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CBS, Viacom to merge in all-stock deal

CBS Corp. and Viacom Inc. on Aug. 13 officially announced plans to recombine in an all-stock merger, ending months of speculation about an agreement.

The companies, which split more than a decade ago, said in a joint statement that they would be better served through a reunion, as their combined assets and enhanced scale could allow the combined entity to compete more effectively in an evolving media landscape.

Existing CBS shareholders will own about 61% of the combined company after the deal, while Viacom shareholders will own about 39% on a fully diluted basis. Under the terms of the agreement, each Viacom class A voting share and Viacom class B nonvoting share will convert into 0.59625 of a class A voting share and class B nonvoting share of CBS, respectively. The transaction is expected to close by the end of calendar 2019.

Viacom President and CEO Bob Bakish will head the combined company as CEO, while CBS President and acting CEO Joe Ianniello will maintain day-to-day leadership over CBS assets, including broadcast network CBS (US) and CBS-owned TV stations. CBS Corp. CFO Christina Spade will assume the chief financial role for the combined company.

Viacom Executive Vice President and CFO Wade Davis will be departing after the deal closes. Davis, who helped to set Viacom's ad sales strategy, also had a hand in leading Viacom's finances, technological operations and the recently acquired internet streaming service Pluto TV.

The combined company's board will include six independent directors from CBS, four independent directors from Viacom and two appointments from majority shareholder National Amusements Inc. Shari Redstone, the head of National Amusements and vice-chair of both CBS and Viacom, will be chair of the combined company.

Centerview Partners and Lazard Frères & Co. are financial advisors to the special committee of CBS' board that has been involved in deal negotiations. LionTree Advisors and Morgan Stanley & Co. are the financial advisors for Viacom's special committee. Evercore is National Amusements' financial advisor.

This is the third effort in recent years to reunite CBS and Viacom. Redstone previously encouraged the media conglomerates to explore a deal in September 2016. She made another push in the spring of 2018, which dissolved as the companies engaged in a corporate governance battle.

When CBS and Viacom split in 2006, the consensus was that Viacom, with its broad cable portfolio, would be the faster-growing of the two. However, declining ratings, triggered in part by cord cutting as more viewers turn to streaming options, have hampered Viacom's outlook in recent years. While not immune to viewer erosion, CBS has remained the most watched linear network for the past 11 TV seasons and has diversified its market position with streaming offerings.

The combined entity could benefit from $500 million to $1 billion in cost savings, as well as potential revenue synergies stemming from content creation, according to media analysts. In the deal announcement, CBS-Viacom estimated the merger would create $500 million in annualized run-rate synergies within a year or two of closing.

The union would also afford more scale within an industry that has undergone major consolidation with Walt Disney Co. buying myriad assets from 21st Century Fox Inc. and AT&T Inc. acquiring Time Warner. The media landscape is being transformed by streaming as a preferred consumer platform, led by Netflix Inc. ahead of upcoming launches from Apple Inc., Disney, AT&T's WarnerMedia and NBCUniversal Media LLC.

Analysts believe a CBS-Viacom reunion could bolster positions in the subscription and ad-supported streaming spaces for both, as a more robust content arsenal would provide the new entity with additional business models to pursue direct-to-consumer opportunities.

Viacom made a big bet on ad-supported streaming with its purchase of Pluto TV for $340 million earlier this year. In the U.S., Viacom also offers preschool subscription service Noggin, which counts 2.5 million global customers, and its BET Networks is teaming with Tyler Perry on subscription service BET+, slated to launch this fall.

CBS launched ad-supported video-on-demand news service CBSN in 2014 and added a trio of streaming services in 2018. The company has accelerated its growth target for a combined subscriber base of 25 million for its CBS All Access and Showtime OTT product by 2022.

On the network affiliate front, Davis said the company recently renewed the vast majority of its linear footprint and has built-in annual fee escalators in the 5% to 6% range. Still, Moody's analyst Neil Begley in a recent interview said higher licensing fees tied to CBS' retransmission-consent clout could be realized down the road.

"Viacom clearly would be a winner in terms of leveraging CBS' retrans negotiations," Begley said.

CFRA analyst Tuna Amobi noted in a recent interview that the combined entity would offer more solutions to the advertising community by bringing together CBS and the younger demos reached by various Viacom networks, including MTV (US) and Comedy Central (US),

Moreover, ad sales fortunes could be buoyed by integrating principles from Viacom Advanced Marketing Solutions business across different holdings, including Pluto TV and CBS cable properties, POP (US), Smithsonian Channel (US) and CBS Sports Network (US).

Amobi noted that with the CBS' interest in Starz, Lions Gate Entertainment Corp.'s premium network, its board already has signaled its commitment to adding scale. The analyst believes another deal — whether with Lions Gate or AMC Networks Inc. — may be coming.

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