Bloomberg says a preliminary deal offer could come within 'days'

CBS is putting together a proposal to merge with Viacom that could be submitted within days, according to a report in Bloomberg News, putting in motion a process that would reunite the former corporate sisters after more than a decade apart.

Viacom and CBS each hired advisers and appointed committees of independent directors to investigate the possibility of a merger back in February. The idea of recombining the two companies – which split in 2005 to unlock value – has been broached before, but was canceled for various reasons. CBS and Viacom vice chair Shari Redstone, who through National Amusements has voting control of both companies along with her media mogul father Sumner Redstone, restarted the process earlier this year. 

Shari Redstone scrapped plans combine the two in 2016 after naming long-time Viacom executive Bob Bakish CEO of the programmer. Bakish has made several bold moves to put the once-powerful youth programmer back on track, including placing more emphasis on its six core brands, pumping more resources into original programming and increasing the channels’ advanced advertising capabilities. 

According to Bloomberg, CBS’ committee of independent directors is expected to submit a preliminary proposal to their counterparts at Viacom, which would include an initial valuation of the company, as well as leadership suggestions. Viacom’s independent committee will likely review the document as well as make its own suggestions. 

Analysts have expected that CBS chairman and CEO Les Moonves would run the combined company, but there are questions still about who would run other aspects of the business, and what role Bakish would play. 

Bloomberg said no details of the proposals will be made public and the time frame to reach a final decision is fluid, although, citing people familiar with the matters, the news service said that both sides would like to have a final deal in place before they report quarterly earnings results in May. 

Officials at Viacom declined comment. Officials at CBS could not be reached immediately for comment. 

Valuation has apparently been a sticking point for the parties. CBS, which has the most watched broadcast television network in the country and also has OTT plays in CBS All Access and its standalone Showtime offering, has a market cap of about $19 billion, compared to around $13 billion for Viacom. But CBS shares have lost considerable ground since merger talks restarted. CBS shares have dropped 12.8% since both sides formed independent committees to evaluate a recombination on Feb. 1. Viacom’s stock slide has been less pronounced – about 6.5% since Feb. 1. 

Most analysts had earlier been in favor of keeping the companies separate, but as OTT providers have grown stronger and content companies have started to seek scale -- like The Walt Disney Co.’s pending $66.1 billion purchase of certain 21 Century Fox assets – they have warmed up to the idea.  

RBC Capital Markets media analyst Steven Cahall estimated that CBS would likely have to take Viacom out at a premium because CBS management cares more about control than price, it would avoid any possible shareholder lawsuits and it compensates Viacom for its turnaround efforts. The question is how high a premium? At 20%, CBS would value Viacom shares at about $36 each and at 30% the price rises to $39 per share. Either way, he wrote that cost synergies of between $500 million and $750 million “could help the accretion math work for CBS,” representing about 2% to 3% of operating expenses. In contrast, Discovery is expected to enjoy about $350 million in cost savings in its purchase of Scripps Networks, or about 10% of operating expenses. 

“In other words, cost cutting would help CBS buy down a deal premium,” Cahall wrote.