Mel takes stock

Karmazin restructuring CBS to buoy shares

CBS president Mel Karmazin will unveil today a major corporate restructuring aimed at rescuing the Eye web’s steadily declining stock price.

No details of the restructuring could be learned late Wednesday but it is expected to involve some sort of stock spinoff of some CBS assets, aimed at giving investors the chance to buy into a broadcasting company without the drag of the TV network.

One CBS insider suggested Karmazin is planning to sell to investors a minority interest in the broadcasting side of the company, which would continue to be majority owned and controlled by the CBS parent company. The network would stay in the parent company.

CBS execs refused any comment late Wednesday but an announcement is scheduled for 7 a.m. today and an analyst conference call has been set for 10 a.m., hosted by Karmazin, CBS chairman Michael Jordan and chief financial officer Fred Reynolds.

The impetus for the restructuring is Karmazin’s longstanding frustration with how CBS is valued by Wall Street. Karmazin is one of the biggest individual shareholders in CBS and has consistently made boosting the stock price his top priority.

Indeed, while CBS stock rallied last year and early this year on expectations that Karmazin would turn CBS around, the stock has slid 25% in the past few months and closed down 81¢ Wednesday to $27.06.

Lehman Bros. analyst Tim Wallace said the stock price slide likely reflected investors’ worries about the impact of a slowing economy on advertising-dependent businesses like broadcasters, although Wallace said he believed such concerns were overstated.

Most broadcast stocks have fallen in recent months but CBS remains much cheaper compared to other broadcasters. Wallace estimated that CBS is now trading at 13.7 times 1999 cash flow, whereas Clear Channel Communications is trading at 20.6 times next year’s cash flow.

Net a stock drag

Karmazin blames CBS’ poor market performance on investors’ disproportionate focus on the troubled CBS television network, an issue most analysts agree with. The network breaks even or loses a few million dollars, while the broadcasting side is hugely profitable, projected to earn about $1.3 billion before interest, taxes, depreciation and amortization in 1998.

Karmazin has contemplated several measures to improve the company’s market valuation in recent months, including spinning off the network from the rest of the company. But the difficulty of operating a network without its owned and operated TV station group made such a proposal impossible, sources say. Karmazin has denied publicly any plans to sell the network, despite persistent rumors.

What is expected is the creation of a new CBS stock dedicated to the broadcasting side and with no exposure to the network. The new stock would be heavily sought after, analysts said, raising the overall valuation for the broadcasting side and that would flow through to the value of CBS’ parent company.

Complex scheme

This is a complicated idea, however, which some investors may not like. Others on Wall Street said creating a stock for the network alone would also be popular because the network is not currently given any value by investors but would get at least a minimal value if it was reflected by its own stock.

Word of the restructuring comes as Karmazin has begun scrutinizing costs through CBS in an effort to make the network profitable. He is believed to have identified cost-savings totaling $100 million.

CBS execs began a concerted effort to cut costs several months ago, trimming the company’s matching contribution to employee’s retirement funds, informing staffers to keep tips on business meals to 15% or less and reducing head count wherever possible (Daily Variety, June 30.)

Layoffs loom

All areas of the company are now under review for budget cuts, with CBS News in line to lose as many as 100 staffers, according to some insider estimates.

The cost-cutting push has also prompted CBS to kill its 1999 winter affiliates meeting. Eye insiders say the annual confab was nixed after execs decided that the coin involved in staging the meeting couldn’t be justified during a time when budgetary pressures have made layoffs at the network a virtual certainty.

The web’s larger, more elaborate spring session with affils is still expected to be held in May or June of next year.

Since Karmazin took control of CBS’ TV station group last year, he has dramatically improved its performance. In contrast, the network’s losses have risen, despite gradually improved primetime ratings.

$30 mil loss

In the six months to June 30, CBS’ network loss is estimated to have been about $30 million, compared with $6 million a year earlier. Television cash flow overall (including stations and cable networks) rose 33% to $133 million (cash flow is earnings before interest, taxes, depreciation and amortization).

Alan Bell, president of Freedom Broadcasting — which owns several CBS affils — says he likes the move by Eye brass to dump the winter convention, which is usually held in conjunction with NATPE.

“I don’t have an objection to meetings when you have something to discuss, but to do it routinely is to simply open your veins and bleed money,” he said, noting the winter meeting “diverts an enormous amount of money and executive energy” from other areas.

(Josef Adalian, John Dempsey and Cynthia Littleton in Los Angeles contributed to this report.)

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