CBS Makes First Viacom Merger Proposal

David Livingston/Getty Images; Jenny Anderson/Getty Images
CBS Corp. chairman and CEO Leslie Moonves (left), Viacom CEO Bob Bakish

The leadership team of Leslie Moonves and Joe Ianniello would run the combined company under the proposal, which valued Viacom below its market price.

CBS Corp. has shared its first merger proposal with Viacom, kicking off negotiations between the two entertainment companies controlled by the Redstone family that could recombine them 12 years after their separation.

The all-stock proposal was submitted by an independent committee of the CBS board to an independent committee of Viacom's board. One source familiar with the situation said the offer was sent on Friday, but word only came after the market close on Monday. That source said it put a below-market price on Viacom when it was submitted.

A source said the proposal included the first suggested valuation for Viacom, based on a ratio of the two stocks, and plans for CBS management, led by chairman and CEO Leslie Moonves and COO Joe Ianniello, to run the merged company. It wasn't immediately clear if the proposal called for Viacom CEO Bob Bakish to have any role after the potential deal closes.

Ianniello has a clause in his contract that he can leave the company with a big payout if he isn't named president by the end of 2018 or any other executive is put above him.

Analysts have long said they expect CBS to put only a small premium on Viacom compared to the latter's stock market valuation in any possible final deal.

CBS Corp. declined to comment, and Viacom couldn't immediately be reached. The companies had in February said they would form independent committees of their board to explore a recombination.

Now it will be up to Viacom's special board committee to respond. One analyst immediately suggested it would push for a premium price and likely also urge the combined company to retain Bakish, given his turnaround efforts and the fact that controlling shareholder National Amusements has been happy with his work.

The companies won't release details of their negotiations publicly, but analysts expect them to wrap up negotiations one way or another before their planned quarterly earnings reports in early May.

Viacom and CBS vice chair Shari Redstone, the daughter of controlling shareholder Sumner Redstone, early this year renewed her push for a recombination. In late 2016, the companies had also held talks about a deal but ended them, with Viacom's valuation being a key issue of disagreement.

Consolidation among Hollywood giants has since gained steam though, with the Walt Disney Co. in December unveiling a $52.4 billion deal to acquire large parts of 21st Century Fox.  

Viacom's market value had been at around $13.0 billion until late last week, with CBS' was at around $19.7 billion. Viacom has made the argument that the turnaround efforts and improvements made under Bakish should earn it a premium valuation.

"With Viacom [stock] down 2 percent year-to-date and CBS down 12 percent, we think investors ... believe Viacom will be merged at a premium," RBC Capital Markets analyst Steven Cahall wrote in a March 27 report. "There are arguments on either side, and we conclude that Viacom will likely get some premium because: 1.) CBS management cares more about control than price (within reason), and wants to get the deal done and move on; 2.) it arguably helps avoid shareholder lawsuits; and 3.) it compensates Viacom for the impact of turnaround efforts."

J.P. Morgan analyst Alexia Quadrani in a recent report wrote, "New Viacom is not the old Viacom," adding, "Executives and agents we met with were notably more positive on working with Viacom, describing the tone and tenor of the company as completely different. Viacom cable networks and Paramount were said to be easier to do deals with and were also more talent-friendly."

Analysts have estimated that cost synergies in a CBS-Viacom combination could reach $500 million-$750 million or more. Cahall calls CBS shares "a compelling buy" at the current prices and his preferred way for investors to play the CBS-Viacom deal. "We think deal-related downside risk, including a higher premium, is pretty limited," he explained. "Even with a [sector standard] 30 percent premium for Viacom and 3 percent operating expenditures synergies, we estimate 23 percent upside to CBS shares."