Viacom Inc. shaved more than $7 million off potential annualinterest costs after its controlling shareholder publicly urged amerger with CBS Corp. just as the media giant was kicking off a $1billion bond sale.

Keen to get in before a media remarriage, debt investorssubmitted some $15 billion of orders for the bonds, people withknowledge of the matter said, and Viacom ultimately raised $1.3billion. The demand allowed Viacom to lower the yield on parts ofthe offering by about 0.7%.

The Redstone family, which controls both Viacom and CBS,formally asked the companies to consider a merger on Thursday. Itcame after Viacom, owner of MTV and Comedy Central, last weeklowered its profit forecasts, halved its dividend and said it wouldtap capital markets. Expectations of a deal, which would recombinecompanies that the family split a decade ago, spurred a rally inViacom's securities.

Investors had been fretting about the company's credit rating,which is teetering on junk, and Viacom moved to reassure them ofits commitment to maintaining an investment-grade rating this weekbefore news of the potential CBS deal became public.

Moody's Investors Service on Thursday said a merger with CBS“could potentially shore up Viacom's fundamental and financialprofile.” The ratings firm, which last week cut the company'scredit grade to one level above junk, said it could raise Viacom ifa deal is “completed in a manner not detrimental tobondholders.”

“The probabilities of a merger are higher now,” saidEduardo Simpson, an analyst at Taplin Canida & Habacht, whichoversees $10.5 billion, including Viacom and CBS debt. “Viacombonds are still trading very wide to CBS. You have the potentialfor a lot of tightening if it were to happen.”

After rallying on news of the potential merger, Viacom's mostactively traded debt, a $1.45 billion, 4.375% bond due in 2043, isyielding about 2.6 percentage points more than Treasuries,according to Trace, the bond price reporting system of theFinancial Industry Regulatory Authority. CBS's most active 30-yearbond yields about 2.05 percentage points over Treasuries.

Viacom sold $900 million of 3.45% 10-year bonds that yield 1.95percentage points more than Treasuries, according to data compiledby Bloomberg. That's down from an initial offer of around 2.5percentage points, the people said, asking not to be identified asthe matter is private. The company's $400 million of 2.25%five-year notes yield 1.2 percentage points more thanTreasuries.

Before National Amusements Inc., the largest shareholder of bothViacom and CBS, proposed that the two companies merge in anall-stock combination, Viacom executives took steps to placateinvestors that the company would maintain its blue-chip ratings,according to people familiar with the discussions. The bonds carrya provision that will boost the coupon paid to investors ifViacom's ratings fall to junk.

Ratings Cut

Moody's said it would affirm CBS's ratings if a deal was struck.CBS is rated Baa2 by Moody's and an equivalent BBB by S&PGlobal Ratings.

A merger could produce cost savings and help both companiescontend with a changing media industry, National Amusements, theRedstone family's holding company, said in its statement. Viacom'scable channels, with more than $10 billion in annual revenue, havelost their hold on young viewers to YouTube, Snapchat, Netflix andother online competitors. The combined company would rival TimeWarner Inc. and 21st Century Fox Inc., spanning broadcasting, cableTV and motion pictures.

“There's certainly the possibility that Viacom bondholders willbe in a much better situation six months from now,” said DaveNovosel, an analyst at research firm Gimme Credit. “What I thinkthey need to be saying is, 'what are the probabilities that a deallike this goes through?'”

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