Time Warner and CBS have flirted for years. A marriage now may make more sense than ever.

Buying the most-watched broadcast network would give Time Warner, owner of cable channels such as CNN and TNT, more negotiating leverage to win higher fees from pay-TV systems that carry its programming. And CBS shares, although they are trading near the highest price since the company and Viacom split seven years ago, fetch the lowest valuation compared to earnings out of the six comparable U.S. companies, according to Bloomberg.

A merger "makes a lot of sense," Michael Morris, an analyst at Davenport & Co., said in an interview. "With the amount of collaboration they do, investors see it as a possibility as well."

The companies already partner on the CW Network, shows such as "The Big Bang Theory" and the "March Madness" college basketball playoffs. Their strengths are complementary -- Time Warner runs Hollywood's most-prolific studio and CBS has the highest broadcast TV ratings -- and both plan asset sales to focus on those areas.

Based on the valuation Comcast paid this year for the rest of NBC Universal, CBS would fetch $35 billion, making it the biggest U.S. media deal in more than a decade, data compiled by Bloomberg show.

Summer Wilkie, a Time Warner spokeswoman, declined to comment on the possibility of a merger, as did Dana McClintock of CBS. Their companies have market capitalizations of $56 billion and $29 billion, respectively.

The rising value of TV programming is spurring media deals, proving again the adage of CBS Chairman Sumner Redstone that "content is king." Demand for TV shows is increasing outside the U.S. and online, and retransmission fees paid to broadcast networks by pay-TV systems are at a record, according to data compiled by SNL Kagan.

TV station operator Sinclair Broadcast Group has spent about $1.8 billion in the past year and a half acquiring stations to gain more leverage with pay-TV systems when negotiating licensing agreements.

Comcast, the largest U.S. cable provider, sped up its purchase of the remainder of NBC Universal in March, more than a year ahead of schedule. At the same time, Walt Disney Co. has also been bulking up during the past decade by acquiring Pixar, Marvel Entertainment and Lucasfilm to broaden its content offerings.

No deal can happen without the support of Mr. Redstone, the 89- year-old billionaire who owns 78% of the CBS's voting rights. After splitting CBS and Viacom seven years ago, he kept control of both companies and would hesitate to sell CBS, said two people with knowledge of Redstone's thinking who asked not to be named because the matter is private.

Jeremy Zweig, a spokesman for Viacom, declined to comment on Mr. Redstone's plans for the company.

Time Warner also knows the pain of a large combination gone bad. In 2009, it spun off AOL Inc., undoing the $124 billion merger in 2001 that triggered record losses.

Still, Time Warner, with cable holdings including HBO, stands to benefit with CBS since the broadcast network is among channels that pay-TV companies would feel compelled to carry, providing a reliable stream of fees, said Chris Scheuer, an analyst at Thrivent for Lutherans. The investment firm owns shares of both companies.

Owning both broadcast and cable channels is gaining importance as media companies compete for licensing fees from pay-TV systems. Time Warner and CBS are each at a disadvantage compared with News Corp., Disney and Comcast Corp.'s NBC Universal, which have broadcast and cable properties that increase leverage in talks with pay-TV systems.

Disney, owner of ABC and ESPN, collects the most of those fees -- about $12.7 billion a year in the U.S. -- based on estimates by SNL Kagan. Time Warner, by comparison, collects $3.6 billion annually.

Expanding those fees is central to Time Warner Chief Executive Officer Jeff Bewkes's growth strategy, said a person with knowledge of the CEO's thinking who requested anonymity because the plans are private.

"There's an advantage to having scale when you come into renegotiations if you have more content to sell," said Brett Harriss, an analyst at Gabelli. "Of the big media companies, Time Warner doesn't have a broadcast network," he said, unlike Comcast with NBC, News Corp. with Fox and Disney with ABC.

Broadcast networks such as CBS have begun receiving compensation in the last few years from pay-TV systems and affiliate stations for the right to carry their signals. Those dollars are adding up. By 2015, CBS will receive $766 million in fees, compared with $118 million in 2010, according to data compiled by SNL Kagan. That revenue could double in the future as the network seeks as much as $2 a subscriber in the next round of negotiations, CBS CEO Leslie Moonves said March 4 at a conference.

"Broadcasters are worth more of a premium, perhaps a substantial premium, because of must-have programming like sports," Mr. Scheuer said in an interview.

~ Bloomberg News ~