy Central to HBO and TBS has to sound an alarm. And the company continues to scramble to either unload or quickly reverse fortunes at stumbling Paramount, the once-proud studio that made “The Godfather,” “Chinatown,” and “Titanic,” but now offers costly flops like current-release “Ben-Hur,” “Zoolander 2,” and “Teenage Mutant Ninja Turtles: Out of the Shadows.” The future of the studio’s management team, led by chairman Brad Grey, remains unclear.

Dauman had been pushing hard to sell a 49% stake in Paramount, but Sumner Redstone said through representatives that he had no interest in selling the “baby” he acquired in 1994 (with the aid of his then-attorney, Dauman).

But at one time, the Redstone camp signaled it was not permanently opposed to a deal, if it proved to add value for shareholders. That requirement has been satisfied, some would argue, by the ongoing interest of Dalian Wanda, the Chinese conglomerate that has already shown itself willing to pay a premium for U.S. entertainment assets. Wanda snapped up the AMC theater chain and, in January, Legendary Entertainment.

One major investor said that rumored values of up to $10 billion for Paramount are “silly,” but that Wanda likely would pay handsomely for what remains one of only six major studios in Hollywood. The investor suggested Moonves seems content to run CBS alone, and to avoid the potential heartache of trying to “fix” Paramount. He said that makes a decision on selling some or all of Paramount the “first order of business” for Viacom’s board.

The source, who declined to be named, suggested CBS would be the purchaser in a recombination, and might offer little or no premium for all of Viacom. The selling points would be the big upside of Moonves’ leadership, and that the combo would provide a much broader platform for CBS content.

But Eric Jackson, an executive with one Viacom investor, suggested that the conglomerate would have to sweeten the deal or risk running into massive opposition, and lawsuits, from CBS shareholders. “If they have to pay a 20% premium for Viacom today, that looks like chump change with just a few new hits from Viacom’s networks,” says Jackson, a managing director at asset management firm SpringOwl, which predicted the Dauman ouster was the best way to pump up value.

Viacom and CBS declined to make executives available for comment.

To be sure, some observers don’t want to wait for Viacom’s engine to run smoothly again, and with good reason. They’ve been waiting for that event for years, all the while suffering from a slumping stock. And some analysts imagine that Moonves could be talked into running both companies, regardless of whether Paramount is part of the equation.

“In the near-term there may be some resistance from CBS shareholders, due to the potential drag, but there is merit to a combination. And having Les run the combined company would be viewed favorably by some investors,” says Tuna Amobi of S&P Global Market Intelligence.

One Viacom investor says he can be patient. Sal Muoio, a principal of SM Investors, is a noted market contrarian who has had success following his own counsel. He thinks Viacom should take the time it needs to strengthen Paramount and its cable networks. By doing so, he says, it will become of immense value to a rival media company, or an executive like John Malone who is looking to build something new, or a subscription-video-on-demand giant willing to pay a massive premium to lock up content from MTV and Nickelodeon.

Viacom, says Muoio — who owns between 250,000 and 300,000 shares of the company across various stock classes — should try to build on the progress it has made in working with advertisers on ideas based on digital metrics. “You’d like to see them get to the point where domestic ad revenue is going up, and I think they’re on the right track to that,” he says.

Another prominent shareholder thinks the trick to engineering a new combination of CBS and Viacom is for the Redstones to find a fresh way to incentivize Moonves. In 1985, famed investor Warren Buffet helped Capital Cities pull off an acquisition of the much larger ABC television network, then agreed as part of the deal to vote with
management for 11 years, so long as one of the two top executives, Thomas S. Murphy and Daniel B. Burke, remained in charge. Mario Gabelli, who holds a prominent position in Viacom through his Gamco Investors, thinks the Redstones should do the same with Moonves.

“You could give over control and say, ‘Go do what’s necessary to take this into the digital world,’” Gabelli says.

People frothing at the mouth to see CBS and Viacom combine anew might also consider the fact that Sumner Redstone was dissatisfied with the merger just six years after making it. Whether the new digital economics of the business warrant testing the idea again is something Viacom’s new managers will have to assess in weeks to come.

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