Viacom deal hits fresh roadblock as CBS sues controlling shareholder

A lot has changed since CBS Corp. (CBS) and Viacom (VIAB) become two separate companies more than a decade ago when their promoters claimed the split was necessitated by the industry dynamics prevailed then. Now, when it comes to reversing the break-up, they realize it is not as easy as the separation.

On Monday, CBS filed a lawsuit against National Amusements and its owner Shari Redstone, who holds the majority stake in both the companies, for allegedly forcing a merger between the company and Viacom. The unprecedented move, which could escalate the tension between Redstone and the CBS management, is the latest of the dramatic events that unfolded ever since the merger proposal was made two years ago.

In an apparent attempt to thwart the merger, the board of directors of CBS has asked the court to restrain Redstone and her company from interfering in its upcoming special meeting. According to CBS, the Redstone family misused their control to take forward the merger proceedings, against shareholders’ interest, and to subvert the corporate governance of CBS.

CBS also claimed that National Amusements does not have sufficient economic interest in CBS to dictate the terms, though it owns the majority of the voting stock of both the companies.  According to CBS, Redstone sought to undermine CBS’ management and threatened to reshuffle its board. The company plans to fight back by approving a special dividend, which would dilute the voting power of Redstone and her company from 80% to 17%, at the special meeting to be held on Thursday.

The board of directors of CBS has asked the court to restrain Redstone and her company from interfering in its upcoming special meeting

What made the entire affair so complicated is the inconsistency in the stance adopted by National Amusements and Redstone, who once dropped the merger idea after making the initial proposal, only to revive it after a few months. Once the initial hiccups eased, Viacom demanded that CBS increase its bid price, which according to the former was far below its market value.

The hectic consolidation activity in the media sector indicates that the relatively smaller companies like CBS and Viacom will have to stay together and bulk up at some point in order to face their bigger rivals.

As the latest developments further weakened the chances of a recombination, the market reacted positively by triggering a stock rally. CBS shares gained nearly 3% in today’s regular session.