CBS, Viacom Strike Deal to Recombine

Shari Redstone, controlling shareholder of both companies via National Amusements, becomes chair of the combined entity with a forecast $500 million in post-merger cost savings.

Thirteen years after Sumner Redstone split his entertainment empire in two, Viacom and CBS struck a deal on Tuesday to recombine, the latest in a recent rash of entertainment industry megadeals.

As expected, Viacom CEO Bob Bakish will lead the merged company as president and CEO, while CBS Corp. acting chief Joe Ianniello will become chairman and CEO of CBS where he will oversee all CBS-branded assets. CBS CFO Christina Spade will serve as CFO of the merged firm, and Shari Redstone, vice chair of both companies, will serve as chair of the combined entity, dubbed ViacomCBS Inc.

The merged company will have a library of 3,600 film titles and 140,000 TV episodes, an important set of assets as CBS All Access and Showtime OTT battle with Netflix and others and as Viacom's PlutoTV gears up to do the same. ViacomCBS will also boast a 22 percent share of the U.S. television audience, larger than Comcast, Disney, Fox Corporation, Discovery or WarnerMedia.

"I am really excited to see these two great companies come together so that they can realize the incredible power of their combined assets. My father once said ‘content is king,’ and never has that been more true than today," said Shari Redstone.

Bakish told investors during an analyst call the re-merger will allow the combined entity of ViacomCBS to scale production of premium content, unite global production and distribution capabilities from the separate companies, accelerate their respective corporate growth strategies and generate "significant synergy value."

The transaction, expected to close at the end of 2019, pending regulatory and shareholder approvals, will result in a combined entity with around 140,000 premium TV episodes and over 3600 movie titles in its library, Bakish told investors. ViacomCBS will also have around 750 TV series that have either been ordered or are in production.

On the production side, the exec said Viacom and CBS in the last 12 months had jointly spent $13 billion on premium content, making it one of the largest media players as a combined entity.

Bakish added the deal will also bring together "powerful consumer brands" and offer an expanded portfolio of direct to consumer products in the subscription and ad-supported space via "an ecosystem that will provide consumers with new forms of access for premium content, and one that will accelerate our growth."

As they negotiated the re-merger, both companies previously agreed on the management setup and the composition of the board of the merged company, which will bring together assets like Paramount Pictures, Comedy Central and MTV with CBS assets like Showtime and streaming offering All Access. The stock exchange ratio for the deal was the final haggling point that was resolved early in the week. The boards of both companies have approved the all-stock deal that will result in CBS shareholders owning 61 percent of the merged firm while Viacom investors get 39 percent.

The company will have 13 board members, including Shari Redstone as chair; another member designated by National Amusements; the president and CEO of the combined company, namely Bakish; six independent members from CBS; and four independent members from Viacom.

Privately held National Amusements, owned by the Redstone family, is the controlling shareholder of both firms, which had twice before explored a recombination without reaching an agreement.

Consolidation to gain more scale amid competition from streaming video and technology giants has been a key focus for the entertainment sector in recent years. The CBS-Viacom deal agreement comes after Walt Disney's $71.3 billion acquisition of large parts of 21st Century Fox and AT&T's $85 billion takeover of Time Warner. CBS is also understood to have offered Lionsgate $5 billion to buy its premium TV unit Starz.

Reports of the likely share ratio, along with a broader stock market decline, sent shares of Viacom down 4.9 percent to $28.53 on Monday, while CBS' stock fell 1.8 percent to $48.04.

In 2018, CNBC reported that the companies had agreed on a price ratio of 0.6135 CBS shares for every Viacom Class B share before a deal fell apart. But the ratio has likely changed this time around given where the stocks have been trading. MoffettNathanson’s Michael Nathanson wrote in mid-July that "we are comfortable using the current ratio of 0.59 times as the base case in our merger model." And Loop Capital analyst Alan Gould more recently wrote: "Viacom’s shares have traded at an average ratio of 0.598 times the CBS price for the past 60 days, which compares with 0.590 over the past six months and 0.577 over the past year."

The two entertainment companies have operated as separate companies since their split in 2006. But Shari Redstone has touted the benefits of scale and is understood to have said at a recent event that if CBS and Viacom combine, the merged firm could look for further deals down the line.

NA has in the past said 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." But in a settlement with CBS last year, it agreed not to push for a Viacom-CBS deal for a couple of years, leaving any such initiative to the companies themselves.

CBS has focused on fewer networks, mostly the CBS broadcast network and premium brand Showtime, along with offering direct-to-consumer services, such as CBS All Access. Viacom under Bakish has renewed various carriage deals with pay TV giants and looked to build new revenue streams. Earlier this year, it also acquired Pluto TV to build up a streaming business.

Bakish during the analyst call touted the re-merger for accelerating the DTC growth strategy for both CBS and Viacom. "We see significant cross-platform upside as the DTC portfolio benefits from the combined company's content and marketing," he said.

CBS CEO Ianniello on the analyst call said the combined entity would look to drive higher affiliate fees as he insisted CBS and Viacom have a combined 22 percent of domestic TV viewership, and yet only secure 11 percent of retransmission fees. "This means the combined company will have tremendous upside we should be going after," Ianniello argued.

To secure higher retransmission fees, Ianniello argued both companies would join forces during upcoming affiliate renewal talks. And on the advertising side, he looked ahead to the 2020 Upfronts before the benefits of a combined entity for CBS and Viacom were significantly realized with increased TV ad sales.

"It's hard to quantify, but when you look at the scale and the size, that's why I talk about billions, and there will be huge opportunities as the driving force behind this deal," the CBS boss added of the synergies to come from the transaction.

Bakish also responded to a question about ViacomCBS continuing to possibly pursue additional merger and acquisition activity amid industry consolidation. "We will continue to look at opportunities in the marketplace," he said, without addressing whether ViacomCBS still eyes a possible takeover of Starz from Lionsgate, as has been speculated recently.

"We have executed on some of those (deals) in the past and this is something we will continue to do," Bakish argued. At the same time, he didn't point to imminent deals as he added, “I don’t think there are any gaps per se."

Aug. 13, 3 p.m. Updated with comments from analyst call.