Viacom, AT&T negotiations weigh on possible CBS tie-up: sources

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[March 23, 2019]   By Helen Coster, Liana B. Baker and Kenneth Li

(Reuters) - Viacom Inc's bitter contract renewal talks with AT&T Inc's DirecTV that could see the blackout of MTV, Nickelodeon and Comedy Central by midnight Friday are weighing on a possible tie-up of CBS and Viacom, sources familiar with the discussions said.

Although the boards of CBS and Viacom have not discussed or decided on pursuing a merger, these sources say they are studying AT&T's impact on Viacom and how it affects the company's motivation to pursue a CBS merger. Viacom needs to resolve the AT&T contract before considering any other strategic moves including mergers and acquisitions, sources said.

Both companies are controlled by the Redstone family’s National Amusements Inc, which pushed for a merger last year but backed off as CBS explores other options before deciding on another run at Viacom.
 


Viacom would take a substantial financial hit without an AT&T deal. AT&T is Viacom’s largest distributor, representing 24.5 million total video subscribers, and was responsible for about 15 percent of Viacom’s 2018 revenue. At stake are about $2 billion annually in fees and advertising, which are seen declining in any new deal, according to Wall Street estimates.

The 2017 Viacom and Charter Communications Inc renewal resulted in a 15 percent rate decrease. A similar outcome with AT&T could lead to a $156 million drop in annual affiliate fees paid by AT&T to Viacom, although some analysts have estimated an approximate 10 percent decrease this time.

Viacom and AT&T declined to comment. Negotiations continued as of Friday afternoon, sources said.

Failure to reach a deal is seen emboldening CBS and Viacom's controlling shareholder's position to put the companies together to give them better leverage in future distribution contract talks.

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"Viacom’s clear need for greater negotiating leverage after being dropped by AT&T might be the final factor necessary to drive the long-speculated CBS-Viacom merger given the common control of both companies by the Redstone-controlled National Amusements," Credit Suisse analyst Doug Mitchelson said in a research note this week.

If AT&T and Viacom walk away from the table, the No. 2 U.S. telecoms company's position could also be weakened, especially if it faces a combined CBS and Viacom by the end of June, when CBS's contract with AT&T expires.

Dropping the CBS broadcast network and NFL games would be disastrous to AT&T, and they may end up paying more for Viacom channels through CBS, analysts have said.

Losing Viacom will also weaken AT&T's leverage as it faces Walt Disney Co later this year, according to Mitchelson.
 


Shares of Viacom closed down 2.46 percent at $25.34 on Friday while AT&T shares closed flat at $31.07.

(Reporting by Kenneth Li, Helen Coster and Liana B. Baker; Editing by Leslie Adler)

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