CBS and Viacom continue to bob along with merger talks and are now circling Aug. 8 as an internal deadline to agree to a deal, according to people familiar with the matter.
While a transaction could be announced sooner -- or later! -- than that, CBS and Viacom happen to share Aug. 8 as the day both companies report second-quarter earnings. That makes it a natural goal post for a merger that's been speculated about for more than a year, said the people, who asked not to be named because discussions are private.
Both companies have conceptually agreed that a deal to gain scale makes sense, said the people. Bulking up to compete with Netflix, Disney, Comcast and others is a narrative that's been pushed by controlling shareholder Shari Redstone, who is prohibited from proposing a merger of the companies herself -- a provision from a lawsuit she settled with CBS Corp. last year. Redstone would like a combined CBS-Viacom to get even larger as it prepares to renew expensive NFL broadcast rights in the coming years. She attended Allen & Co.'s Sun Valley conference last week, an annual setting for companies to begin thinking about future acquisitions.
The price of the transaction, which will come in the form of a merger exchange ratio, hasn't been discussed and won't be addressed until all strategic and management issues are sorted out, according to people familiar with the matter.
Last year, CBS and Viacom got close to announcing a merger with an exchange ratio of 0.6135 CBS share for every Viacom Class B share. That deal was ultimately scuttled by management issues, but those issues were resolved when Les Moonves stepped down as CBS CEO last year amid sexual misconduct allegations.
This time, the CBS and Viacom boards of directors won't reach an agreement on the exchange ratio until all other elements of a deal are set, the people said.
Viacom wants the ratio to increase slightly from last year because the media company, run by CEO Bob Bakish, has outperformed CBS in the last year and avoided a blackout with AT&T's DirecTV earlier this year, which had been an overhang on the stock in 2018. Issues such as leadership and board composition could swing the exchange ratio one way or another, although the ratio likely won't move drastically, said the people.
Still, some of Viacom's outperformance may be due to a renewed M&A premium baked into the stock. And Viacom agreed to lower carriage fees to secure the DirecTV deal.
Viacom is up about five percent in the last 12 months. CBS is down 11 percent in the same time period.
Bakish is expected to be the leader of a combined company, as CNBC has previously reported. While CBS's board has concerns about Viacom's leadership under Bakish, the combined boards of the companies will likely work with Bakish to name other executives instead of mandating that certain CBS executives come pre-installed as part of a deal, said the people. CBS CEO Joe Ianniello's role is still unclear, said the people. His contract as CBS CEO's runs out at the end of December.
New streaming strategy
Beyond leadership decisions, the main points of discussion around a deal focus on a go-forward strategy for the combined company, the people said. A CBS-Viacom could close quickly -- possibly by the end of 2019 -- because National Amusements controls both companies, two of the people said.
After closing, the company may want to move quickly to acquire another company, such as Starz, which has already held talks about selling to CBS.
New leadership will also need to plan a streaming strategy to combat offerings from Disney, AT&T's WarnerMedia and others. CBS's streaming service CBS All Access has more than 8 million subscribers and estimates it will have 25 million by 2022.
Viacom owns Paramount Pictures and has movie rights for "Star Trek," "Mission Impossible" and "The Godfather." It also owns popular kids' programming such as "SpongeBob SquarePants," which airs on Viacom's Nickelodeon, and "South Park," a Comedy Central property.
A combined service with CBS could be appealing as a competitive product, or CBS-Viacom can focus on selling its programming to existing services and collecting the licensing fees. While both are possible, top executives will have to decide which strategy to emphasize.
