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Even if National Amusements (NAI) is successful in its attempt to recombine CBS [NYSE:CBS] with Viacom [NYSE:VIA.B] after board room drama last week, the net result is unlikely to turn out well for the investor, said a former CBS executive and a veteran media banker.

A potential challenge for the merger is that Shari Redstone—who now leads NAI after the decades-long tenure of her father and NAI founder Sumner Redstone—has yet to articulate a strategy under which a combined CBS-Viacom group can effectively compete in a media world that will be increasingly driven by over-the-top (OTT) video, said the former executive, who owns shares of both CBS and Viacom.

Likewise, NAI’s response to CBS’s fight for independence, and a forced merger with Viacom, could push out the CEO of CBS, Les Moonves, who is credited with much of the success of the business.

Following’s Disney’s [NYSE:DIS] USD 52bn deal to acquire key assets from 21st Century Fox [NASDAQ:FOXA] late last year, Shari Redstone revisited a plan to recombine CBS and Viacom in January by asking the firms to consider the options. CBS and Viacom’s boards have formed special committees to review the merger that would combine the venerable broadcaster with a collection of cable TV channels, theme parks and the Paramount movie studio.

After cobbling together a collection of media and entertainment assets starting in the 1980s, Sumner Redstone split Viacom from CBS because he wanted to be sure to retain the executives who headed each business –Moonves at CBS, and Tom Freston at Viacom. Freston was ousted a few years later, but Moonves remained. Redstone maintained voting control over both companies through NAI, though a majority of CBS’s board of directors is independent.

Over-the-top plans

In making a decision to reunite the two companies, aside from a general desire to respond to the Disney-Fox transaction, Shari Redstone and NAI left open the question of why a united CBS-Viacom entity would be able to boldly make its way forward at a time when traditional-media revenue streams are at risk, the former CBS executive said.

NAI has not outlined an OTT strategy for the combined company since it would leave this strategy to the company, said a person familiar with the matter. The person said the controlling shareholder does believe that a combination would allow CBS and Viacom to provide a compelling direct-to-consumer video offering.

OTT platforms such as Netflix [NASDAQ:NFLX], Amazon [NASDAQ:AMZN] Prime Video and Hulu are attracting growing audiences of former cable subscribers who no longer want to pay for expensive packages of hundreds of channels, jeopardizing revenue models that depend on such packages. CBS in particular has benefited from retransmission fees.

One of the concerns CBS has about a merger with Viacom relates to these highly-lucrative retransmission fees, the former CBS executive said. The worry is that in negotiating with a combined company, pay-TV providers – rather than paying so much cash to CBS for the right to retransmit the signals of CBS stations -- may instead want to barter carriage for Viacom’s underperforming cable channels including MTV and Nickelodeon as part of that compensation. “That would be a net destroyer of value for CBS,” the executive said. A person familiar with CBS’s thinking echoed this view.

However, Viacom has done much to shore up ratings at some of its key channels, including BET, MTV and Comedy Central, said a person familiar with the situation at Viacom. For this reason, a combined CBS-Viacom entity would have more leverage with pay-TV providers in negotiating compensation, rather than less, this person said.

With regard to OTT, “what are [CBS and Viacom] going to do? How are they going to be successful? I don't think anybody … knows what the goal is here,” the former CBS executive said. The problem is even more glaring because Disney, under long-time CEO Bob Iger, has clearly outlined its OTT plan, the executive said.

With the Fox acquisition, the media and entertainment giant can assume control of OTT provider Hulu, funneling much of the Fox content through that pipeline. The company likewise has the Watch ESPN platform for its flagship sports channel and enjoys the dominant kids’ outlet in Disney Channel.

The Moonves factor

Whatever a recombined CBS and Viacom intend to do in the OTT universe, analysts and investors would likely be more comfortable with the merged company if CBS CEO Les Moonves leads it, the former CBS executive said.

