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Morningstar | CBS Updated Forecasts and Estimates from 21 Sep 2018

CBS announced that the board and National Amusements have agreed to a settlement to the pending lawsuits in the Delaware Chancery Court that were scheduled to begin proceedings on Oct. 3. As well as both sides dropping litigation and reversing the actions passed during the May board meeting, National Amusement has agreed to postpone any discussion of a merger between CBS and Viacom for at least two years.

CBS also revealed that Les Moonves has departed as chairman and CEO and will be replaced as CEO on an interim basis by current COO Joseph Ianniello. The board did not buy out the severance clause in Moonves' contract, as previously rumored. Instead, any future severance payments will depend on the outcome of the independent investigation into the allegations of sexual assault and misconduct made by several women in August. The two concurrent but separate moves by the board place the long-running drama between CBS and its controlling shareholder on hold for the near future. We retain our narrow moat rating and our $71 fair value estimate. With the stock trading in 4-star territory and the removal of two of the major overhangs on the firm, shares may offer an attractive entry point for investors.

The settlement with National Amusements covered much of what was rumored and expected, as we outlined in our Sept. 6 note, "More Plot Twists at CBS: Board in Talks to Settle With Redstones and Ease Out Moonves." The two sides dropped their lawsuits and reversed both the special dividend declaration and the rule change regarding the requirement of a 90% supermajority to pass a special dividend. The potential for a forced merger with Viacom is deferred for two years. However, the board did not win the right to shop CBS to potential buyers as part of the settlement, implying that Shari Redstone will attempt to recombine CBS and its sister firm in two years unless the restructuring plan at Viacom fails and makes a merger of equals even more untenable than it was last year.

The board composition also changed as part of the settlement, with National Amusements appointing six new independent directors to supplement the five remaining independent directors and two nonindependent directors affiliated with National Amusements, including Vice Chair Shari Redstone. With the changes, Shari Redstone has effectively put her stamp on the CBS board and removed many of the directors linked to her father and Moonves. While the new independent directors may not all vote with Redstone, they will not be intractably against her or attached to her father and management. This could make the process of reuniting CBS and Viacom in two years less of a headache than it has proved to be over the past few years.

Unlike the settlement with National Amusements, rumors about a deal with Moonves were incorrect. Moonves resigned without getting any of his severance payments guaranteed, and his contractual payment of $180 million in severance could be reduced based on the independent investigation into the allegations of sexual assault and misconduct. The production deal that was also a part of the contracted severance appears to be completely off the table. In addition to stepping down, Moonves has agreed to make a $20 million donation to charities associated with the #MeToo movement, which CBS will match. While CBS may miss Moonves over the long term due to his relationships with production houses, sports leagues, and sponsors, acting CEO Ianniello does represent a bridge to those relationships and should be able to provide a stabilizing presence during this transition period. We think that Ianniello has a chance to win the permanent role as CEO but believe that it is likely that the board led by Redstone will split the chair and CEO roles.