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Viacom and CBS: 2 could become 1 ... again

CEO Les Moonvesrecently laughed off speculation that a merger with might be in the works. Butthat was before the Redstones got involved.

On Sept.29, Sumner Redstone's holding company, National Amusements Inc., sent aletter to the boardsof CBS and Viacom asking them to consider combining the two companies. NationalAmusements, directly and through subsidiaries, owns approximately 80% of thevoting shares of both media companies.

"Webelieve that a combination of CBS and Viacom might offer substantial synergiesthat would allow the combined company to respond even more aggressively andeffectively to the challenges of the changing entertainment and medialandscape," said the letter, which was signed by both National AmusementsCEO Sumner Redstone and his daughter, National Amusements President ShariRedstone.

Followingthe letter, Viacom said its board will form a special committee of independentdirectors to "carefully consider" the request from NationalAmusements and any proposed transaction. CBS, for its part, confirmed it hadreceived the letter and would be determining what action would be "in thebest interest" of CBS and its shareholders.

Notably,Moonves recently indicated he had no interest in a deal.

"Thetruth of the matter is we are a stand-alone public company. We are really happywith the hand we are playing," Moonves said at a recent after beingasked about Viacom's future and the role that CBS could play in it.

Henoted CBS Corp. is doing "extraordinarily well" with its currentstable of assets. "We are never going to do something that is bad for theCBS shareholders or the employees. So I just want to leave it at that," hesaid.

Thereis no doubt that recombining CBS Corp. and Viacom — the pair split at the endof 2005 — could be a Herculean task given the continued ratings softness at keyViacom networks, including MTVand Comedy Central.The company has reported eight consecutive quarters of domestic advertisingsales declines, and there is no turnaround in sight.

Butin a recent blogpost, BTIG LLC analyst Richard Greenfield argued that the situation at Viacomis not as bad as it might first appear. While he acknowledged Viacom no longercarries any "must have" programming on its networks, he also notedthat live plus same day viewership of Nickelodeon/Nick At Nite is No. 2 amongst all cablenetworks, ranking only behind FOXNews Channel. And while MTV has certainly "lost its mojo,"according to Greenfield, live plus same day viewership on the networks stilloutperforms networks such as Bravo,ESPN2 andTravel Channel.

"Whenlooked at collectively, Viacom's overall total day viewership is not nearly asbad as many investors may think it is," Greenfield said.

Andthe picture would be even brighter if Viacom's networks were combined with CBSCorp.'s given the latter company's flagship broadcast network. "Viacomneeds the 'shield' of CBSto protect its distribution, maximize the growth of its license fees, while CBSshould want Viacom to enable it to utilize the power of its sports andentertainment franchises to create value above and beyond its existingbroadcast assets," Greenfield said.

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Currently,Viacom and Time Warner Inc.are the two primary conglomerates that do not own a broadcast network, notincluding Time Warner's 50% interest in The CW. This puts both companies in a slightly weakernegotiating position with distributors, as media companies often negotiatecarriage for their full stable of networks and leverage their broadcastholdings to secure wider distribution for their cable channels.

Followingnews of National Amusements' letter, S&P Global analyst Tuna Amobi raisedhis rating on Viacom shares to "hold" from "strong sell"and raised his price target on the stock by $7 to $39.

Butthough a potential combination with CBS might come as good news to Viacomshareholders, some analysts and investors worry the same could not be said forCBS Corp. shareholders. While CBS shares have climbed more than 40% over the pastyear, Viacom shares are down more than 13%.

MarioGabelli, whose firm holds a large number of voting shares in Viacom and CBS,told Reutershe was undecided on a potential deal, calling Viacom "a fixer-upper."He compared the media company to "prime real estate on a beach overlookinga bluff in East Hampton, but the house sucks."

PivotalResearch analyst Brian Wieser notedin a Sept. 22 research report that the combination itself "isn't such abad one for Viacom shareholders necessarily (and could be good for both themand CBS)" but any effort on the part of National Amusements to force adeal "would serve to highlight the problematic nature of the company'sboard and its governance."