Media

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Ever since the ex-girlfriend of Sumner Redstone filed a lawsuit last week regarding the 92-year-old media mogul's diminishing health, speculation has swirled about what this means for CBS and Viacom, two companies still in the billionaire's control. 

Manuela Herzer, who was booted in October as Redstone's caretaker, said he's become mentally incapacitated and "a living ghost." (She also made some other claims about him, which are probably TMI). Redstone's attorney called the suit "a meritless action, riddled with lies."

Still, there are news articles that theorize the suit could do more than potentially nullify his decision to remove her. Redstone technically oversees $45 billion worth of shareholder value as chairman of both CBS and Viacom. So some lawyers are saying that if the court determines he's mentally impaired and unable to make decisions, shareholders could sue, claiming they were kept in the dark about important information. Some also speculate he could be forced to give up control of his empire.

Many will point to how Apple didn't disclose enough about the health of its former chief executive Steve Jobs, who had a rare form of pancreatic cancer and died in 2011. Other executives have been more open about their illnesses. Warren Buffett, the third-richest person in the world and head of the $330 billion conglomerate Berkshire Hathaway, said in 2012 that he had been diagnosed with stage 1 prostate cancer. Jamie Dimon, CEO of JPMorgan Chase, said last year that he was being treated for throat cancer. Goldman Sachs CEO Lloyd Blankfein said this year he has a "highly curable" form of lymphoma and would undergo chemotherapy. 

But each of these men runs a company. Redstone hasn't been part of day-to-day operations at either CBS or Viacom for some time.

It also seems incredibly disingenuous that any investor could claim they were unaware of Redstone's deteriorating health or that proper disclosure of his mental state somehow would have changed the decision to hold CBS or Viacom shares. His age is known, and his scaling back of involvement in the companies has been covered by the press. It's been a year since he's spoken on either companies' earnings calls. And even then he said just 10 words on CBS's and eight on Viacom's. Let's face it, no one thinks Redstone's presence or lack thereof makes a difference in influencing the companies' stock prices or growth or profitability.

What investors ought to care about is what will happen to the media properties once Redstone passes, or otherwise loses control should a ruling deem him mentally unfit. 

Viacom Trails CBS
Redstone split them up, but now some investors want the companies to become one again as Viacom's stock disappoints.
Source: Bloomberg

CBS and Viacom were one company until Redstone separated them about a decade ago. The move made sense back then, and it also paid off for shareholders. But in the past few years there have been calls to reunite the companies to increase negotiating power with pay-television providers, which have also been consolidating.

At the helm of CBS is Les Moonves, 66, a well-respected industry executive. Philippe Dauman, 61, runs Viacom. Only one of them is a member of the trust that will inherit Redstone's controlling stakes, and that's Dauman (the trust also includes Redstone's 61-year-old daughter, Shari). The snag is, should CBS and Viacom merge, most consider Moonves to be the rightful chief executive. 

This is an issue Redstone hasn't addressed publicly -- nor has the trust -- so it's unclear whether he, or trustees, would put CBS and Viacom back together or if there are other plans for the businesses. 

What is clear is that Viacom has become the weaker link, and so the case for a merger is especially compelling for those shareholders. The stock has lost 34 percent this year, while CBS fell about 8 percent. A group of global entertainment media companies tracked by Bloomberg Intelligence are down 4 percent year to date. 

Viacom, which owns the Nickelodeon, MTV and Comedy Central networks, has suffered ratings declines that threaten to slow ad sales as some viewers switch to online platforms such as Netflix. Comedy Central also no longer has hit comedian hosts Jon Stewart and Stephen Colbert. 

Back when the companies split, Viacom was considered by many to be the more attractive piece. "But cable networks may not be as good as we thought, and certainly not if you don't have good networks," said Paul Sweeney, head of media research at Bloomberg Intelligence. CBS, with its high-margin retransmission fees and some hit TV shows, has been outperforming Viacom. 

Media M&A Surges Again
Recent activity has been led by cable TV, such as Charter's $79 billion takeover of Time Warner Cable. A re-merger of CBS and Viacom would be another massive deal, at more than $50 billion.
Source: Bloomberg

Many have said a re-merger would still benefit both, though. The ultimate decision is up to Redstone, so this suit is crucial in that respect. A court ruled last year that Donald Sterling, then 80 years old and owner of the Los Angeles Clippers, was mentally incapacitated after he made racist remarks. That left the basketball team in the hands of his wife, who then sold it for $2 billion to Steve Ballmer, the former CEO of Microsoft.

It's unclear whether trustees acting in Redstone's place would be more open to putting Viacom and CBS back together. But if they aren't, they might need to be prepared for activist investors ready to ensure that Redstone's legacy isn't put ahead of the interests of minority shareholders. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net