While CBS All Access, the company’s OTT platform, and the on-demand application of premium cable channel Showtime, are certainly not enough to challenge the Disney-Fox behemoth, Wall Street would at least be reassured by Moonves’ track record and his willingness to come up with some plan of incremental attack in this uncertain environment, the executive explained.

Last week CBS’s board of director members not affiliated with NAI attempted to dilute NAI’s voting control over CBS by proposing a special dividend of Class A voting stock to both non-voting Class B and existing Class A shareholders. The independent board members said the change would make CBS a non-controlled company and allow it to “more fully evaluate strategic alternatives.”

NAI quickly adjusted CBS’s bylaws so that issuance of the dividend would require a 90% supermajority vote by the CBS board to go into effect. Because Redstone and other members of the board voted with NAI on Thursday, the dividend received a favorable vote from only 78% of the CBS board.

CBS considers the motion to have carried, a person familiar with the company’s thinking said, though it acknowledges that since a Delaware judge opted not to interfere in the NAI’s bylaw change, the dividend proposal is dead.

For NAI’s part, it believes the motion was defeated, and it is up to CBS to challenge that fact in court, a person familiar with NAI said.

Under these circumstances, “it’s hard to see how Les can continue to work for Shari,” said a person familiar with one of the largest independent holders in the Class A shares of both CBS and Viacom.

“Shari and Les have come to daggers drawn, and the next step is probably for Les to step down,” the veteran media banker said. Moonves’ probable exit, combined with shareholder litigation that will surely result from this week’s clash, will ultimately have a negative effect on CBS’s value, the banker said.

Even if Shari Redstone succeeds in combining CBS and Viacom, the banker said the only viable play is a sale of that entity to a third party, and without Moonves, she cannot hope to obtain a fully valued bid, the banker said.

However, the situation between Moonves and Redstone might still be salvaged, the former CBS executive said. Those who assume he will leave fail to understand what motivates him, the executive explained.

Loyalty above all

More than anything else, Moonves is driven by his fierce loyalty to his allies, the former CBS executive said. That is why Moonves objected so vehemently to NAI’s earlier demand that Viacom CEO Bob Bakish either be the number two man at the recombined company or at least have a seat on the board.

Having carefully groomed CBS COO Joseph Ianniello for such a role, and with dozens of senior executives in place at CBS who have been at the network for more than 20 years, Moonves is proud of his team, and wants to take care of each member of that team, the former executive said. Having Bakish on the board would be “disruptive,” the exec added.

Viacom sees the situation differently. “You'll have a combined company that would look very different than what CBS looks like as a standalone now,” said the person familiar with the situation at Viacom. So the notion that you wouldn't have anybody on the board with a deep familiarity with Viacom's assets that Bob has, is kind of ridiculous.”

Moonves realizes that if he resigns, the members of his team would be vulnerable to whoever NAI brings in to run the company, the former CBS executive said.

Being fired is another matter, the former executive noted, as firings would trigger certain payouts to departing individuals, including Moonves himself, Ianniello and other executives.

Shari Redstone certainly could opt to fire Moonves, despite his importance, a second media banker said, noting that she did not hesitate to oust former Viacom CEO Philippe Dauman two years ago.

“I actually thought [CBS and NAI] were making progress until this news hit, that was the chatter I had heard. So it came as kind of a surprise. But this is nuclear,” the second media banker said of the CBS lawsuit.

Should CBS prevail and be able to sell itself to a third party, that would be the best scenario for CBS shareholders, the person familiar with a large independent stockholder said.

Although telecom giant Verizon [NYSE:VZ] has denied having any interest in acquiring CBS, the first media banker and the former CBS executive said a deal remains plausible.

With Moonves in place, CBS could sell for as much as USD 70 to USD 75 per share, the former executive estimated, noting that the highest estimate he has seen is USD 90 per share.

Therein lies the quandary for Shari Redstone, the person familiar with CBS’s thinking said. “If she loses [the court fight], she can’t do the [Viacom] merger. If she wins, she loses Les,” this person said.

CBS, Viacom and NAI declined to comment.