CBS-Viacom Saga Presses On
National Amusements president Shari Redstone

CBS Corp. (CBS) and Viacom Inc. (VIAB) have once again danced closer together in their seemingly endless tango.

The broadcast network owner and movie studio owner on Thursday, Feb. 1, separately announced the formation of special committees of their boards of directors to evaluate a potential merger. The companies cautioned there was no guarantee they would reach a deal or of the terms of any transaction.

The companies and the committees said they would not comment further until the process is complete.

Theater chain National Amusements Inc., which controls both companies, in its own statement said, "National Amusements supports the processes announced by CBS and Viacom to evaluate a combination of the two companies, which we believe has the potential to drive significant, long-term shareholder value."

That support comes as no surprise, as the company of Sumner and Shari Redstone in the past has pushed for CBS and Viacom to consider a merger. In September 2016, National Amusements approached both boards, only to conclude in December that the time for a merger was not right.

"Over the past few months, after careful assessment and meetings with the leadership of both companies, we have concluded that this is not the right time to merge the companies. Following the management changes that the Viacom board put in place, we have been very impressed with the forward‐looking thinking and strategic plan being pursued under Bob Bakish's leadership," wrote Sumner, National Amusements' CEO, and his daughter, Shari, the company's president in December 2016. 

"We know Viacom has tremendous assets that are currently undervalued, and we are confident that with this new strong management team, the value of these assets can be unleashed," National Amusements continued. "At the same time, CBS continues to perform exceptionally well under Les Moonves, and we have every reason to believe that momentum will continue on a standalone basis."

JBL Advisors analyst Jeff Logsdon recently suggested a merger of the media companies is inevitable if Shari Redstone and her 94-year-old father, Sumner, are resolved to make it happen.

"National Amusements or Shari wants this to happen, and ultimately they will find a way," Logsdon said.

UBS analyst John Hodulik on Wednesday wrote a deal would be positive in the near term for both sets of shareholders and could drive operational synergies although "there is still a lot of debate if CBS would be in favor of such a deal and what the leadership for the combined company would look like."

CBS and Viacom were housed under the same corporate roof until Dec. 31, 2005, when Viacom was spun out of the television broadcaster.

When Sumner Redstone announced Viacom's $37.3 billion purchase of CBS in 2000, it was the largest media deal ever.

He envisioned a global media powerhouse, but just five years later the amalgamation of cable, broadcast and film production companies had become too complicated. Viacom spun off CBS to make the companies easier for investors to value and invest in and for management to run.

Today, Viacom in particular looks undersized in a media landscape that Netflix Inc. (NFLX) and Amazon.com Inc. (AMZN) increasingly dominate.

While Viacom's revenue gained 6% in fiscal 2017 to $13.3 billion, Wall Street expects sales to decline about 2% in fiscal 2018. The top line in 2017 was smaller than it was in 2012.

CBS has also bounced up and down. Analysts expect $13.5 billion in revenue for calendar year 2017, a 2% increase from 2016. Wall Street anticipates a 4% increase for 2018.

Walt Disney Co.'s (DIS) pending purchase of Twenty-First Century Fox Inc.'s (FOXA) film, television and global distribution businesses has focused attention on traditional media consolidation in the age of Netflix.

"If Disney and Fox need to merge to get to 'scale' in a direct-to-consumer, data-driven, multi-screen world, how can Viacom and CBS be at scale today?" BTIG LLC analyst Rich Greenfield wrote in a 2018 preview report. "Aggregate value has been destroyed over the past year of waiting to recombine the two companies."

A merger could be more about protecting NAI's investment in Viacom than gaining market power.

If the deal were solely about beating back Netflix, Logsdon suggested, CBS might buy a company such as Lions Gate Entertainment Corp. (LGF.A) , which produced the "Hunger Games" and "Twilight" franchises and made "Mad Men" for AMC Networks Inc. (AMCX) . Lions Gate is a relative bargain, with a $7 billion market cap that is roughly half Viacom's $13.6 billion total equity value.

CBS shares on Thursday after hours were up 0.5% to $59.25 after rising 2.3% in regular trading. Viacom stock was up 1.5% to $33.70 after falling 0.6% in the regular session. Those share prices are lower than when news came of the end of the last talks in 2016. --Chris Nolter contributed to this story

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