National Amusements Withdraws CBS-Viacom Merger Proposal, Stocks Drop

Power 100: Shari Redstone - Getty-H 2016
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The controlling shareholder says it is "very impressed with the forward-looking thinking and strategic plan" of Viacom acting CEO Bakish and CBS continues to perform exceptionally well under Les Moonves."

Viacom and CBS Corp. controlling shareholder National Amusements has withdrawn its proposal for the two entertainment companies to explore a recombination.

A source told THR that the decision was driven by Shari Redstone, daughter of Sumner Redstone, as she recognized finding a price tag for a deal would be difficult. The source also said that she liked the work of CBS chairman and CEO Leslie Moonves and recently named Viacom acting CEO Bob Bakish.

"Bob has done a great job mobilizing our employees, developing a strategic plan and bringing back the culture that made Viacom great," Shari Redstone tells THR on Monday. "This has created real momentum within the company and provides Viacom with a tremendous opportunity to unlock the value of our core businesses."

In a conversation with THR, she recently called Bakish "a great leader." Sources at Viacom also tell THR that staff has taken to Bakish and his positive can-do approach to running the company, which has marked a welcome change from the leadership of former CEO Philippe Dauman.

National Amusements published a letter to the companies' boards on Monday after a CNBC report early in the day said that Shari Redstone had pulled her support for the merger idea. National Amusements, which controls 80 percent of the voting shares of both Viacom and CBS and is privately owned by the Redstones, in late September had called on the companies to explore a possible recombination. They have operated as separate companies since their split in 2006. 

Viacom's stock, which has gone higher since the deal proposal was first announced, dropped 7.4 percent in early Monday trading. CBS shares were down 2.9 percent early in the session. Investors had expected that Moonves, who is popular on Wall Street and is known as a strong operator, would run a combined company and could close down smaller networks and look to improve the ratings and advertising performance of Viacom's cable networks.

But sources tell THR that the companies had challenges agreeing on the valuation for a deal, and governance issues, such as the Redstones' influence over the operations of a merged entity, were also seen as a possible stumbling block. One banker explained that putting a valuation on Viacom was difficult amid its recent U.S. ratings challenges and the weak performance of Paramount Pictures, adding that CBS was looking to pay the current market price for Viacom or even slightly less as it was preparing for possible financial downside risks, while Viacom was focusing on possible upside and looking for a premium to its current stock price.

Wells Fargo analyst Marci Ryvicker similarly said on Monday: "We think the underlying issue came down to value – we don't know that either company was able to get to a valuation that made sense for their respective shareholders."

NA had said this fall that a combination "might offer substantial synergies that would allow the combined company to respond even more aggressively and effectively to the challenges of the changing entertainment and media landscape."

NA in its Monday letter to the members of both companies' boards explained: “We believed that given the industry landscape, a merger might redound to the benefit of both companies and their shareholders. On a parallel track, we urged both companies to move forward with steps to strengthen their operations on a stand-alone basis."

It continued: "Over the past few months, after careful assessment and meetings with the leadership of both companies, we have concluded that this is not the right time to merge the companies. Following the management changes that the Viacom board put in place, we have been very impressed with the forward-looking thinking and strategic plan being pursued under Bob Bakish’s leadership. We know Viacom has tremendous assets that are currently undervalued, and we are confident that with this new strong management team, the value of these assets can be unleashed. At the same time, CBS continues to perform exceptionally well under Les Moonves, and we have every reason to believe that momentum will continue on a stand-alone basis."

The letter concluded: "Based on our assessment of the strengths, progress and future prospects of both companies, we are requesting that the boards discontinue their discussions at this time and focus instead on their independent paths forward. We are incredibly proud of the talented and hard-working individuals who comprise both companies, and who are truly second to none in the industry. We would like to thank the boards and special committees of both Viacom and CBS for their consideration of our request."

Viacom said in a response: "We can confirm that Viacom has received the letter sent today by National Amusements, and the company will provide further updates accordingly.”

Bakish recently told THR that he was focused on running Viacom as a standalone company while a board committee was reviewing a possible CBS deal. "I have been chartered by the board to focus on running Viacom as a strong independent company and putting in place a strategy, which will grow the company over time," he said at the time.

Moonves has long said a deal would only happen if it makes sense for shareholders. He had told a UBS investor conference earlier this month that committees, lawyers and bankers have been doing their things, concluding: "We're looking at it — we'll see what happens." Sources have said that Moonves and his team like being able to focus on negotiating carriage deals for CBS and Showtime. Under a Viacom deal, they would have had to also strike deals for smaller cable networks, including some that aren't necessarily popular with all pay TV distributors.

Ryvicker in a first reaction wrote: "We are not that surprised, as we had been saying that the longer this took, the more likely a deal was not going to happen. We also thought Les Moonves' commentary at recent investor conferences was rather suggestive that CBS was better as a stand-alone." And she added: "We do think the Street has warmed up to Mr. Bakish in his new role, which might have helped Shari/NA get to their final decision." 

Analysts said Monday that now that Viacom will remain a separate company, it could look at possibly shutting down some smaller networks with little viewership and possibly further cut costs at its music channels.

One source on Monday predicted more Shari Redstone involvement at Viacom and "big" executive changes at key cable networks, with Cyma Zarghami, head of the Viacom Kids and Family Group, expected to continue at the company. A slew of executives have already departed from Viacom networks in recent months.

Bakish has said that he has asked Viacom Wade Davis to spend time working with Paramount boss Brad Grey to ensure the studio's performance gets turned around. He told a recent UBS conference that Davis has spent half his time on that. Bakish's team has also brought in Sony veteran Andrew Gumpert as Paramount COO to help with the business operations. 

It remains to be seen if NA will bring back the idea of a CBS-Viacom combination down the line. The wording of Monday's NA letter leaves open the possibility to revisit a combination at a later time. A banker and an analyst who didn't want to be named both told THR that NA could see how Viacom's turnaround attempts progress over the next year or two and decide then whether a renewed look at a merger could be warranted then.

Kim Masters in L.A. contributed to this report.