CBS-Viacom Talks on Possible Merger Structure Reported

Are Viacom and CBS cooking up a merger? Sources close to the companies say Sumner Redstone, chairman of Viacom, and Mel Karmazin, chief executive of CBS, held talks as recently as last week about merging their companies.

One source said the two executives held the meetings off-site to ensure secrecy, with several of them conducted at Karmazin’s newly purchased $11.4-million penthouse apartment in Trump Towers in New York. The source added that the two executives have yet to work out the structure of a deal as a variety of combinations are being considered at both companies to take advantage of new federal rules issued last month governing television station ownership.

Sources say issues of control could interfere with a deal, and many executives predict that the discussions ultimately will be scaled back to a swap of cable and broadcast assets or a partnership for operating television stations.

Yet many on Wall Street like the idea of a full-blown combination. Viacom’s stock has soared 13% since reports of merger talks first surfaced last week in Broadcasting & Cable Online. Investors have been concerned by the lack of a succession plan for Redstone, the feisty 76-year-old mogul who controls Viacom, which owns Paramount Pictures and a cable juggernaut that includes MTV, VH1, Nickelodeon and TV Land. Karmazin has become Wall Street’s favorite media mogul in recent years because of the company’s steady financial improvements and its aggressive expansion in radio, outdoor advertising and the Internet.

Sources say that after spinning off the Infinity Broadcasting radio group from CBS and squeezing profit from cost-cutting measures, Karmazin is seeking another major play to continue CBS’ growth. A study conducted two years ago for CBS by Bain & Co. listed Viacom as the No. 1 acquisition target because of the lack of overlap between the two companies.

Analysts say Viacom could get more mileage out of CBS’ two cable channels, Nashville Network and Country Music Television, by combining them with its MTV Networks cable group. Viacom also could build its home-grown Internet properties by using CBS’ radio, television and billboard advertising outlets for promotion. The companies also could streamline their broadcast operations by combining station groups that overlap in six major markets: Philadelphia, Boston, Dallas, Detroit, Miami and Pittsburgh.

Viacom Class A shares closed Friday at $45.31, up $3.13 a share. CBS hit a 52-week high Friday before easing back to close at $48.94 a share, up $1.69. Both stocks trade on the New York Stock Exchange,

Sources say the talks of a full-blown merger of equals grew out of discussions of ways to combine the two companies’ television station groups to take advantage of new federal rules that allow the ownership of two stations in one market for the first time ever.

The Federal Communications Commission last month eased rules to allow the top four stations in a market to own a weaker outlet as long as eight stations remain after the transaction to ensure a diversity of voices. The rules give new flexibility to the television networks, many of which are bumping up against federal caps preventing ownership of stations that reach more than 35% of the nation’s households.

For instance, CBS, the nation’s second-largest operator, with 15 stations that reach 32.8% of the nation’s households, could buy a second, weaker station in its current markets without adding to that total.

Yet even with the rules, the addition of Paramount’s 19 stations would bring CBS’ reach above the cap, to nearly 41%.

The deregulation has been pushed by struggling station groups, such as the broadcasting arm of Barry Diller’s USA Networks and Paxson Communications, as well as broadcasters such as CBS that are losing money on their networks but making money from their stations.

The new ownership guidelines have set off a series of negotiations, as broadcasters scrambled to be first to strike a deal. Sources say USA has had discussions with both CBS and Disney about a “duopoly” station alliance. They say Viacom has discussed a station combination with fourth-ranked Tribune Broadcasting. Speculation has also centered on Tribune and Gannett.

NBC and Fox have pursued Paxson, although sources say Fox is no longer interested.

“There are a lot of conversations, but nobody is jumping in because it’s difficult to figure out how to make money,” said one Fox source. “Paxson and USA have failed broadcast strategies and someone is going to bail them out. But not many people are willing to overpay--especially when digital technology is in time going to give broadcasters as much capacity as they need.”

Sources said a complicating factor in the Viacom-CBS negotiations is Chris-Craft Industries, the nation’s seventh-largest television station operator, which is locked with Viacom in a troubled 50-50 partnership that owns the UPN network. One source said Chris-Craft would be included as part of any merger.

Sources say that Paramount has been aggressive in looking for a duopoly partner because it is vulnerable should Chris-Craft find a partner and dissolve the money-losing UPN.

Because Chris-Craft’s stations are highly profitable, the company is considered the most prized duopoly partner.

Sources said a merger would probably be a one-for-one stock swap since both companies are close in size, with Viacom valued at $31 billion, and CBS valued at $36 billion. They said Redstone could retain control, with Karmazin running day-to-day operations until a planned succession. Sources say Redstone sees Karmazin as a kindred spirit, and considered him a possible successor after the two became better acquainted two years ago at the Allen & Co. media retreat in Sun Valley, Idaho.

Short of a merger, sources say, CBS could negotiate a swap involving its two cable channels, valued at $4 billion, for Viacom’s stations, valued at half that amount. Or they could contribute those assets to a new joint venture with Chris-Craft.