Analysts: Moonves Trouble Creates Overhang For CBS Stock, Renders Viacom Merger 'More Inevitable'

The CBS Corporation CBS board decided Monday to retain CEO Les Moonves while independent investigators probe sexual harassment claims.

“This board is in a pickle,” Keach Hagey of the Wall Street Journal said on CNBC. “This board is in big trouble.”

A Les-Focused CBS

Analysts said the decision to conduct an investigation could result in overhang limiting the CBS stock’s ability to outperform.

“We also worry about the impact on company operations,” Cowen analyst Doug Creutz wrote in a note. “As much as we expect CBS staff to try to soldier on, at some level this has to be a distraction - at a time when the industry is undergoing tremendous change and even companies with no internal turmoil are struggling.”

If the board’s paid investigation results in Moonves’ departure, things could get even worse.

“How much of the CBS story is the Les Moonves story? Entirely, as investors are concerned,” Hagey said. “Les Moonves is CBS.”

Moonves has worked for CBS since 1995 and has held the role of CEO since 2006.

The Big Picture

The trouble may also weaken the board’s ongoing legal resistance to National Amusements’ control of the company and interest in pushing a Viacom, Inc. VIAVIAB merger. If the board is found to have failed to protect shareholder interest by enabling a culture of sexual harassment, National Amusements could leverage CBS’ fiduciary inadequacy, Creutz said.

That could pave the way for a merger topped by Viacom management.

“We think such an outcome would likely be value destructive, with a very, very difficult integration process that would likely feature an enormous amount of resentment among CBS staff about how things went down,” the Cowen analyst wrote. “In such a case, we suspect the combined company multiple would wind up being closer to Viacom's than CBS's, at least initially.”

While Hagey expects the directors to continue resisting the merger in the near term, “long-term, ever since Friday, it [the union] looks more inevitable.”

Valuation

Cowen downgraded CBS to Market Perform and cut its price target from $69 to $50.

“While we continue to like the company's assets and strategic positioning, between the legal/control fight with NAI, the potential for a recombination with Viacom, and the allegations of sexual harassment at the company, there are too many unquantifiable variables for us to remain Outperform-rated,” Creutz wrote.

The stock traded around $51.44 at time of publication.

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