Why CBS Radio’s Planned Divestment Is Really About Revenue Diversification

CBS Radio Spinoff Driven by Diversification
Cheyne gateley/Variety

When CBS Corp. reported first-quarter earnings earlier this month, CEO Leslie Moonves didn’t have much to add to the stunning announcement he made in March about his intent to divest the company’s radio business — the foundation on which the conglomerate was built back in 1927.

But when you dip into the latest numbers, you get a sense of just how huge a move it would be to sell the division, which Bloomberg has valued at nearly $3 billion. By my estimation, the radio unit is more profitable on a margin basis than the company’s core entertainment division, which includes the CBS broadcast network, Moonves’ crown jewel.

So why sell or spin off? When Moonves said the move would “unlock value” for shareholders, observers cited diminishing returns of a business that technology is rendering obsolete. But even in decline, radio could be a solid revenue-driver for years to come.

What the planned divestment is really about is revenue diversification, or reducing CBS’ dependence on the volatile ad business, on which Wall Street has soured amid increasing audience fragmentation.

At its investor day in March, CBS touted the change in its revenue composition over the past few years, citing a decline in ad dollars as part of its total revenue from 65% in 2010 to 51% in 2015. The 2014 spinoff of another ad-centric business, its outdoor division, contributed about five percentage points to that decline. Now it appears CBS is planning to repeat the feat.

Unlike with the outdoor business, CBS doesn’t report radio as its own segment; rather, it’s part of Local Broadcasting, along with TV station assets, which registered a 9% year-over-year gain in the first quarter, likely driven by station ad sales.

By doing a little triangulation on the growth figures for these two sub-segments, we can estimate that radio generated $1.2 billion in revenue over each of the past three years, roughly flat from 2013 to 2014, then shrinking by 6% in 2015. That amounts to 8%-9% of CBS’ total revenue.

CBS’ proportion of revenue from advertising will likely jump again in 2016, given the bump from the Super Bowl last quarter. But over the long term, the company would achieve its objective of diversifying its revenue.

What’s harder to predict is what cutting the radio arm would do to margins. CBS stands to lose several hundred million dollars in operating profit, plus more than $1 billion in revenue annually. We’ll learn more when the company files documents with the SEC in the next few months.

Jan Dawson is the founder and chief analyst at Jackdaw Research, an advisory firm for the consumer technology market.