Merger Mania: Comcast Eyes Fox as CBS Resists Shotgun Wedding With Viacom
Merger mania has never been so manic.
The media and business world is abuzz with the swirl of billion-dollar bare-knuckle brawls over the fate of companies that are the pillars of the U.S. entertainment industry.
The prospect of Comcast swooping in on the Disney-21st Century Fox takeover agreement has come into sharp focus as the cable giant has begun dropping big hints that a rival bid is in the offing. And CBS Corp. has gone to court in a bold move to do an end run around the source of power for its controlling shareholder: the preferred stock holdings that have long granted the Redstone family an iron grip on CBS and Viacom. CBS’ legal maneuver adds another bitter chapter to the battle over the fate of the empire built by Sumner Redstone, who turns 95 on May 27.
Comcast wants to bust in on Disney’s plans to add to its arsenal of content and distribution operations because chairman-CEO Brian Roberts sees the Fox deal as a transformative moment — and he’s fighting as hard as possible to make sure it’s his company that’s transformed, not Bob Iger’s Disney. CBS, meanwhile, wants to stop a shotgun wedding with Viacom sought by Shari Redstone, via holding company National Amusements, because it doesn’t want to take on Viacom’s cable channels and Paramount Pictures.
Court papers filed May 14 in the Delaware Court of Chancery make it clear that CBS brass is mighty steamed at Redstone for allegedly telling a CBS suitor (believed to be Verizon) not to bother to make a bid for the company because she wasn’t interested in selling.
Redstone “has threatened to impose her and (National Amusements’) will on the company at the expense of all of the company’s stockholders. She has undermined management,” the CBS lawsuit states. “It has been publicly reported that she will replace directors who will not do her bidding. She has sought to combine CBS and Viacom regardless of the strategic and economic merits of the transaction and to the exclusion of considering any other potential transaction. Those actions have damaged, and will continue to damage, CBS and its stockholders.”
National Amusements called the lawsuit “outrageous” and vowed to vigorously defend its rights in court.
The lawsuit is a byproduct of the rancor between Redstone and CBS chairman-CEO Leslie Moonves over the merits of bringing CBS and Viacom back under the same roof. Redstone sees it as a natural move at a time when the big are getting bigger in media. Moonves sees it as a mistake for CBS, which has prospered via a strategy of focusing on two key networks (CBS and Showtime) and riding the content licensing and streaming boom. National Amusements’ control of 80% of voting rights in CBS has raised the specter of Redstone moving to replace CBS board members to get the deal done. CBS’ court documents state that the CBS special board committee evaluating the takeover of Viacom concluded this past weekend that the deal did not make sense for CBS shareholders. The lawsuit was a preemptive strike against the possibility that the rejection would spur Redstone to act on the board.
CBS’ special committee — composed of independent directors Gary L. Countryman, Charles K. Gifford, Bruce S. Gordon, Linda M. Griego and Martha L. Minow — has proposed issuing a special stock dividend to shareholders that would have the effect of diluting National Amusements’ voting power without diluting its equity holdings in CBS. National Amusements has 79.6% of voting rights but only 10.3% of the equity in CBS. Under the stock dividend scenario, Redstone’s voting rights would drop to about 17%, which would not be enough to sway decisions such as naming board members.
The CBS filing also creates a corporate car-chase scenario. CBS is additionally seeking a temporary restraining order against National Amusements making changes to the company’s charter or replacing board members prior to the May 17 special board meeting where the dividend plan will be voted on. CBS is already scheduled to hold its annual shareholders meeting on May 18.
In a sign of how fraught and fast-moving the air around CBS and Viacom is these days, CBS will be in court fighting to blunt its controlling shareholder at the same time the mothership network is presenting its new fall lineup to advertisers at Carnegie Hall. The hearing on the restraining order is set for May 16, which means all eyes on Wall Street and in Hollywood will be watching Redstone’s next move. In its statement, National Amusements said it “had absolutely no intention of replacing the CBS board or forcing a deal that was not supported by both companies.”
In Philadelphia, Comcast is not only building a war chest for an all-cash offer for Fox pegged in the $60 billion range (to start); it’s also building a case for why a deal with the company for key TV, film and digital assets should pass muster with U.S. regulators. Disney is not expected to back down easily from the $52.4 billion deal it reached with Fox in December, though it will certainly be pressured to sweeten its offer.
