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Disney Lights Fire Under CBS, Redstone

CBS and Viacom need more scale as rivals link up.
Photographer: Andrew Burton/Getty Images
CBS CORP-CLASS B NON VOTING
-1.06
At Closing, February 22rd
54.32 USD
VIACOM INC-CLASS B
-0.10
At Closing, February 22rd
32.93 USD

Nothing like a little competition to get the M&A juices flowing, eh, CBS? 

Word has it that Shari Redstone, the de facto decision maker at CBS Corp. and Viacom Inc., is reexamining a merger of her ailing father's two media companies. Les Moonves, CBS's chief, is also reportedly coming around to the idea of taking the troubled Viacom media assets under his wing -- a plan he helped steer Redstone away from in late 2016. As I've been saying in recent weeks, it was only a matter of time before CBS-Viacom would be back on the table. 

With 21st Century Fox Inc. selling most of its TV and film assets to Walt Disney Co. and others exploring deals, Redstone won't want to sit out the industry consolidation. The $66 billion Disney-Fox merger and AT&T Inc.'s $109 billion takeover of Time Warner Inc. still hinge on government approvals. But assuming those go through, along with Discovery Communications Inc.'s acquisition of Scripps Networks Interactive Inc., a subsequent deal between CBS and Viacom would reduce the top eight U.S. media companies down to five. That will transform the competitive landscape:

Whether the industry reconfiguration is enough for the traditional programmers to solidify their subscriber base in the age of Netflix Inc. and skinny streaming bundles is another story. Still, scale is their best hope, and if proven dealmakers Bob Iger and John Malone are doing it, then Redstone should take her cue. 

Synergies would be easiest to identify between CBS and Viacom, given the shared ownership and similarities. Plus, if Redstone believes Viacom can still be fixed, then it's awfully cheap at these levels:

Bargain Bin

With CBS in need of scale and Viacom's valuation sagging at a 20% discount to its peers, merging the two companies may benefit both the Redstone family and minority shareholders

Source: Bloomberg

Viacom isn't CBS's only option, nor does a CBS-Viacom merger go far enough on its own. I flagged film studio Lions Gate Entertainment Corp. as another takeover candidate for CBS, or alternatively the prospect of CBS selling itself to Verizon Communications Inc., which despite outward appearances is probably still thinking about merger possibilities. For all the industry challenges, there is still a premium being placed on content, as evidenced by AT&T's monstrous bet on Time Warner, Charter Communications Inc.'s recent move into original programming and the record highs that Netflix's stock price continues to reach even as it burns through cash to produce its own shows and movies. 

Left in the Dust

Traditional programming giants still generate the cash, but Netflix is the one to beat as subscribers make the switch and investors become enamored with its growth

Source: Bloomberg

Given Moonves's age -- 68 -- and that his contract is up in June 2021, CBS needs to be thinking about succession, something that could be solved through M&A. A report from The Wrap said that while Moonves would probably run a combined CBS-Viacom entity, Redstone is considering other candidates.

We'll have to wait and see if Redstone's merger musings result in a deal this time. If they do,  I wonder who then buys AMC Networks Inc. and the other smaller network owners? The dominoes are already starting to fall.

--"Banding Together" graphic provided by Cynthia Hoffman.

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

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