Top Investors Question If Redstone Should Step Down

By Jessica Toonkel

NEW YORK (Reuters) - Two of the largest shareholders in Viacom Inc have made the highly unusual move of publicly questioning Sumner Redstone's mental fitness to remain executive chairman of the multi-billion dollar media company.

Mario Gabelli, whose funds hold the second-largest voting stake in Viacom after Redstone himself, and Salvatore Muoio, whose firm is the seventh-biggest voting shareholder, voiced the concerns a week after a former girlfriend of Redstone filed a lawsuit alleging that the 92-year-old mogul was mentally incompetent.

A member of Viacom's board made the rare move of responding publicly on Tuesday to investors' concerns, saying Redstone remains "mentally capable."

The investors' expressions of doubt about the mental competence of a high-profile company executive came as a surprise, but gossip column reports and heavy secrecy around the health of the media mogul have led to intense speculation over the future of Redstone and his $45 billion media empire.

Manuele Herzer, Sumner Redstone

Redstone has not been involved in the day-to-day management of the company for some time, but the lawsuit by ex-girlfriend Manuela Herzer, who has petitioned the court for an examination of Redstone, has caused some to worry that a surge of litigation could hamper the company as it tries to recover from a drop in TV ratings.

Herzer filed the lawsuit Nov. 25, weeks after being kicked out of Redstone's Los Angeles-area home. Redstone had designated her as his agent to make health care decisions if he was unable to do so, and in October Redstone replaced her with Viacom Chief Executive Philippe Dauman.

Herzer claims that Redstone was mentally incapable of making that decision and asked the court to reinstate her.

Redstone's lawyer, Gabrielle Vidal, had said the lawsuit was baseless and that Herzer is financially motivated.

Viacom's board denied any issues with Redstone's mental fitness on Tuesday.

“As has been widely and publicly disclosed, Mr. Redstone’s physicians have publicly attested that he is mentally capable, and this information is consistent with other medical and other information available to me," William Schwartz, chairman of Viacom’s governance and nominating committee, said in an emailed statement.

The suit highlighted the uncertainty over what will happen on the death of Redstone, who controls about 80 percent of both Viacom and CBS and is executive chairman of both companies.

"Is he or isn't he in the position where he should be chairman emeritus or something?" Gabelli, chief executive officer of Rye, New York-based GAMCO Investors Inc, told Reuters. He left a message for a person at Viacom about the issue on Tuesday, he said, declining to say whom he called.

Muoio, a principal with New York-based S. Muoio & Co, said he had similar issues.

"If Sumner is no longer fit to lead the board, then he should give up that role," Muoio told Reuters.

CBS and Viacom, home to cable networks MTV and Nickelodeon, have a combined market value of $45 billion. Redstone controls both companies through his vehicle National Amusements which holds 80 percent of the voting stock. As chairman and owner, he has the ultimate say over major decisions involving CBS and Viacom, including any potential merger deals.

If CBS or Viacom did remove Redstone as executive chairman, it is unclear who would replace him. Upon Redstone's death, a trust of seven people, including daughter Shari Redstone and Viacom CEO Dauman, will oversee his voting stake.

Redstone has not been on an earnings call since last year and did not turn up for Viacom’s annual shareholder meeting in March or one held by CBS in May.

"Too many people are calling me and saying: 'What's really going on?'," Gabelli told Reuters.

Gabelli also tweeted about the issue on Tuesday afternoon, writing that Viacom should "give to all shareholders what the Board of Directors know about Executive Chair."

Even investors who are less concerned about Redstone's title are worried about the attention the suit is getting.

"I don't think the company is rudderless because Redstone is in ill health, but I do think the issue has created more noise lately because of the lawsuit," said Michael Cuggino, president and portfolio manager at San Francisco-based Permanent Portfolio of Family Of Funds, which is the fifth-largest voting shareholder in Viacom.

As an example, Cuggino said a copy of Redstone's signature from one of the filings in Herzer's lawsuit looking like a line going off the page had been widely seen.

(Reporting by Jessica Toonkel; Editing by Lisa Von Ahn and Bill Rigby)