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CBS Corp. and Viacom Inch Closer to Formal Merger Discussions

CBS Corp. and Viacom are inching toward formally exploring a corporate reunion of the two halves of the Redstone media empire.

There is less opposition within CBS Corp. this time around compared to the last attempt by CBS/Viacom vice chairman Shari Redstone to bring the two companies back together in the fall of 2016. The early rumblings are that CBS would acquire Viacom in an all-stock transaction.

There are still big hurdles to clear in terms of valuation for Viacom, given the systemic concerns around its lower-profile U.S. cable networks, but there is also an understanding that the media landscape is changing fast and the potential for the two sides to work together on international growth initiatives provides rationale for a reunion. Viacom’s share price has also tumbled further during the past year, making a deal more attractive on a financial basis for CBS shareholders. As of Thursday, Viacom had a market cap of $13.8 billion, with shares closing at $33.61. CBS is valued at $22.7 billion, with shares closing at $59.27.

Sources close to the situation emphasize that neither side has yet engaged bankers or advisers to hammer out an agreement. But CBS Corp. CEO Leslie Moonves and Viacom CEO Bob Bakish have had at least one discussion about the possibility of merging, according to a Reuters report Thursday.

Media reports earlier this month that Redstone was poised to nudge the two companies into merger discussions raised some hackles at both companies. But after the emotions settled, the positive attributes of a reunified company are said to have become clearer for both camps. It’s understood that Moonves would run the combined operation with Bakish serving as a key corporate lieutenant. In 2016, the merger discussions initiated by National Amusements, the Redstone family holding company, came before Bakish was appointed as permanent CEO and Viacom was still reeling from the public legal battle between the Redstones and former Viacom CEO Philippe Dauman.

CBS and Viacom were first brought together in 2000 by Sumner Redstone, now chairman emeritus of both firms. The two were split up again in January 2006 out of Sumner Redstone’s frustration with a sagging stock price.

Moonves and Bakish have had a cordial relationship over the years. The two came to know each other after Viacom acquired CBS in 2000, when Bakish was running Viacom’s international channels division.

CBS’ management team has had a storied run of maintaining its status as the nation’s most-watched network, building Showtime into a major player, expanding its TV production activity, and diving into the OTT arena with CBS All Access. The expectation is that a recombined CBS and Viacom would have a stronger balance sheet to compete for talent, M&A opportunities, and for the pricey sports rights that have been crucial to CBS’ ability to wring top dollar out of MVPDs in retransmission consent deals.

For CBS, access to Viacom’s Paramount Pictures unit would help CBS’ Showtime pay cable network. The general streamlining of overlapping operations could yield savings of as much as $500 million, according to analyst Michael Nathanson of MoffettNathanson.

The downside for CBS is that the enlarged company would be the antithesis of the strategy that the Eye has touted to investors for years. CBS Corp. and its handful of channels anchored by the mothership broadcast network has been able to command top dollar from MVPDs in retrans and carriage agreements because it has been able to drive hard bargains for two must-have channels: CBS and Showtime. Adding Viacom’s 25 domestic cable channels would change the dynamic of discussions with traditional and upstart MVPDs considerably.

Under Bakish, however, Viacom has taken big steps to channel most of its programming resources into six flagship cable brands — Nickelodeon, MTV, VH1, BET, Comedy Central and Paramount Network (the rebranded Spike TV that debuted last week). Undoubtedly, it is only a matter of time before Viacom begins to shutter some of its lesser channels which are already losing distribution as MVPDs take a harder line in dealmaking and consumers embrace skinnier, cheaper bundles.

A deal between CBS and Viacom would also remove a hurdle to future M&A activity. It’s understood that the Redstones had previously balked at dealmaking opportunities involving CBS Corp. unless Viacom was also in the mix.

Reps for CBS, Viacom, and Shari Redstone declined to comment. The companies will likely have to acknowledge the brewing discussions by the time that both report earnings for the fourth quarter of 2017. Viacom is up first on Feb. 8, followed by CBS on Feb. 15.

(Pictured: Leslie Moonves, Bob Bakish)

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