Viacom Rejects First CBS Offer

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Viacom CEO Bob Bakish

It valued Viacom below its market price and called for CBS chairman and CEO Leslie Moonves and COO Joe Ianniello to run the combined company.

Viacom has rejected CBS Corp.'s initial merger proposal that had been submitted March 30 to kick off negotiations between the two entertainment companies controlled by the Redstone family as they consider recombining 12 years after their separation.

The all-stock proposal from CBS used a ratio of the two stocks and valued Viacom below its market price. It also called for CBS chairman and CEO Leslie Moonves and COO Joe Ianniello to run the combined company without any known plans for any role for Viacom CEO Bob Bakish.

A source Wednesday morning confirmed a CNBC report that the independent committee of Viacom's board that is handling the deal negotiations has informally rejected the offer and is planning a formal rejection, as well as a counterproposal that would put a higher price on the company. Viacom didn't comment.

Analysts widely said Viacom would see the first CBS as a starting point for tough negotiations, predicting Viacom would push for a higher valuation and a possible role for Bakish, whose turnaround efforts have improved the company's financial and ratings performance over the past year and who has the support of Shari Redstone, whose family controls both companies and who serves as vice chair of both.

The negotiations between CBS and Viacom have no known timetable, but both sides are believed to ideally want to wrap up talks before their quarterly earnings reports in early May.

Many analysts predict that if a deal is finalized, CBS would put a small premium on Viacom compared with the latter's stock market valuation, but not the 30 percent premium some have recently mentioned as typical in sector deals. The companies had in February said they would form independent committees of their board to explore a recombination.

Shari Redstone, the daughter of controlling shareholder Sumner Redstone, early this year renewed her push for a recombination on the companies. In late 2016, they 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.  

But bankers and analysts have said that price and management structure will be key hurdles in the CBS-Viacom negotiations, with much focus on the roles of Ianniello and Bakish given that Moonves is widely seen as a key to the merged company's success and that Redstone has a long-standing working relationship with him.

As far as price goes, Viacom's market value had been at around $13.0 billion until late last week before dropping to around $12 billion, with CBS' 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. 

Analysts have estimated that cost synergies in a CBS-Viacom combination could reach $500 million to $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."

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