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Morningstar | More Plot Twists at CBS: Board in Talks to Settle With Redstones and Ease Out Moonves

The long-running drama featuring CBS, CEO Les Moonves, sister company Viacom, and National Amusements, the controlling shareholder for both firms, appears to contain even more plot twists. CNBC, The Wall Street Journal , and other media outlets on Sept. 5 and 6 have reported that the board at CBS is holding talks with National Amusements to settle the ongoing legal disputes between the two firms and postpone any discussions concerning a merger with Viacom. The board is also reportedly negotiating a potential exit settlement with longtime CBS head Moonves, who was accused of sexual assault and misconduct by several women in August. The two deals are reportedly not linked, but we believe the board is attempting to simultaneously clear the two major issues hanging over the firm so that it can move forward. We are maintaining our narrow moat rating and $71 fair value estimate for CBS.

The CBS board and National Amusements lawsuits are scheduled to begin proceedings Oct. 3 in the Delaware Court of Chancery. The lawsuits stem from the May tit-for-tat actions that saw the board sue National Amusements and its controlling shareholders, Sumner and Shari Redstone, for breach of fiduciary duty with respect to a potential merger with Viacom. The board also declared a special dividend of Class A shares to all holders, which would lower the voting share of National Amusements to roughly 17% from the current 70%. At the same board meeting but just before the special dividend vote, Shari Redstone moved that any special dividend of shares needs to be approved by a supermajority of 90% of the board or 13 of the 14 members. The rumored settlement would likely call for both sides to drop the lawsuits, revoke the special dividend, and postpone the merger with Viacom for specified period. We think the board will also try to receive permission to shop CBS to potential buyers as part of the settlement, if nothing else to at least establish an arm’s-length value for the firm.

While there has not been any news about the outcome of the investigation into the allegations of sexual assault and misconduct by Moonves, we believe that the settlement discussion between the two sides indicates that some preliminary merit has already been uncovered. The reported settlement amount of $100 million in CBS stock appears large but is roughly half of the value of his contracted settlement of $180 million in severance and production deal. The board is apparently also asking for a clawback provision if the allegations are proved. We believe that CBS is likely to miss Moonves over the long term as his relationships with production houses, sports leagues, and sponsors have helped the firm outpace Viacom in terms of revenue growth and stock price appreciation since the two companies split in 2006. However, it appears that the board has no choice but to replace Moonves, given the number and severity of allegations against him.