CBS Opportunity on Spin-Off/REIT Conversion

Background
In January 2013, CBS announced plans to divest its outdoor division. CBS plans to sell the international outdoor business as well as IPO the domestic outdoor business after a planned REIT conversion by late 2013.

The Domestic Outdoor business is on pace to earn about $400m in EBITDA this year and conservatively assuming it trades at roughly one turn discount to LAMR at 10x EBITDA that equates to a value of 4 billion dollars. The international outdoor business has been rumored in the FT to fetch between $300-400m. The outdoor business is 10% of current EBITDA, but CBS will offset this with new retransmission agreements that have recently been negotiated or / are coming up for renewal.

Retransmission fees for CBS owned and operated properties was $100m in 2011, 250mm in 2012 and CBS targets $1 billion by 2017 as many major market affiliates come up for renewal in 2014-2015. Retransmission revenue is fee revenue and is almost 100% margin

The New News Corp (NWSA) maybe interested in purchasing Simon and Schuster to merger it with its Harper Collins division. Simon and Schuster earns about $80mm of EBITDA at a 7-7.5x multiple has a value of $560-600.

Opportunity
CBS current market cap is $30 billion. If CBS uses the Outdoor sale to buyback stock or does an exchange offer CBS can retire at least 15% of its outstanding stock. CBS also owns Showtime and it can begin to monetize the out of home market via ShowtimGO.

Bear Case:
1. Advertising revenue declines – CBS derives 56% of its revenue from ads compared to 35% for Viacom. If ad spending declines it could detrimentally impact CBS
2. Political Ad spending was a large portion of revenue for CBS if there is litigation to change political ads it could negatively impact CBS.
3. Outdoor business is not converted to a REIT and CBS cannot monetize the asset slowing the buyback of shares
4. CBS loses its position as #1 network.
5. Hit driven TV shows are unsuccessful hurting current content revenue as well as future syndication revenue

Valuation
Consensus Net Income and EPS is ~ $2,110 of net income assuming roughly 590mm shares and $3.50 in EPS for 2014 using a 14x multiple which is in line with TIME Warner and Viacom but a discount to Disney and AMC - CBS is fairly valued at $49

If CBS continues to take $1billion of its estimated 2billion in fcf generated each year to continue its accelerated share repurchase. To be conservative if I assume CBS uses half of the proceeds from the sale of the Outdoor business to repurchase shares. Assuming that shares are repurchased at $50 a share CBS could retire 60 million shares or 10% of its float next year. Raising EPS from $3.50 to $3.89 and providing about 11% in additional value.
Bulls will argue that the transmission revenue which is higher margin than outdoor should cause CBS to trade a higher multiple.

Bears will take a wait and see approach to make sure that outdoor will get REIT status and that assets can be monetized and that retransmission can actually hit 1 billion in 2017.