CBS Opportunity on Spin-Off/REIT Conversion

By: SumZero Staff | Published: July 18, 2013 | Be the First to Comment

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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.

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