The CBS board has decided the company needs to get bigger, but merging with Viacom is not enough for Shari Redstone, who has voting control of both companies, according to people familiar with the matter.
If the CBS-Viacom deal gets done, Redstone's National Amusements would like to move quickly with a second deal, the people said. Discovery Communications is interested in selling to CBS or a combined CBS-Viacom, according to two people familiar with the matter. Redstone is open to the idea, but would also consider buying other companies, including Sony Pictures and MGM, according to people familiar with her thinking.
No talks have taken place between CBS and Discovery, said the people, who asked not to be identified because the company's plans are private. But bankers have already pitched Discovery on merging with CBS, one of the people said. Discovery CEO David Zaslav, who extended his contract with his company in July through 2023, would be interested in eventually running a combined company with CBS, according to a person familiar with the situation. Zaslav has also spoken about selling Discovery to other companies in recent years, including Comcast, said another person.
CBS plans to discuss merger options at a board meeting on Thursday. The board will listen to its bankers as they present a variety of merger options, though step one is expected to be a deal with Viacom, two of the people said.
Spokespeople at Discovery and CBS declined to comment.
It's imperative for CBS to get bigger quickly so it has the balance sheet capacity to compete for National Football League broadcast rights, which it owns through the 2022 season. Renegotiation discussions for those rights typically take place about a year before expiration of the agreement. While CBS believes its long-standing relationship with the NFL will help cement a new deal, the company also realizes it needs to have the financial capacity to compete against enormous technology companies such as Amazon for the rights.
A CBS-Viacom merger nearly happened last year, with the two companies agreeing to an exchange ratio, but talks fell apart over who would run a combined entity and board composition. Since then, CBS has retooled its board and former CEO Les Moonves resigned amid sexual misconduct allegations.
Redstone has long been in favor of putting CBS and Viacom together but can't personally push for a merger for about two years, a result of a settlement between CBS and National Amusements last year that included the resignation of Moonves. CBS has a market cap of about $19 billion and an enterprise value of about $29 billion, while Viacom has a market cap of about $12 billion and an enterprise value around $20 billion.
Discovery, with a market capitalization of about $20 billion and an enterprise value of about $37 billion, could be appealing as a second step. Discovery and CBS have a mix of assets that make a combination strategically feasible and potentially compelling. Discovery's strength is international programming and nonfiction cable stations, including the Discovery Channel, HGTV, Animal Planet and Food Network. CBS is led by the strength of its broadcast network and Showtime. Discovery could benefit from CBS' retransmission fees and premium movie channel.
Viacom nearly acquired Scripps Networks in 2017 and was outbid by Discovery, which ended up buying the company for $14.6 billion. If a combined CBS-Viacom acquired Discovery, then Viacom and Scripps would come together after all.
The concept of putting together smaller media companies to gain scale has been long championed by John Malone, who controls more than 27 percent of Discovery's voting rights. Malone also owns about 8 percent of Lions Gate Entertainment, another media entity that could eventually be rolled into a larger company. A CBS merger with Viacom before a Discovery deal would help Redstone keep control of a combined company.
"Not everybody is going to be able to do a global direct-to-consumer platform," Malone said in November at Liberty Media's annual investor day. "Many will be trying to move into that space as a supplier or a player, perhaps in some cases branded or in other cases as part of the food chain. ... I think you can expect a lot of transactions."
A spokesperson for Discovery told CNBC the company is not for sale.
"Discovery is not for sale," the spokesperson said. "Any reports to the contrary is not accurate. We remain extremely confident in our growth strategy in the US and globally as we continue to build the leading portfolio of superfan brands in every market around the world."
CBS is actively looking for a new CEO with merger and acquisition experience and will try to choose one by the end of March, according to people familiar with the matter.
Executive search firm Korn Ferry has selected a handful of people who will be culled down to a short list of finalists over the coming weeks, said the people, who asked not to be named because the discussions are private. The CBS board and Redstone, whose National Amusements controls about 80 percent of CBS' and Viacom's voting power, will then meet with the finalists to pick the candidate.
The CBS board has taken its time selecting a full-time CEO to replace Moonves, who stepped down in September. Six new independent directors were elected to the board when Moonves departed. Those board members have spent the last several months learning about CBS so they can help chart its future course.
If CBS moves forward with a Viacom merger, Redstone would like a CEO who can work with Viacom CEO Robert Bakish in a leadership position, with either Bakish running a combined company or being the No. 2 to a new CEO, one of the people said. When CBS nearly merged with Viacom last year, Moonves would have been the CEO and Bakish his second-in-command.
CBS interim CEO Joe Ianniello is still a candidate to become the company's full-time chief, two of the people said.
Ideally, CBS would like to select either a nonwhite or female CEO with experience running a large media company, one of the people familiar with the discussions said. But the CBS board may not be able to find that candidate and values experience growing companies over demographic traits, said the person. Any candidate will likely be given incentives through compensation to make the company larger — either through a merger or a sale, one of the people said.