In an era of media mega-deals like AT&T’s recent $85 billion acquisition of Time Warner and Disney’s pending $71 billion purchase of 21st Century Fox’s entertainment assets, a knock-down-drag-out fight in Delaware state court is gumming up the futures of two media companies over much more modest stakes.
Broadcaster CBS offered $12 billion for film-and-cable conglomerate Viacom that would re-merge the two companies that Sumner Redstone broke apart in 2005. Viacom wants an additional $2.8 billion and more executive involvement at the re-combined company. Shari Redstone—whose National Amusements owns both CBS and Viacom and who has taken over her father’s reins—wants the two companies to get a deal done ASAP so she can sell the combined entity to a bigger buyer like Verizon or Amazon.
Keach Hagey, who covers the media business for the Wall Street Journal, details the Redstone family’s control—lack of control would better characterize the current dispute with CBS—of the two companies in her new book The King of Content, which tells the story of the rise and fall of the Hollywood studio system, the cable business, home video, and Sumner Redstone. She walked us through the merger morass.
Shari Redstone and CBS are tied up in court in Delaware. What’s actually happening?
Shari and her family’s company, National Amusements, are locked into a summer-long back and forth in hearings and meetings about who gets to take whose deposition and other discovery in the lawsuit, and the trial is set for October. I will be very interested to see if cooler heads prevail and reach a settlement before then.
Is the issue that Shari wants to re-merge CBS and Viacom but CBS has some kind of structural poison pill that’s preventing her from doing that?
The issue of whether they will merge or not is the source of the conflict, but things devolved quickly from that to the issue of her right to control those companies period. I have never seen a company attack its controlling shareholder. At least in the decade I’ve been covering the media, that is truly unprecedented.
I’ve never seen anything like what’s happening.
CBS is arguing that there’s a provision in the CBS charter allowing it to give a dividend to its shareholders that essentially undoes the Redstones’ voting control of the company. It’s hard for me to believe that a Delaware court is going to allow that to happen. If CBS were to win, I think that would ripple through media and tech where there are a lot of controlled companies.
I don’t understand Shari Redstone’s argument for re-merging CBS and Viacom. Recode has an interesting graphic that shows the big media and telecom companies as circles sized relative to their market values, and even a re-merged CBS-Viacom would be a tiny grain of sand in this market.
That’s totally true. Shari thinks that the best way to get value for shareholders—including Shari and her family as shareholders—is to combine the companies so that the buyer will buy the whole thing as opposed to cherry-picking the assets.
With Viacom being the part that a buyer would be cherry-picking around?
In the simplest terms, yes. There’s an argument that the combination CBS (the broadcast network, the shows, the sports rights) and Viacom (the reach of the cable networks, the Paramount studio) would create leverage that the two companies don’t have on their own.
I question the approach of re-merging the companies when the market is moving as fast as it is. Consolidating CBS and Viacom would take a year at a time when a year is like dog years. She could sell CBS to Verizon and Viacom to Discovery today, which would seem to make more sense than merging them and finding one buyer a year from now.
I don’t think merging the companies is the only choice in front of her, but analysts have said for years that merging the companies back together makes sense. National Amusements has wanted to merge the companies for several years. Her position is that she wants to explore a merger and that she can change her mind during the process if a merger isn’t in the companies’ best interest.
Would you put the odds at 50 percent or better that CBS and Viacom will be re-merged or on the path to being re-merged within the next year?
I hate to get out the crystal ball on these things, but I’ll take 50 percent or better that the two companies will merge back together. That seems like the simplest, most logical way to deal with the wave of consolidation that’s washing across the industry to make sure that one of those companies doesn’t get left out. With the litigation slowing everything down, though, who knows.
What kind of company would want to buy a combined CBS-Viacom?
A phone company like Verizon—or maybe even AT&T wouldn’t be too crazy. A tech player like Amazon wouldn’t be completely discounted.
Sumner Redstone is 95 years old. When was the last time he was on the stage in a major way?
The last time he was on an earnings call was in the fall of 2014, and that was shortly after he had had a bad episode with his health. My feeling from researching the book is that he last had his vigorous intellect in the early part of 2014. He did an interview with The Hollywood Reporter in January 2014 where he seemed cogent, and that was probably the last time.
Sumner Redstone’s own erratic behavior—sexual shenanigans, creating family drama, etc.—seems to have caused a good bit of Viacom’s problems over the years. Would the company have been better served by an executive who wasn’t a member of the Redstone family?
There are advantages and disadvantages to Sumner Redstone’s business model. During the ’90s when he was swashbuckling across the media landscape, he was able to do big, risky things—buying Paramount, merging with Blockbuster—that created a lot of value. A more professional, non-family board may not have dared some of those things.
As Redstone got older, though, he was never able to get his succession plan to a stable place. That crippled his companies. The power struggle that we saw in 2016, where Philippe Dauman took two years to oust amid a diving share price, is because of Redstone. No one wanted to have him declared incapacitated. He has still never been declared incapacitated.
He’s no longer directly involved in the companies, though, right?
He has an emeritus board title but is no longer involved or drawing a salary, but those changes were only made under, essentially, duress. His former companion, Manuela Herzer, got a doctor to examine him, and then changes were made to remove his control almost immediately.
And that was over her money.
Yeah. She argued in her case that she wanted to be reinstated as his healthcare agent. When he made the change to remove her as his healthcare agent, he also wrote her out of his will.
