If Westinghouse Electric Corp. succeeds in taking over CBS, it will face two competing and sometimes contradictory challenges.
The industrial company, which hopes to remake itself as a broadcaster, must make its $5.4 billion investment pay off by slashing costs at the station level. But it also must step up its investment in programming, both to rescue the CBS network from the ratings cellar and add value to the local stations it owns.
So far, Westinghouse chairman Michael Jordan has proved alarmingly scarce on details of who will run CBS, or how. Perhaps that’s because he’s unsure if he’ll face a rival bidder, or maybe he just hasn’t figured out those answers yet.
Either way, Walt Disney Co.’s far more inspired $19 billion deal for Capital Cities/ABC a day earlier last week dramatically upstaged Westinghouse’s CBS courtship, leaving Eye insiders more worried about its prospects. For CBS’s new owners, remarked an industry programming exec, “Disney just raised the bar about six feet.”
On the surface, the CBS deal seems attractive: Westinghouse will pay a rich $81 per share for the Tiffany network and its station group, cementing ties forged a year ago when the two companies created a joint venture to produce programming and sell time on most of their stations to national advertisers. CBS gains more distribution, while Westinghouse gets a more reliable source of cash flow from a business more glamorous than refrigerated trucks.
More importantly, at least to many inside CBS, the deal appears to rid the company of chairman-CEO Laurence Tisch, who has left CBS damaged and vulnerable with his own legacy of ruthless cost-cutting and hasty asset sales, even as his family’s Loews Corp. walks away with a $906 million profit. CBS sold its profitable music and publishing businesses but failed to expand into cable TV, international and other markets, worsening its financial plight as its core TV network stumbled.
But Westinghouse, too, seems hellbent on trimming fat, and has so far provided no suggestion of how it intends to rebuild the house that William Paley built.
Moreover, a key rationale for Westinghouse’s pursuit of CBS – access to its enviable lineup of seven owned-and-operated stations – is threatened by a potential presidential veto of Congress’ telecom bills, which among other things lift caps on station ownership and household coverage. The Westinghouse deal hinges on that deregulation, since the combined Westinghouse CBS Corp.’s station lineup exceeds current limits.
If the bill becomes law, Westinghouse will be allowed to retain all 15 TV and 39 radio stations – reaching 33% and 35% of U.S. households, respectively. Jordan promises “tremendous marketing synergies” between radio and TV outlets, as well as cost savings from potential mergers of overlapping radio and TV news departments in individual markets, as Westinghouse already has done in Boston. In these and other moves, Westinghouse essentially promised layoffs at both the station and corporate levels.
“The best performance comes from running the network and the owned-and-operated stations as a cohesive unit, fully integrated,” says Jordan, who vowed to improve cash flow by up to $300 million over two years by doing just that.
That worries some entrenched CBS station executives, who fear that Westinghouse – like Tisch – will focus too keenly on costs and not enough on building revenues by supporting and investing in the CBS brand.
“The big concern, obviously, is the heavy debt load coming into this thing,” says one CBS station group exec. ‘When you work under highly leveraged people, the problem is very close detail to cash flow on a day-to-day basis, and that’s generally coupled with not a very long-term vision; it’s quarter to quarter.”
Clearly, however, there’s room for improvement. Operating margins at CBS-owned TV stations hover around 35%, analysts say, a performance that pales next to Cap Cities’ 50% to 55% margins and those at Group W stations, which fall somewhere on the high side in between. A station exec notes that affiliate group margins are helped by generous network compensation payments and increased ad revenues from syndicated shows that sometimes preempt network schedules. A network-owned outlet gets neither.
But while profit improvement will help Westinghouse pay down debt, it will hardly solve CBS’ fundamental problems: crashing ratings, a weakened affiliate lineup and poor morale.
Jordan, who expects to take a strong hand running CBS operations, like Tisch has no background in broadcasting. Firstrun programs from Group W, Westinghouse’s existing broadcast unit, have fizzled. And Jordan’s early pronouncements – at a hasty and ill-managed press conference – are unlikely to endear him to employees.
“The only way they’re going to fix this thing is by fixing revenues,” says Melissa Cook, an analyst at Prudential Securities. “Larry Tisch has been focused on cost-cutting for a long time, but their problem is market share. You don’t raise shares by cutting costs; you raise shares by improving programming.
That task falls to Leslie Moonves, the talented Warner Bros. TV chief who became CBS’ programmer only last month, and the only CBS exec to whom Jordan explicitly gave his support. So far, Moonves tinkered slightly with the web’s fall schedule, brought in a few new lieutenants and will now wait to see whether an unprecedented 11 new series will sink or swim.
“If they’re smart they’ll reaffirm his hiring, give him a hug and get out of his way,” says Alan Bell, president of Freedom Broadcasting, owner of four CBS affiliates. “They clearly don’t add as much as if they were a major studio or content provider. But all of us are pleased the Tisch era is ending, because it was a stormy ride.”