Comcast is said to be waiting for the judge’s ruling in the AT&T-Time Warner antitrust trial, set for June 12, before making a final decision about taking another run at Fox. But all indications are that the company is zealously preparing for battle. It’s already got its nose in the tent after making a rival offer for all of Sky, the European satellite platform that Disney hopes to inherit through the Fox purchase.
The chance of a bidding war erupting between Disney, Comcast and possibly other contenders is stirring up some long-held grudges among the key players — Iger, Comcast’s Roberts and NBCUniversal’s Steve Burke. Rupert Murdoch is in the catbird seat as two media titans fight over big pieces of his empire, including the 20th Century Fox studio, FX Networks, National Geographic Worldwide and 18 regional sports channels. But he’s also going to be on the defensive after his wholehearted embrace of the Disney deal as the best possible home for a clutch of Fox’s crown jewels.
The signals coming out of Philadelphia spurred groans in Century City as Fox staffers realized that Comcast’s plans will surely drag out the sale process, especially if a bidding war erupts between Comcast and Disney and other suitors. The rank and file across Fox have had five months of uncertainty as the Disney transaction began its regulatory review. Comcast’s entry would only prolong the wait for answers to who stays, who goes and how the management picture will shape up for the Fox assets being sold as well as those staying behind with what has been dubbed New Fox.
Murdoch and the Fox board were cool to Comcast’s offer during negotiations in November and December in part because of fears that the sale would be blocked by regulators. Comcast has an image as a big media bogeyman in Washington, due to its status as the nation’s largest cable operator and one of the biggest broadband providers. Comcast’s efforts to acquire Time Warner Cable in 2014 were turned back by the FCC and the Justice Department as opponents howled about its potential to have too much influence over the broadband market.
But Comcast is readying a pitch to regulators and investors if AT&T-Time Warner is approved without onerous conditions by U.S. District Court Judge Richard Leon.
Comcast will position itself as less of a threat than AT&T because its cable and broadband operations are regional rather than national like AT&T’s wireless platform and DirecTV’s pay-TV service. It will also point to the revenue breakdown of the Fox assets in play as being more than 50% from international markets — an arena where Comcast only has a small footprint. On the home front, Comcast will point to the fact that the combo of Disney and Fox would give the company greater market share at the box office than the combination of Universal and Fox. Comcast also intends for the Fox acquisition to flow through the Comcast side of the company rather than directly through its NBCUniversal unit, which raises questions about how the Fox assets would be managed.
Fox outlined its reasoning for favoring the Disney bid over Comcast’s higher offer in a Securities and Exchange Commission filing on April 18. Comcast took that as a blueprint for how to revise its offer to a level that the Fox board cannot dismiss without another round of active negotiations.
The Murdoch family has tight control over most decisions involving 21st Century Fox through preferred shares, which gives it expanded voting rights, just as the Redstones enjoy with CBS and Viacom. But in the specific case of a sale, the Murdochs’ expanded voting rights are not in force, meaning that the family has votes equal to the number of shares it owns, which amounts to about 17% of the company. In other words, the Murdochs don’t have the clout to unilaterally decide to stick with the Disney deal.
The stakes are high for major players who have jousted over deals and strategic pursuits in the past. Iger and Comcast’s Roberts and Burke butted heads in 2004 when Comcast made its unsolicited bid for Disney. Burke and Iger by multiple accounts had a strained relationship during their respective tenures at ABC, one of the factors in Burke’s decision to join Comcast in 1998.
The headwinds are building. Media analyst Todd Juenger of Bernstein & Co. is among those who see the budding Disney-Fox-Comcast fight as a seminal moment for the traditional media industry and its efforts to remain competitive against the new breed of tech behemoths, i.e., Apple, Amazon, Netflix and Google. The same can be said for the positioning of CBS and Viacom as Verizon and other titans look for ripe acquisition targets.
“It is becoming increasingly our point of view that both Disney and Comcast (and Fox as well) are looking at the long-term shape of the marketplace for in-home/personal video entertainment and concluding there will be only a handful of global, scale players. Probably only one of which will be controlled and offered by a conventional TV media company,” Juenger wrote on May 9. “We think Disney and Comcast increasingly view Fox as the seminal defining point, and this the moment in time, in determining which company ascends to that role. And therefore, we think both Comcast and Disney are likely to pay a high price.”
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