Why a CBS and Viacom Merger Is Looking Likely in Early 2019

Viacom CEO Bob Bakish would make the most sense to lead the combined company, according to BTIG analyst Rich Greenfield

Last Updated: January 9, 2019 @ 4:42 PM

A merger of CBS and sister company Viacom that has been hovering in corporate and legal limbo for roughly three years may now happen during the first six months of this year, industry experts say.

“I would be surprised if this merger doesn’t happen during the first half of the year, maybe even the first quarter,” CFRA Research analyst Tuna Amobi told TheWrap.

Analysts note that one of the chief obstacles to the long-proposed deal — former CBS CEO and chairman Les Moonves — is now out of the picture following his firing for cause late last year after multiple accusations of sexual misconduct.

Since the idea of a merger began gaining traction in 2016, Moonves all but launched a corporate and legal siege to block any attempts to combine the two companies by Shari’s Redstone’s National Amusements Inc., the privately held family firm that controls roughly 80 percent of the voting power in both companies (which had split into separate companies in 2005).

“We never expected CBS’ Les Moonves to fight a transaction that would have benefited CBS and Viacom shareholders and enabled the combined company to lead the consolidation wave in legacy media, versus trail it,” BTIG analyst Rich Greenfield wrote in a blog post earlier this week. “With Moonves now gone, we expect Viacom and CBS to merge in early 2019.”

That effort wouldn’t come from National Amusements, which has repeatedly pressed the two companies to consider reteaming. As part of Moonves’ ouster last September and the settlement of lawsuits over corporate governance with the CBS board of directors, National Amusements agreed that it would not pursue a merger for two years.

CBS and Viacom could still seek a merger if two-thirds of the board members who aren’t affiliated with National Amusements request it.

“When [the CBS board] opposed the merger last year, it wasn’t because the justification for it wasn’t there, but because of all the noise and push-and-pull with the governance issues,” Amobi said. “Folks assumed that it could take two years before we heard anything about a merger; it was lost that the CBS board would look at this and revisit it.

“National Amusements can’t initiate a merger, but it was likely something very much in the back of their minds when making those board appointments.”

The CBS board is currently facing some major question marks. For example, the company needs to decide whether to hire an outside CEO or promote Ianniello to the job beyond interim status; analysts have been uncertain whether he’d be a permanent fit.

In late December, The Wall Street Journal reported former Disney COO Tom Staggs — who had once been tapped as the heir apparent to Disney chief Bob Iger — had emerged as a candidate to permanently fill the role. The Journal also listed Hasbro CEO Brian Goldner and Starz COO Jeffrey Hirsch as potential candidates.

But in the event of a CBS-Viacom merger, analysts suspect that Viacom CEO Bob Bakish — who has made strides to improve the company’s performance since taking over in late 2016 — would make the most sense to lead the newly recombined companies.

“Rather than name a new CEO, we believe CBS’ board of directors should reopen merger discussions with Viacom immediately,” Greenfield wrote. “We would expect the management team of the combined company to be led by current Viacom CEO, Bob Bakish, and current Viacom CFO, Wade Davis, with Shari Redstone likely to take the chairperson role.”

Greenfield has argued in the past that the future of a combined Viacom and CBS would be driven by an increased focus on international and scaling up. Before taking the reins at Viacom, Bakish spent roughly a decade overseeing various international operations at the company, including in January 2011 being promoted to president and CEO of Viacom International Media Networks.

Recent multibillion-dollar deals such as Disney’s acquisition of the majority of Fox’s TV and film entertainment assets and AT&T’s acquisition of Time Warner speak volumes to the exponential importance of scale in the media and entertainment industry.

A CBS merger with Viacom could be a vital step in achieving scale for both companies and, importantly, their shareholders. According to Greenfield, however, it likely wouldn’t end there.

“Following the merger, look for the new Viacom-CBS combined company to focus on scaling up to better compete with the industry behemoths,” he wrote. “Assets such as Discovery, Lionsgate, MGM, Sony TV/Film, etc. could all be of interest in 2020 and beyond.”

While CBS has consistently been at or near the top in broadcast ratings, the company’s yearly revenue and net income has remained roughly stagnant over the last five years. In 2017, the last full-year financials CBS has reported, the company reported that revenue was down more than 10 percent compared with 2013. And 2017’s net income declined roughly 30 percent over that time frame.

Meanwhile, Viacom has been in rebuild mode since Bakish took over from former boss Philippe Dauman in 2016, has been attempting to stabilize its business. The company’s fiscal annual revenue has remained relatively steady, dipping roughly 6 percent in 2016 from the previous year, but annual net income has rebounded significantly since 2016 when income slid more than 25 percent compared with the previous year.

In 2017, income bounced back more than 30 percent, though in the 2018 fiscal year, there was a roughly 10 percent decline in net income.

According to Bakish though, Viacom isn’t banking on an M&A deal to save them, despite having put serious consideration into reteaming with CBS last year. The Viacom CEO told Variety that while they’ve thought about it, they can’t be sure what’s going to happen.

“The rationale for bringing these two companies together is still there. What I’ve heard, talking to investors, there are some institutional holders that think the time is now,” Amobi said. “There’s speculation that it could be top of the agenda at the upcoming board meeting.”