Karmazin Steals the Show as CBS and Viacom Create Media Powerhouse

The CBS chief, who will take over the role of president and COO of the new Viacom, has investors smitten, and optimistic that he can energize the company.
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Funny, he doesn't look like a god.

But on the day that

Viacom

(VIA) - Get Report

and

CBS

(CBS) - Get Report

announced the largest entertainment merger in history, investor reverence for CBS Chief Executive Mel Karmazin reached all the way to heaven, or at least the 20th floor of New York's

St. Regis Hotel

.

The recent history of big entertainment deals has been iffy at best:

Time Warner

(TWX)

stagnated for five years after it was glued together in 1990, and

Disney

(DIS) - Get Report

still has heartburn from its $19 billion takeover of

Capital Cities/ABC

in 1996. But Wall Street is betting that Karmazin, who has revitalized the Tiffany Network in his short stint as that company's chief, can do the same on a global scale at the new Viacom.

That optimism pushed up shares in both companies after the $35 billion deal was announced Tuesday morning. CBS shares closed up 3.6%, while Viacom gained 5.8%, both in heavy trading.

"These guys have made me a lot of money as an investor," says Mark Greenberg, manager of the

Invesco Strategic Leisure

fund, a longtime Karmazin fan who owns shares in both Viacom and CBS. "And that's what it comes down to."

Under the agreement, billed as a merger of equals even though the new company will be called Viacom and have 10 board members from the old Viacom board and just eight from the CBS board, each share of Viacom stock will be exchanged for 1.085 shares of CBS. Sumner Redstone, Viacom's 76-year-old current chairman and chief executive, will keep those positions at the new company, while Karmazin will become president and chief operating officer.

At a packed press conference discussing the deal in the rooftop ballroom of the St. Regis, Karmazin and Redstone joked like old friends, though their marriage has been in the making only a few weeks. The courtship began simply, when Karmazin approached Redstone about a swap of television stations owned by their companies after the

Federal Communications Commission

relaxed station ownership rules in August. But Karmazin "seduced us," Redstone joked. "He talked about a bigger deal. ... He began to turn me on."

"I did approach Sumner," Karmazin said. "This was the deal that I wanted to make."

By any measure, the new company will be an entertainment giant, defining pop culture for couch potatoes around the world. (See

sidebar for details.)

The new Viacom will immediately vie with Disney and Time Warner for supremacy in almost every part of the U.S. entertainment business, from movies to television broadcasting to cable networks to theme parks. The CBS television network had more viewers than any other last season, while Viacom's

Nickelodeon

and

MTV

cable networks dominate the competition for kids and teenage viewers.

"It's phenomenal. It's just a great combination and a very fair price," says

Merrill Lynch

analyst Jessica Reif. "If I think about this company, it not only has all of the assets that we think a company needs to be successful in the current media environment ...

but Karmazin is one of the best operators in the business."

The two jewels of the new company will be Viacom's cable networks and CBS's radio stations and billboards, Reif says. Both should provide about one-third of the combined company's cash flow, which should be around $5 billion in fiscal 2000, and both are growing at more than 15% per year. (Analysts commonly use cash flow, or earnings before interest, taxes, depreciation and amortization, as a way to measure the performance of entertainment companies. The measure allows them to compare the performance of companies with different capital structures, as well as obscure the fact that many entertainment companies don't generate much in the way of bottom-line profits.)

The rest of Viacom isn't growing as fast, but Reif expects the new Viacom will shave as much as $250 million from its expenses, a number in line with the company's expectations. As a result, she thinks Viacom can grow its cash flow by 15% to 20% for the next three years, an impressive figure considering the company's size.

"They will have the fastest growth rate of any company in the industry," Reif says. (Reif rates CBS a strong buy and Viacom a buy; Merrill Lynch underwrote a recent offering for

Infinity Broadcasting

(INF) - Get Report

, a CBS subsidiary.)

The deal's

effects, large and small, will ripple through the entertainment industry. The merger is likely to accelerate the consolidation of television station ownership, because although FCC rules now allow one company to own a "duopoly" of two broadcast stations in many large cities, they limit the number of duopolies allowed in a market. Since the merger will create duopolies for Viacom in several major markets, other big broadcasters, like

NBC

and

Fox

(FOX) - Get Report

, must race to buy their own secondary station groups or risk being cut out of further consolidation.

In addition,

Chris-Craft

(CCN)

, which owns half of the struggling

UPN

network, soared Tuesday on speculation that the new Viacom's next move would be to restructure its Chris-Craft partnership, perhaps by buying Chris-Craft, if FCC rules allow that move. (

TSC

took a look at Chris-Craft in March.) Restructuring the Chris-Craft deal is "such an obvious second step for this company," Reif says. Chris-Craft stock rose 5 9/16, or 11%, today, to 57. (Merrill hasn't performed recent underwriting for Chris-Craft.)

But the questions of FCC approval and UPN weren't on investors' minds Tuesday, as the deal -- and Master Mel -- racked up near-unanimous approval.

"The combination is fantastic. The assets fit together like a glove. ... In Mel Karmazin, the new Viacom will have one of the most dynamic media executives around today running one what is without argument the highest growth, lowest capital intensity package of media assets available to large-cap growth investors," says John Schreiber, analyst for

Janus

, which owns both Viacom and CBS stock.