By Jessica Toonkel and Ross Kerber

(Reuters) - Media investors are looking beyond the legal battle between the Redstone family and Viacom Inc <VIAB>O> CEO Philippe Dauman, speculating that a deal for the $18 billion media conglomerate could be on the horizon.

Last month, Sumner Redstone, 93, the controlling shareholder of Viacom and CBS Corp <CBS.N>, changed key members of his seven-person trust that will take over his majority voting stake of CBS and Viacom when he dies or is deemed incapacitated, and he signaled he may dismiss the Viacom board and Dauman.

That led to new allegations, this time from Dauman, that the home-bound mogul is mentally incompetent. In a previous lawsuit filed by a former Redstone girlfriend, Dauman testified that Redstone was "engaged" and "alert."

There is no evidence that a deal for Viacom is in the works. Still, investors have bid up shares of Viacom about 16 percent since May 20 when Redstone removed Dauman from the seven-person trust that will eventually control CBS and Viacom.

A Viacom spokesman and a spokesman for Sumner Redstone declined to comment. A spokeswoman for Redstone's daughter, Shari Redstone, declined to comment. Shari Redstone, who sits on her father's trust, opposed Dauman's elevation to Viacom executive chair earlier this year.

Dauman is fighting his ouster from the trust in court, asserting that Redstone's diminished mental capacity left him vulnerable to his daughter's improper influence. But many investors expect he will leave Viacom.

“I don’t see how he would stick around,” said Ben Strubel, a principal with Lancaster, Pennsylvania-based wealth manager Strubel Investment Management, which owns non-voting shares of Viacom.

The thinking among investors is that if Dauman leaves, Viacom's fate would be in play.

One scenario would be Viacom merging back into CBS<CBS.N>, 10 years after the companies split, Strubel said.

“I think Viacom recombined with CBS is the most natural fit,” he said.

CBS would have better bargaining power with distributors, with the added heft, Strubel and other investors and analysts said. And some hope that Viacom programing would improve under Leslie Moonves, the CBS chief executive who has presided over a successful era for the television network.

Other investors said they want Viacom put up for sale in an open auction and believe suitors could include Discovery Communications <DISCA.O>, AMC Entertainment Holdings <AMC.N> and companies that may be interested in getting into programing, such as Apple Inc<AAPL.O>, Dish Network Corp<DISH.O> and Verizon Communications Inc<VZ.N>.

The battle over control of Viacom is playing out at a time when the growth of streaming video providers like Netflix and Amazon is putting pressure on networks and cable companies to offer smaller, lower-cost packages of channels.

The environment leaves Viacom, as a stand-alone company, little time to pull off a turn-around and improve its ratings and overall performance, said Christopher Marangi, a portfolio manager for Rye, New York-based GAMCO Investors Inc, the second largest owner of voting shares of Viacom after the Redstone family.

"Time is of the essence," Marangi said in an interview. He declined to comment on his preferences for Viacom's future.

GAMCO CEO Mario Gabelli said in an interview in May that he gives Dauman six months to turn the company around. He declined to say what would happen if there was no improvement in that time.

Viacom owns MTV, Nickelodeon, Comedy Central and the Paramount movie studio. Shares in the company have fallen nearly 50 percent in the past two years even with the most recent uptick. Dauman has told investors he plans to pay down debt by selling a minority stake in Paramount, a move that Redstone opposed, according to his spokesman.

On Monday, National Amusements, the Redstone family business that holds its Viacom stake, changed Viacom's bylaws to require unanimous Viacom board support for any Paramount-related transaction. A Viacom spokesman said the bylaw changes were illegitimate.

BRINGING THE BAND BACK TOGETHER

Late last month, Redstone suggested in a statement issued through a spokesman that he was considering ousting Dauman and Viacom's board [ID:nL2N18O19H], increasing speculation that he is considering merging Viacom back into CBS.

Shari Redstone has expressed strong support for Moonves as CEO and executive chair of CBS.

A combined CBS-Viacom could save more than $200 million in costs, according to BTIG Analyst Richard Greenfield.

"If things are going to continue to move into smaller bundles of channels, the fastest way to protect Viacom is for it to merge," Greenfield told Reuters.

A CBS spokesman declined to comment. Moonves, seen as key to the deal, has not said he wants to run the two companies.

Not all CBS shareholders are certain that such a deal makes sense.

"We would have to assess it more from the side of CBS to make sure they weren't investing in a bad deal," Michael Cuggino, president and portfolio manager at San Francisco-based Permanent Portfolio Family of Funds, which owns voting shares of CBS and Viacom, told Reuters.

Salvatore Muoio, principal with New York-based S. Muoio & Co, a major owner of Viacom voting shares, said a bidding process for Viacom would realize the most value.

Viacom could give companies such as AMC and Discovery programing and scale to better negotiate for higher fees from cable and satellite distributors, Muoio said.

Representatives for Verizon, Apple and Discovery declined to comment. E-mails to AMC were not returned.

Absent a deal, Viacom may continue to face skeptical investors, such as John Heinlein, Chief Executive of Horan Capital Management, which sold out of Viacom in May over what Heinlein called "too many issues confronting the company."

"I do believe a major shakeup of management is needed and an ultimate sale could possibly help unlock some of the underlying value," Heinlein said via e-mail.

(Reporting By Jessica Toonkel; Additional reporting Liana Baker and Ross Kerber, editing by Peter Henderson and Lisa Girion)