Why CBS Shareholders May Not Want a Viacom Reunion

Image Source: Getty.

It has been just 11 years since CBS (PARA -0.47%) and Viacom (NASDAQ: VIA) (VIAB) split into separate companies.

Go back to 2005, and the storied broadcaster and, what was then a growing cable power, were both integral parts of Sumner Redstone's media empire, all under one CEO. At the time of the split, the move made sense (though there were plenty of detractors who argued against breaking up the conglomerate).

Now, the trend has moved back toward media consolidation, and the aging mogul, whose health has been declining in recent years, wants the two companies to at least consider getting back together. Redstone, whose mental competence has been questioned in multiple court cases, still controls both companies through his privately held National Amusements theater chain, which holds 80% of their voting shares.

Because of that, whether it's actually his idea or -- as many think -- it's his daughter Shari Redstone who is pulling the strings, any "suggestion" to consider a merger from the Redstones has to be taken seriously by the boards of both companies. That puts each board in an interesting position. It's easy to see why struggling Viacom, which does not currently have a permanent CEO, would want to join with its former partner under CEO Leslie Moonves, but it's hard to see why CBS's board would want the same thing.

Ultimately, the Redstones have the ability to dictate what happens, here, but what's good for the family and best for Viacom shareholders may not be what's best for CBS stockholders.

What is happening?

There have long been rumors that the Redstones wanted CBS and Viacom to merge. You can even argue that it makes sense given that media companies have recently been consolidating rather than spinning off assets.

Now Reuters has reported that the National Amusements board (acting as mouthpieces for the Redstones, you can assume) has urged the two to consider recombining. In addition, the news service reported, the National Amusements board said, "it would not support the acquisition of either media company by a third party or surrender its control of either firm."

For the past year CBS And Viacom stock have mostly gone in different directions. Image source: YCharts.com.

Why is this bad for CBS?

It's easy to see why this move would be good for Viacom shareholders, but the benefits to CBS stock owners seem less clear. Even Moonves has been skeptical of the benefits in the past.

"We are never going to do something that is bad for CBS shareholders," he told investors at a Bank of America Merrill Lynch investor conference earlier this month, adding that the two companies were not "in active discussions," according to a different Reuters article.

The reason a Viacom merger may not be attractive to CBS is that many of its assets are struggling. The Paramount movie studio in particular -- an asset Sumner Redstone has been unwilling to consider selling -- has struggled to deliver hits.

In the past year, the studio had a huge flop with Ben-Hur, which cost over $100 million to make (before its marketing spend) and has earned only just under $90 million in global box office, according to Box Office Mojo. That coupled with the fact that the recent Teenage Mutant Ninja Turtles sequel bombed and Star Trek: Beyond proved that franchise has lost some of its pull, all serves to demonstrate the ongoing weakness at the studio.

In addition, in a movie landscape dominated by Disney and Comcast, which have numerous sure-fire franchises churning out billion-dollar hits multiple times each year, Paramount has a pretty bare cupboard. The company has the Mission Impossible films and Transformers, but beyond that, it has very little under its control that counts as a near-guaranteed success.

It's easy to see why CBS would not want to take on Paramount -- and why in the current cable environment, it would be at least a little wary of the future prospects for Viacom's cable portfolio, which includes MTV, VH1, Nickelodeon, Comedy Central, and more.

Ben-Hur was a remake of a classic, which bombed. Image source: Paramount.

What will happen?

A board is supposed to represent the best interests of shareholders, but in this case, it's hard to see how CBS's will be able to serve anyone not named Redstone. When Viacom's board and leadership attempted to buck Sumner and Shari, CEO Philippe Dauman lost his job, and some board members were replaced.

When one family owns 80% of the voting shares in two companies, it tends to get what it wants. Moonves may not like the idea, but if Sumner and Shari want a merger to happen -- and it has seemed for a long time like they do -- then it will happen even if its not best for the 20% of CBS shareholders who are not part of the family.