That’s kind of unbelievable. [Laughs.] That kind of thing happens in families all the time, but they’re seldom families that own a cable conglomerate, a Hollywood studio, and a broadcast network. We don’t often get to see skeletons dragged out of the closet that impact multi-billion-dollar companies.
The Redstones have more skeletons than most. The fact that Shari Redstone is as sane as she is is a miracle considering all that has happened in her family. Her grandfather, who started the company, left the company to his four grandchildren. Shari is one, and the other three have all had very sad outcomes. One of them joined a sex cult and died of AIDS, one was in a mental institution throughout his youth and died of a drug overdose that was recently determined to be a suicide, and another was completely cut off from the family and now lives in Colorado. Shari is the last one standing.
That sounds like a TV series. Have you had interest in adapting the book for film or TV?
Anyone interested should contact my agent Alice Martell. [Laughs.]
Have you seen Succession on HBO? That show seems to have borrowed from the Murdochs and the Redstones.
Yeah, it’s about half Murdoch and half Redstone.
What’s the Redstone half?
Well, the fact that the mogul has what appears to be a stroke followed by questions about his mental capacity is very Sumner Redstone. There’s also a financial plotline ripped directly from the Redstone story about a secret loan that the family holding company took out with a bank against the value of the holding company’s shares. When the stock price went down, that triggered a margin call, which triggered a debt crisis. That all really happened to National Amusements in 2008 and 2009.
That’s something that wasn’t publicly known because it wasn’t carried on Viacom or CBS’s books?
Basically, yes. National Amusements controls CBS and Viacom, and the company can do things that the shareholders of CBS and Viacom don’t know about. There are SEC laws governing some of that, but National Amusements is a private company.
The Redstones are reaping what they sow to a certain extent with CBS and Viacom. They split up the companies ten years ago as a financial mechanism for “unlocking” the market value of Viacom, but that was entirely financial engineering—with no real operational or structural benefits—and now they’re seeking to reverse that decision for the same reasons. Those are not decisions intended to actually make the companies better.
That’s fair, I think. Sumner Redstone’s most enduring characteristic was his obsession with the stock price. He got the money to take over the company in the first place by playing the stock market. He was famously obsessed with sitting in front of the TV watching his stock price. His mind was on the stock price and financial engineering, and I can see how he would want to split up the company when people were telling him that would make the companies more valuable.
The book is interesting on what a storied studio Paramount was with the Oscars and the beginning of the summer box office. You look at Paramount now, and it’s not an important global or even domestic film company. Did the rest of the industry leave Paramount behind?
I was struck by how important Paramount was to the creation of Hollywood. Paramount created the business model for the golden age of Hollywood and was the most important studio for a very long time, so the company’s fall has really been something. My colleague Ben Fritz’s new book (The Big Picture: The Fight for the Future of Movies) focuses on Sony, but he also talks about Paramount because the companies are in the same category of studios trying to make movies for adults and not owning a lot of intellectual property for big film franchises.
Paramount has Transformers and Mission: Impossible but just doesn’t have the intellectual property like the comic book titles that some of its rivals have. You add to that the cyclical nature of the studio business and the lack of investment from the parent company over the years, and it’s a recipe for disaster.
Disney’s Lucasfilm, Pixar, and Marvel are making a combined four or five film titles a year. There have been 20 Marvel Cinematic Universe movies and five Mission: Impossible movies. Didn’t anyone at Paramount ever say, we need a Mission: Impossible spinoff or TV series?
The late Brad Grey was the head of Paramount for a long time, and the industry did not understand how he kept that job for so many years when the studio was doing so poorly. He was good at managing up—forging relationships with Sumner Redstone and Shari Redstone and the other people who really mattered.
Shari Redstone appears to have been cooperative with you on the book. Is that a fair characterization?
I talked to a lot of Redstone family members for the book. In order to protect their cooperation, I can’t identify more specifically who I talked to.
Do you agree that Shari gets a decent shake in the book?
I think a lot of the characters do. I think the book has a fair amount of criticism of her from voices—particularly those close to her father—who question her judgment and her business prowess.
I’m thinking particularly about the end of the book where you say she’s the first female media mogul who wasn’t the brand herself like Oprah Winfrey or Arianna Huffington.
Well, that’s true. We haven’t taken a historical note up until this point how important it is that a woman controls as much media as she does. There are very few women who own media assets. Shari Redstone controls a media empire that is vastly larger—even adjusted for inflation—than the Washington Post Co. was in the ’70s when Katherine Graham ran it.
You made that comparison in the book, and I had never thought about that. I’m not a Kay Graham expert, but I think of her as much more of a manager of her company than Shari Redstone has been with her companies. Redstone isn’t operationally involved at Viacom or CBS and is effectively locked out at CBS, which is the subject of the litigation.
Shari is not an executive at either company. Her role is as the owner of these companies, which is different than the role of a manager. Kay Graham was CEO of the Washington Post Co. Shari has been clear that she doesn’t want to be a CEO and in some ways is following the mode that her father did in running the companies.
Sumner Redstone would sometimes swoop down as a CEO, but he was a chairman who largely left the daily operations of the companies to his managers. That requires trust, and the lawsuit in Delaware is about the fact that the trust between Shari Redstone and CBS CEO Les Moonves has been broken.