Viacom, CBS to Merge in Record $37-Billion Deal : Business: Agreement would form a media giant, second only to Time Warner in size, that combines popular cable properties with major broadcast network.

In the largest transaction in media history, Viacom Inc. and CBS Corp. agreed to merge Tuesday in a deal valued at nearly $37 billion in stock, creating the world’s second-largest entertainment giant after Time Warner Inc.

The marriage catapults the two companies into the top tier of the entertainment industry, creating a media juggernaut with some of the best known brands in television and cable, including MTV, Nickelodeon, the CBS broadcast network and Paramount Pictures.

The merger, which faces regulatory hurdles and must also be approved by shareholders, gives Viacom a major broadcast outlet for its movies and television shows, as well as vast radio, television and billboard advertising outlets to promote and build its growing stable of cable channels and Internet sites.

Wall Street analysts said the two companies are a strong fit, noting the cross-promotional opportunities and the little overlap. They said redundancies in television station operations and cable programming could lead to cost savings and increased efficiencies.

Though characterized as a merger of equals, Viacom will be the surviving entity and will also assume about $1.4 billion of CBS debt. Sumner Redstone, the feisty 76-year-old mogul who built Viacom, will retain control of the company and keep the title of chairman and CEO.

Mel Karmazin, the hard-nosed chief of CBS who has more than doubled the company’s stock price since he took charge in 1998, will be president and chief operating officer of Viacom.

The merger assures CBS’s position after a decade of industry consolidation that threatened to marginalize the network, as Time Warner, the Walt Disney Co. and News Corp. expanded cable and broadcast distribution outlets and the Hollywood programming content to feed them.

CBS was at risk of losing out on the best programming as studios such as Disney, Time Warner and Fox funneled more of their best TV series and movies to their own outlets.

CBS controlled Viacom 30 years ago but was forced to spin it off because of changes in federal rules that prevented networks from owning cable systems and producing programming.

Other Major Deals Could Follow

Analysts say the CBS-Viacom joining could propel a series of other deals as companies such as General Electric’s NBC, Universal Studios, Sony Pictures Entertainment and USA Networks Inc. look for complementary partners to remain competitive.

The deal could also transform the advertising marketplace, forcing media companies to reassess the way they package and sell their inventory.

“This could be the media company for the 21st century because of the combined companies’ clout with advertisers,” said Christopher Dixon, a media analyst at PaineWebber Inc. “The combined companies will have advertising sales three times the level of Time Warner’s and double the level of Disney’s--and that is the most interesting part of this deal.”

The combined companies will bring in an estimated $10.7 billion in advertising revenue this year, compared with News Corp.’s $5.8 billion, Disney’s $5.1 billion and Time Warner’s $3.8 billion.

Propelling the transaction are federal rules adopted last month that for the first time allow television station owners to control two stations in a market under certain circumstances. The new Federal Communications Commission guidelines would allow CBS--which is the nation’s second-largest television group, with 15 stations--to operate second outlets in those markets without violating ownership limits.

Redstone, who once told The Times he was “not, not, not interested in buying CBS,” said Tuesday that Karmazin “seduced” him into a deal using his master skills as a salesman.

“It was a seduction,” said Redstone, who will retain his 67% voting control, through Class A Viacom stock, after the transaction closes next year. “He first came with a small deal, then a slightly larger deal, and then the big deal.”

The small deal involved aligning the six television stations they each own in common markets, under the CBS and UPN banners, to achieve operating efficiencies. Redstone said they also discussed swapping CBS’s two cable channels, Country Music Television and The Nashville Network, valued at about $4 billion, for Viacom television stations, worth about half that.

Sources said Redstone initially was so dismissive that Karmazin couldn’t even get a return phone call from the media mogul, who built Viacom from a chain of movie theaters. Gordon Crawford, the powerful Los Angeles-based money manager at Capital Research Co., which holds major stakes in most of the top media companies, helped facilitate early meetings in June.

Karmazin said he and Redstone chatted again at the Allen & Co. media retreat in July but that the merger talks did not begin until 10 to 12 days ago, through a series of secret meetings at Karmazin’s penthouse apartment.

Redstone said he grew to see the magic of the marriage Karmazin was proposing. He said Nickelodeon, the nation’s top-rated network with children, could be used to lift CBS’s Saturday morning ratings, and that MTV programming on CBS might be able to lure younger viewers to the network.

