Deals

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

Whenever CBS-Viacom merger speculation surfaces, the conversation tends to flow toward why this deal would be so beneficial for the ratings-challenged Viacom and how CBS would be stuck with the burden of having to fix it. But the fact is, a deal would be good for CBS, too. 

They Like It
See that stock pop ? That's not Viacom. Even CBS investors are showing support for a merger.
Source: Bloomberg

On Wednesday afternoon came reports that the Redstone family, which controls CBS and Viacom through their holding company National Amusements, is requesting that both boards establish independent committees to consider a merger. No surprise there. Sumner Redstone, the now 93-year-old ailing billionaire, split CBS and Viacom into separate companies about a decade ago. As I've written before, the breakup was a smart move at the time, but given the changes happening in the industry, it makes increasing sense to reunite the businesses (explained further in the video at the end of the story).

What entertainment-media companies want right now is more valuable content. The added scale not only helps garner the negotiating power they need against pay-TV providers, which are getting bigger through their own mergers, but it also ensures these content companies have a home in the newer online streaming and on-demand platforms that cord-cutters are increasingly embracing. Recently, two content players joined forces: Starz is selling to Lions Gate Entertainment, which analysts predict will be billionaire John Malone's vehicle to roll up more of these assets. Lions Gate estimates $200 million a year in savings from that $4.4 billion purchase.

Say what you will about Viacom, there's no question it offers valuable content -- even if, as my Bloomberg News colleagues put it, it has too much "Teen Mom" and no "Game of Thrones."

Yes, it's dropped the ball at MTV. With television networks desperate to crack the millennial generation, MTV was in a unique position in that most millennials grew up watching it, yet it's struggled. But strong leadership and creative talent could get the the network back on track, and that's something CBS is known to have -- starting with its CEO Les Moonves. 

Viacom's Comedy Central has faced its challenges, too -- its ratings dropped after Trevor Noah replaced Jon Stewart on "The Daily Show." The program's other big alums, John Oliver and Samantha Bee, now host shows at networks owned by Viacom's rival Time Warner, while another "Daily Show" graduate, Stephen Colbert, hosts "The Late Show" on CBS. Comedy Central still has a decent following, though.

Tough Times
Viacom needs help. Is Les Moonves the man for the job?
Source: Bloomberg

Buying content with such scarcity value is expensive, but CBS can get Viacom's for a relative bargain. Viacom's minority shareholders seem to largely support the idea of a CBS deal, even though they know it won't come with a big takeover premium. So CBS has the opportunity to add assets, which have room for improvement, and not pay a steep price for them. Assuming a no-premium all-stock transaction, CBS's earnings per share could surge by 14 percent next year, according to Bloomberg's merger calculator. And that's without factoring in cost synergies, which would be pretty big. 

Lastly, you can't forget about Paramount Pictures, the movie studio that Viacom owns. It would be another fixer-upper; the division suffered $308 million of operating losses in the nine months ended June 30. And Viacom said this month it's going to record a $115 million charge for a film that hasn't been released yet. But just like the rest of Viacom, the solution may be fresh blood.

Sure, the Redstones have a heavy influence over the two companies. But if Moonves and his team decide to follow through with a deal, it'll be because they see the opportunity not just to rescue Viacom from itself, but also to make money for CBS 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