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No merger for Viacom, CBS

Less than three months ago, Sumner and Shari Redstone thought it might be a good idea for CBS Corp. and Viacom Inc. to combine. Now, the father and daughter pair have changed their minds, leading many investors to wonder what the future may hold for the two media companies.

In a Dec. 12 letter to the boards of both companies, the Redstones — who control 80% of the voting shares in Viacom and CBS through their ownership of the National Amusements Inc. holding company — said that after "careful assessment and meetings with the leadership of both companies, we have concluded that this is not the right time to merge the companies."

In the wake of the news, some news outlets began reporting that other potential buyers might be interested in striking a deal. The New York Post, for instance, cited a source as saying that Verizon Communications Inc. has been "poking around" CBS, explaining that the telco's interest may have been stoked by AT&T Inc.'s proposed purchase of Time Warner Inc.

But a number of analysts expressed skepticism about the most recent scuttlebutt.

"I really doubt you are going to see either of these companies enter into a merger or be acquired. That's certainly not our outlook right now," CFRA analyst Tuna Amobi said in an interview.

Amobi noted that National Amusements has previously indicated it has no interest in selling either CBS or Viacom to a third party. Specifically, when National Amusements sent its September letter urging the two companies to explore a combination, it said it would not "accept or support (i) any acquisition by a third party of either company or (ii) any transaction that would result in National Amusements surrendering its controlling position in either company or not controlling the combined company."

According to Amobi, "to the extent that the two companies have been requested to remain independent and also to the extent that National Amusements still owns a controlling stake, it is hard to imagine a scenario where the Redstones are going to relinquish control."

Barrington Research analyst Jim Goss agreed, saying he does not foresee the Redstones selling.

"They have control right now, I don't think they are anxious to give up control. They're just trying to find the best route for the entities they do control," Goss said in an interview.

Instead, he expects the Redstones to focus on ensuring Viacom is put back on a path toward growth. To that end, National Amusements seems to be throwing its support behind Bob Bakish, who has led Viacom as acting president and CEO since Nov. 15. Just hours after National Amusements said the Redstones were no longer pushing for a CBS/Viacom tie-up, Viacom said Bakish would take on the CEO role on a permanent basis, effective immediately.

"We have been very impressed with the forward-looking thinking and strategic plan being pursued under Bob Bakish's leadership. We know Viacom has tremendous assets that are currently undervalued, and we are confident that with this new strong management team, the value of these assets can be unleashed," Shari and Sumner Redstone said in their Dec. 12 letter.

But both Amobi and Goss note Bakish has a good deal of work ahead of him if he is to return the company and its networks to revenue growth.

"It remains to be seen where his vision lies as to the potential turnaround strategy but that doesn't really change the fact that the company is really facing some major headwinds in terms of their core business and the shifting media landscape," Amobi said, pointing to the rise of online viewing and the negative impact it has on traditional TV ratings.

Goss agreed, noting, "In a way, Viacom is a victim of their own success in terms of targeting a demographic group that probably would prefer their content in a different way. So they have to figure how to get paid for that viewership."

That said, Goss said it may make sense for the Redstones to give Bakish a chance at Viacom before pushing the company to explore some other strategic alternatives.

"Is it better for them to figure out a way to deal with the issues and improve? If the management thinks they can do that and the Redstones agree, then maybe they get more value creation by doing that than by combining" with CBS, Goss said.

Bakish has said he sees a "clear path forward," a path that involves a better balance of music and entertainment on MTV and improving the performance of Paramount Pictures.

If revenues and viewership at Viacom's ratings do not improve, however, Amobi said, the Redstones could be forced to reconsider their stance on retaining ownership of Paramount.

"The best that one might really hope for is they might decide to sell off parts of the studio, which has come up before," Amobi said. "I would not be surprised if that resurfaces at some point."

Under former Viacom CEO Philippe Dauman, the company had sought to find a minority stakeholder in Paramount, but the deal faced strong opposition from the Redstones and was ultimately aborted. The disagreement in part led to a bitter court fight with the Redstones over control and management of Viacom, ultimately leading to Dauman's ouster.

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