A Boon for CBS’s Demographics

Though CBS reaches more households than its rivals, its audience is older than any of the other networks and is therefore less valuable to advertisers.

Redstone said he is also excited by the benefits of merging CBS’s two cable networks with the MTV Networks powerhouse, and with cross-promotional opportunities for MTV and CBS’s radio stations, which include outlets such as KROQ in Los Angeles.

Analysts said Viacom could become one of the leading Internet players by using CBS’s vast advertising outlets to drive traffic to its sites. The companies own more than a dozen Internet holdings, including mtv.com, nickelodeon.com and stakes in cbsmarketwatch.com, cbs.sportsline.com and mtv.com.

But the merger may face significant regulatory hurdles. For instance, the pairing of their station groups will take Viacom over the national cap, which limits owners to stations that reach no more than 35% of the nation’s households. Viacom would total 41% after the merger.

Also, federal laws prevent the ownership of two broadcast networks. Viacom could be forced to sell or terminate UPN, the struggling network it owns in a 50-50 partnership with Chris-Craft Industries Corp.

Karmazin and Redstone said Tuesday they were flying to Washington today to meet with the FCC and are expected to seek a waiver to own the two networks. Both dismissed current rules governing network and station ownership as outdated in an era when companies own multiple cable outlets and most broadcast networks are losing money.

Karmazin said the company would like to keep UPN going. While the partners have invested an estimated $1 billion to start up UPN, analysts said Viacom could program the stations as independent outlets should the government force divestiture.

At a press conference Tuesday, Redstone said he was having conversations about UPN with Chris-Craft, and sources said Karmazin has viewed Chris-Craft as part of the deal from the start. Adding the Chris-Craft stations would give Viacom two stations in 12 large markets, and analysts say the company would divest the others to comply with government ownership limits.

Karmazin has been an outspoken proponent in Washington for easing station ownership caps and the network ownership rules, which are due to be reviewed by the FCC in December.

Wall Street is propelling both stocks upward, in part because the combined companies will have such a strong balance sheet, with Viacom taking on only $1.4 billion in additional debt. Viacom will not be issuing any new debt to finance the purchase--allowing Redstone to keep a promise made to Wall Street after over-leveraging the company in 1994 to win Paramount Communications in a bidding war against Barry Diller.

CBS shareholders will receive 1.085 shares of Viacom’s Class B shares for every one of their CBS shares. Based on Tuesday’s closing prices, that values CBS shares at $50.93 a share, a slight premium over Friday’s close of $45.06 a share. Although CBS got only a slim premium, the structure gives the combined company the flexibility to make additional acquisitions, analysts said.

The deal also answers the long-standing succession issue that has hovered over Viacom, although Redstone’s voting shares revert to a trust controlled by his family upon his death. “I will control this company forever through myself and my designees,” said Redstone.

Under Karmazin’s new three-year contract with Viacom, he will become chief executive of the company as soon as the position is vacant.

Redstone’s two deputy chairmen, Tom Dooley and Philippe Dauman, will step down after the merger is completed but will remain on the Viacom board. Karmazin, 56, said he is protected by a provision that requires 14 of 18 Viacom directors to agree to remove him from his post. He said he is more interested that CBS shareholders own 55% of Viacom’s economic interest than in his own lack of voting control.

Redstone has no plans for retirement. Asked about his aging and the succession question, Redstone recoiled. “Have you seen me on the tennis court?”

* DIFFERING STYLES

The men behind the merger are a study in contrasts. C1

* THE PLOT THICKENS

TV’s web of programming deals could grow more tangled. C1

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

A Media Marriage

In the biggest media deal ever, Viacom announced Tuesday that it is buying CBS. Here is what the companies bring to the deal:

COMPANIES’ KEY COMPONENTS

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VIACOM

* Operations include Nickelodeon, TV Land, MTV, Paramount Pictures, Spelling Television, Showtime, Blockbuster videos and Simon & Schuster. It owns 19 TV stations and stakes in UPN and Comedy Central.

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CBS

* Operations include CBS Television, with 15 stations and 212 affiliates, and cable’s Nashville Network and Country Music TV. It also has a majority stake in Infinity Broadcasting Corp.

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NEW TOP MEDIA PLAYERS

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Stock market value Company in billions* Time Warner $80.5 Viacom/CBS 68.5 Walt Disney 59.2 News Corp. 29.5

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* As of market close Tuesday

Sources: Bloomberg News

Researched by JENNIFER OLDHAM / Los Angeles Times