VIACOM SWALLOWS CBS

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The ink had yet to dry on Viacom Inc.'s $37 billion
all-stock merger with CBS Corp. before industry executives started wondering what would be
next on the programming giant's acquisition menu.

Viacom and CBS ended weeks of speculation on a possible
pairing, crafting what is so far the largest media merger in history. Together, the
combined company will have an enterprise value of more than $80 billion, making it the No.
2 entertainment conglomerate behind Time Warner Inc.

The merger creates a media behemoth with interests in cable
networks, radio and television stations, amusement parks, outdoor advertising, movie
studios and television production.

The company will be called Viacom, and it will be headed by
Viacom chairman and CEO Sumner Redstone. CBS chairman and CEO Mel Karmazin will become
president and chief operating officer of the new company.

But many in the industry are wondering what's in store
next. Some were guessing that the Internet was the most likely area for the new Viacom to
focus its considerable muscle.

"The uncharted territory is the Web," Sanford C.
Bernstein & Co. senior research analyst Tom Wolzien said. "The way CBS has
handled it in the past, on almost an ad hoc basis, they would have to spend some fairly
serious money."

Serious money is something the new Viacom will have in
abundance. After the deal is completed -- which is expected in about six to nine months --
the combined company would have generated about $21 billion in revenue and $4 billion in
cash flow in 1998.

According to Salomon Smith Barney managing director Jill
Krutick, the combined company will generate about $5 billion in cash flow in 2000.

That's considerable, especially when free cash flow --
or the amount of money a company has left after it pays its bills -- is taken under
consideration.

The combined company is expected to have $2 billion in free
cash flow during its first year of operation. That money could be used for many things,
including acquisitions, paying down debt and share buybacks.

"We have a great interest in continuing to expand, and
we have the balance sheet to do it," Karmazin said at a press conference last week.

However, Redstone added, any potential acquisition will
have to be a better deal than buying back Viacom's own shares.

"We will be looking at possible acquisitions, but
neither Mel nor I would indicate what particular targets we would be interested in,"
Redstone said at the press conference.

Viacom also has many options. Aside from expanding its
Internet presence, the combined company could look to acquire more television stations, or
it could focus its energies inward, toward growing the existing business.

"There are a lot of interesting things they could do
-- tying MTV [Networks] together with [CBS] radio stations, the ability to use their
TV-station platform to launch traditionally syndicated shows," Wolzien said.
"All of these are possibilities."

PaineWebber Inc. analyst Christopher Dixon said
Viacom's first order of business will probably be to shrink its capital structure,
and then it will most likely look overseas for potential acquisitions.

"Obviously, they will look for opportunities in the
international market," Dixon said. "MTV has a strong presence internationally.
Then I see them doing a series of tuck-in acquisitions, radio-station and
television-station swaps to round out the duopoly."

Dixon said as far as the Internet goes, it is likely that
Viacom will roll up its Internet assets with those of CBS in a separate company, take that
company public and use it as a vehicle to acquire other Internet properties.

For the time being, Viacom will focus on getting the CBS
deal done. According to the deal, Viacom will exchange 1.085 shares of its class-B common
stock, or about $48.89 per CBS share, for each share of CBS stock. In addition, Viacom
will assume about $1.4 billion in CBS debt.

Although Wall Street generally praised the deal, there are
still some regulatory hurdles to clear, including approval from the Federal Communications
Commission. The combined entity would surpass the FCC's 35 percent cap on
broadcast-population reach -- the new Viacom would have 41 percent of the market -- but
Viacom said it would do what was necessary to comply with federal regulations.

Redstone and Karmazin traveled to Washington, D.C., last
week to make their pitch to increase the ownership cap -- coincidentally at a time when
AT&T Corp. and other cable operators are trying to persuade the agency to increase its
30 percent limit on cable ownership.

But having another media mega-merger to consider is not
expected to affect the FCC's plans for cable, or even the proposed $58 billion merger
between AT&T and MediaOne Group Inc., which would surpass the FCC limit.

"The difference between this and AT&T is that
there is no real national policy that's at stake [with the Viacom deal],"
Wolzien said. "This is about vertical integration and finding out what the right
balance is. The AT&T merger is all about building a separate infrastructure across the
whole country. There's a lot more public-policy stuff at stake."

Although deals of this magnitude usually spur other
companies to act similarly, Dixon does not believe another major media merger is on the
immediate horizon.

"You're going to see some deals at ABC [Inc.] and
NBC as they look to enhance the duopoly structure," Dixon said. "But do I see a
huge deal? This doesn't make the case."

Still, others see NBC, Sony Corp. and USA Networks Inc.
chairman Barry Diller making moves in the near future, albeit not as large as the
Viacom/CBS merger.

"NBC is certainly the odd guy out, but there is
nothing that forces them to do a deal this week," Wolzien said. "They're
the only guy that's not vertically integrated. Diller is an odd guy out and
Sony's an odd guy out. Viacom and CBS are joining three other vertically integrated
companies -- [The Walt] Disney [Co.], Fox and Time Warner [Inc.]. They all have networks
and they all have production. That basically leaves NBC without those components."

Merrill Lynch & Co. analyst Jessica Reif Cohen also saw
NBC as a potential deal candidate, but she added that the network is in a good position
due to the financial health of its parent, General Electric Co., and because it is the
last unaffiliated broadcast network.

"The options are limited," Cohen said. "A
deal is inevitable, but not imminent."

Speculation has been that NBC will take a 30 percent stake,
worth $400 million, in Paxson Communications Corp., the fledgling West Palm Beach,
Fla.-based network with about 73 television stations across the country. Paxson officials
declined to comment.

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