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By Keach Hagey and Joe Flint 

Weeks after cementing a powerful role in her family's $40 billion media empire, Shari Redstone is moving to potentially undo the last big strategic move of her ailing father, Sumner Redstone.

National Amusements Inc., the Redstone family's holding company, is poised to urge the boards of the companies it controls -- Viacom Inc. and CBS Corp. -- to explore a merger, according to people familiar with the matter. It plans to send its message in a letter delivered before the market opens Thursday, they said.

Coming a decade after Mr. Redstone split the two companies from each other, the proposed reunion would be effectively an admission that the divorce, which was originally intended to free Viacom's then fast-growing cable channels from the drag of CBS's old-school broadcast assets, didn't pan out as intended.

Viacom's 26 U.S. cable networks -- many of which are small or have had significant viewership declines -- now look vulnerable in an era when consumers are cutting the pay-TV cord and signing up for slimmed-down bundles of cable channels. CBS, meanwhile, has been a prime-time ratings juggernaut and has boosted its position in the market by carrying big sports events like professional football and college basketball.

"We never thought they should ever be separated," said Michael Nathanson, an analyst at MoffettNathanson, adding the 2006 split "destroyed tons of [Redstone] family value over a decade."

Ms. Redstone rose to power in her father's empire after a bruising power struggle that played out this summer. She is president of National Amusements, and recently ousted her longtime rival, former Viacom Chief Executive Philippe Dauman, from the boards of both the family holding company and Viacom.

Mr. Redstone, who is 93 years old and in ill health, remains on the board of National Amusements, though he stepped down from his role as chairman of both CBS and Viacom earlier this year amid questions about his mental capacity.

Viacom has been struggling with underperforming assets like its Paramount Pictures studio and cable channels MTV and Comedy Central, which has led to a slide in its stock price. The company has $12 billion in debt and has been under pressure to improve its operating performance. Moody's Investors Service recently downgraded its credit rating to the lowest level of investment grade.

Viacom said last week that its interim CEO, Tom Dooley, was planning to leave in November. It also halved its dividend, and said it planned to tap the bond markets.

On Wednesday, after Reuters reported news of National Amusements' plans to urge the companies to consider a merger, Viacom shares rose 3.1% to $36.56, while CBS shares rose 4% to $54.15.

A merger could provide a strong leader for Viacom in the form of CBS CEO Leslie Moonves, a favorite of media investors.

Ms. Redstone broached the topic of a Viacom-CBS merger with Mr. Moonves several months ago, a person familiar with the matter said. However, there have been no serious talks since then or since Mr. Dauman agreed in August to step down as Viacom's chairman and CEO.

CBS said Wednesday that, "As we've said before, the CBS Corp. will always act in the best interest of all of its shareholders."

Mr. Moonves has previously expressed skepticism about a merger of the companies, and he said at a recent investor conference that there were no active talks between CBS and Viacom.

People close to Viacom and CBS think Mr. Moonves won't be sold on a deal unless CBS is valued at a premium to Viacom and he has the same level of autonomy he currently enjoys at CBS. His contract allows him to leave if the composition of the board changes.

With a popular broadcast network, CBS feels like it has a strong hand, its executives say, and worries its leverage with cable and satellite-TV distributors would be weakened if it had to use its assets to cut deals for Viacom's channels, many of which are in ratings slumps.

At the same time, however, a deal with CBS would give Mr. Moonves, who is known for his programming acumen, a chance to revitalize Viacom's assets.

Moreover, there would be some synergies between the two companies. CBS could use the Viacom channels as a second home for some of its content.

There could also be advantages internationally for CBS, as Viacom has been building is presence abroad not only through distributing its programming but also by acquiring or creating its own channels.

Investors were taking a wait-and-see attitude. "We've been a very frustrated shareholder of Viacom and a relatively happy one in CBS," said Michael Cuggino, president of Permanent Portfolio Fund, which owns both stocks. A merger "makes sense on a lot of levels, but there has to be more to the story because Viacom would be a potential drag on the performance of CBS."

Mario Gabelli, whose fund owns the largest stake of voting shares of both companies outside the Redstone family, said the level of his enthusiasm would come down to the "terms of the trade." He said enticing Mr. Moonves to lead both companies would be crucial for such a deal.

"Shari has a great relationship with Les, so the logical choice is [asking] Les, 'Do you want to go global? Do you want a studio? And do you want some interesting challenges?" Mr. Gabelli said.

Analysts have been running the numbers on a possible merger in recent months, often concluding that under most scenarios a combination would be more beneficial to Viacom shareholders than those of CBS.

CBS shareholders are only likely to see an upside if an all-stock transaction includes synergies of more than $500 million and the combined company is valued at 8.5 times 2017 earnings before interest, taxes, depreciation and amortization, or higher, according to an analysis from Barclays.

Minimizing the premium placed on Viacom and selling assets would boost the upside for CBS's minority owners, Barclays analyst Kannan Venkateshwar wrote in a note this week.

--Shalini Ramachandran contributed to this article.

Write to Keach Hagey at keach.hagey@wsj.com and Joe Flint at joe.flint@wsj.com

(END) Dow Jones Newswires

September 29, 2016 02:47 ET (06:47 GMT)

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