An Eye to the future

CBS to raise $4.5 bil on radio/billboard sale

NEW YORK — CBS Corp. will raise as much as $4.5 billion from the sale of 20% of its radio and outdoor advertising businesses, it said Thursday, as part of a restructuring of the media conglomerate dividing its television business from its radio/outdoor businesses.

Designed to both improve CBS’ valuation on Wall Street and raise cash for further expansion in radio and outdoor, the restructuring has the added bonus of making a complete separation of the radio and television businesses easier.

The CBS network, 14-TV station group and cable networks (which include the Nashville Network, Country Music Television and Eye on People) will stay in CBS while the radio and outdoor advertising businesses, which now account for more than half of CBS’ earnings, will be transferred into a company bearing the name Infinity Broadcasting Corp. owned 80% by CBS.

Name’s the same

That’s the name by which Mel Karmazin’s radio empire was known before it was sold to CBS in 1996. Infinity will be the biggest radio operator, with 155 stations, but Karmazin declared that Infinity would be an “aggressive consolidator in radio and outdoor,” just as it had been previously.

At the same time the separation (Daily Variety, Aug. 27) allows someone to buy just the TV side for as little as $10 billion, rather than the $20 billion-$30 billion cost of buying the existing CBS.

“It gives them full flexibility in the future for anything,” Merrill Lynch analyst Jessica Reif Cohen said.

This is sure to fuel persistent speculation, usually denied, that a sale of the Eye web is forthcoming. CBS president Karmazin tried to quash such speculation when he told a meeting of Wall Street analysts Thursday that “the CBS television network is my favorite asset” and declared it would be profitable in 1999.

CBS chief financial officer Fred Reynolds also said there were no plans to break up the company fur-ther. “We don’t want to dismantle what we took 30 months and lots of effort to put together.”

Sale still possible

But CBS execs do not rule out a sale if the network does not recover. Reynolds told Daily Variety, “We are not going to be patient with underperforming assets anywhere,” in answer to a question about CBS’ expectations about the network’s performance this fall.

Reynolds also said that if someone made an offer for the TV side, “We are just here for the shareholders … if someone wanted to do that, my guess is they are going to have to pay a lot of money.”

Not that a sale appears to be on the drawing boards. Reynolds said, “I am convinced that we have (the network) fixed,” a refrain echoed by Karmazin.

Indeed, along with new programming like NFL football, Karmazin is focusing on intense cost-cutting efforts in an attempt to get the network into the black.

Layoffs expected

To that end, CBS said it would take a charge against third quarter earnings of between $50 million and $70 million to cover the cost of layoffs in the network. Between 200 and 300 jobs will be cut, Reynolds said.

Eye web insiders say that anywhere from one third to a half of the 200-300 positions to be trimmed will likely come from the news division, though final numbers have yet to be determined. Other cuts will likely affect corporate operations and engineering, human resources and the company’s legal department.

Wall Street reacted positively to news of the restructuring, pushing up CBS stock $2 to $29.18 amid a heavy market sell-off. Creation of a separately traded Infinity would “highlight their largest and fastest growing businesses,” Merrill’s Reif Cohen said.

“This is really a signal that they’re going to do a lot of acquisitions,” said Lehman Bros. analyst Tim Wallace, adding that Karmazin clearly hopes Wall Street will value Infinity high enough to enable the company to pay for acquisitions with its stock.

CBS stock hurt

The existing CBS stock has been hurt by worries about the network, although CBS execs have repeatedly argued that Wall Street paid disproportionate attention to the network side, which breaks even compared with almost $1 billion of cash flow generated by the radio side and about half as much from the TV station group and cable networks.

CBS stock price has fallen 25% in recent months, aggravating Karmazin’s frustration about the stock. The slide reflects softness in the broadcasting sector generally, but some broadcasters, like Clear Channel, continue to trade at much higher valuations than CBS.

Reynolds said Infinity, if it is valued at the same level as Clear Channel, would be worth $20 billion to $23 billion. That is roughly what CBS as a whole is worth now, which Reynolds said proved that the market does not give any value to CBS’ television side.

If Reynolds is correct, sale of 20% of Infinity would raise about $4.5 billion although CBS did not specify a figure they expected to be raised.

CBS execs said the cash raised from the sale would be used to repay debt, which currently stands at about $5 billion, so CBS will emerge from the deal almost debt-free.

Spending binge

Infinity itself will only have about $750 million of debt, Reynolds said. Both companies will have plenty of balance sheet capacity to borrow more money, and Karmazin made it clear that Infinity will go on a spending binge.

“We have great interest in continuing to expand in radio and outdoor and we think this vehicle will allow us to do that,” Karmazin told analysts on a call that was replayed to the press.

Wall Street sources say CBS is among several top radio companies eyeing Jacor Communications, which is believed to be on the selling block at a price of about $4 billion. Reynolds declined comment.

Karmazin also wants to expand in television, although his ambitions in that sector are limited by existing ownership rules. CBS’ station group now reaches 32% of the country, giving it room to buy only a few more stations before it hits the 35% ownership cap.

Karmazin said he would be “interested in owning more CBS affiliates.” But execs indicated that most of the growth will come through Infinity.

The restructuring won’t change management at CBS, as everyone on that level will keep his job, although as CBS Radio Group CEO, Karmazin will become CEO and chairman of Infinity.

Karmazin also insisted that the restructuring won’t end his plans to cross-sell advertising across television, radio and outdoor. Indeed Reynolds said the network gives CBS access to certain advertisers that don’t spend money in radio or outdoor.

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