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CBS likely will reject Viacom's demands for a higher valuation

CBS likely will reject Viacom's demands for a higher valuation
Shari Redstone, pictured in 2017, wants her pick, Viacom Chief Executive Bob Bakish, to be the No. 2 executive at a combined CBS-Viacom. (Stephen Smith / TNS)

Viacom Inc. has asked CBS Corp. to raise its bid by about $2.8 billion in a move that would value the New York media company at about $14.7 billion, according to two people familiar with the matter who were not authorized to speak publicly.

CBS is likely to reject the latest offer, the latest sign of the wrangling between the two companies controlled by the Redstone family.

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The Viacom offer recommends an exchange ratio of 0.68 CBS shares for each share of Viacom class B stock. CBS had offered 0.55 of its shares for each Viacom class B share, according to the knowledgeable people — an amount lower than Viacom's current stock price.

"Given a Viacom counter-offer that appears to suggest a 15% to 18% premium above its recent trading range … the parties seem reasonably at odds on valuation, not unexpectedly," Tuna N. Amobi, media analyst with CFRA Research, wrote in a Monday note to investors.

CBS has argued that Viacom's stock already has a built-in premium because Viacom shares jumped in late January when news of the possible merger emerged. In addition, the proposed deal has weighed on CBS stock as investors worry that swallowing Viacom's assets could become a drag on CBS.

In a letter to CBS board members last week, Viacom asked that Viacom Chief Executive Bob Bakish become the second-in-command at the proposed combined company, behind CBS Chief Executive Leslie Moonves. Shari Redstone, who has led the drive to merge the two companies, has made it clear that she wants Bakish in the heir-apparent role.

The Redstone family controls nearly 80% of the voting shares of CBS and Viacom through their Massachusetts-based investment vehicle, National Amusements Inc.

Viacom and CBS declined to comment.

The combined company would include CBS' assets, including the popular broadcast network, television stations and Showtime premium channel. Viacom owns MTV, VH1, Nickelodeon, BET and the Hollywood movie studio Paramount Pictures.

Price and management structure appear to be the main obstacles to reunite the companies that split off in 2006 when billionaire patriarch Sumner Redstone — now 94 and ailing — decided he could create more wealth by dividing his empire into two companies.

Shari Redstone tried to recombine the two companies a decade later, but that effort collapsed in late 2016 due to CBS' reluctance to swallow the more challenged Viacom. She then installed Bakish, who previously ran Viacom's international operations, in Viacom's top role.

CBS wants to keep its management team intact, with Moonves and CBS Chief Operating Officer Joseph Ianniello continuing in their current roles. Under the Viacom plan, Ianniello's role is unclear.

The situation poses a conundrum for Shari Redstone.

"Shari Redstone… appears to be facing a number of unpalatable decisions," said Michael Nathanson of the MoffettNathanson research firm in a note. "How does she convince CBS to agree to merge with Viacom when it is clear that CBS doesn't really want to merge with Viacom? Is she willing to keep Bob, but lose Joe and maybe Les?"

Meanwhile, one of CBS Corp.'s biggest shareholders has warned the company's board not to pay above market price for Viacom, Bloomberg reported, without naming the shareholder.

Reuters first reported Viacom's request for a 0.68 exchange offer.

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That might be a fair price, Nathanson concluded. He noted that since the summer of 2015, Viacom shares have traded at 0.71 of CBS shares. He also proposed a compromise in which Moonves would be the chief executive for at least two years, while Ianniello would run the CBS assets and Bakish could control Viacom's television group.

Paramount's chief executive, Jim Gianopulos, could report directly to Moonves, Nathanson suggested, adding that Paramount should be combined with the CBS TV Studios, which produces such shows as "NCIS," "Hawaii Five-0," "The Late Show with Stephen Colbert," "Jane the Virgin" and "Crazy Ex-Girlfriend."

"To us, this seems like the most practical way to get to an agreement, correctly re-combine the assets, and provide more time to determine the better future steward of the combined company," Nathanson wrote.

CBS shares closed unchanged Monday at $52.84. Viacom closed up 7 cents to $30.97.

UPDATES:

1:30 p.m.: This post has been updated to include the closing share prices of Viacom and CBS.

11:55 a.m.: This article was updated with additional analyst comments.

This article was originally published at 9:45 a.m.

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