CBS rolled out its latest hit last night, and this time it’s not critics, but analysts that provided the favorable reviews.
The company announced plans for its outdoor advertising business that should generate a substantial amount of cash, which could be used to buy assets in CBS’ core TV business.
Employing a bit of financial creativity, CBS said it would convert its Outdoor Americas division into a real estate investment trust (or REIT) and try to sell its outdoor operations in Europe and Asia. With real estate markets improving, using a REIT as an investment vehicle makes new capital available to CBS.
Analyst Marci Ryvicker of Wells Fargo called the announcement “REIT-astic” and raised her valuation of CBS stock by $2 a share. (Other analysts similarly raised their target prices for CBS shares.) CBS shares jumped 10% in Thursday morning trading.
Brian Wieser of Pivotal Research said the moves “may highlight the potential for additional asset pruning,” pointing to publisher Simon & Schuster as a non-core asset that could also be monetized.
“Disposing of outdoor advertising will have the effect of reducing the company’s exposure to advertising, long a source of volatility for the company’s operating results,” Wieser added. “In fact, during the third quarter, if we exclude outdoor from the company’s revenue totals, advertising would have accounted for less than half (49.2%) of total revenues, rather than the 56.5% the company actually generated.”
Analyst Michael Nathanson of Nomura Securities figures that between the REIT, which could be sold or spun off in an IPO, and the international asset sales, could bring CBS $4.2 billion in equity, some of which could be converted to cash. In addition to increasing the company’s value, “CBS could also decide to use the cash to acquire strategic assets (e.g., an independent cable network or a TV studio) to boost its ability to create more owned content,” Nathanson adds.
Which assets might CBS go after? Todd Juenger of Sanford C. Bernstein gets pretty specific. “After the initial positive reaction to the stock the questions that emerge include: What will CBS do with the about $1.3 billion of incremental cash proceeds from the increased leverage and sale of foreign assets?” Juenger said. “The default option is buying back shares. Of course, they have also said on numerous occasions that they could program a general interest cable network very well. They could potentially do a little of both,” he said.
“There is plausible industrial logic for CBS to pursue Starz, but CBS flatly denies any interest,” said Juenger. He also pointed to Hallmark, TV Guide Network or AMC Networks as potential targets.
While raising his valuation of CBS stock, Nomura’s Nathanson pointed out that all is not blue sky for CBS. He warned that the “upside could be impacted by multiple contraction due to weak CBS network performance, local ad weakness, and/or changes in syndication revenue outlook.” Nathanson said he is maintaining his neutral rating of CBS shares.
