This is the last part of the long-running effort to separate the entertainment company from its billboard business. CBS spun off the operation — CBS Outdoor Americas — in March, but still owns 81% of the publicly traded company. The plan announced this morning will unload that by giving CBS stockholders an incentive to swap their holdings for shares of CBS Outdoor. The goal is to give investors a 7% premium to make a tax-free trade of some or all of their shares in early July. The deal is contingent on CBS’ ability to trade at least 58.2M of its 97M CBS Outdoor shares. Once CBS Outdoor is fully independent, it will convert itself into a real estate investment trust (REIT). “We fully believe that CBS Outdoor will continue to be successful as a stand-alone company,” CBS chief Les Moonves says. “And for our part, CBS Corporation can focus on what we do best, which is invest, produce and distribute premium content across all platforms and all around the world.”
Goldman, Sachs and Morgan Stanley will manage the exchange and J.P. Morgan will be a financial advisor.
CBS shares are up 1.6% while CBS Outdoor Americas — the billboard company that the broadcaster spun off earlier this month — is up 6% following the ruling. It means that CBS can save a bundle on taxes later this year when it unloads the 81% interest it still has in the outdoor business. “CBS Outdoor’s conversion into a REIT will unlock its true value, and the completion of our Outdoor initiatives will enhance our ability to return capital to our shareholders,” CEO Les Moonves says. “We’re very pleased with the way CBS Outdoor has launched as a public company, and with this favorable IRS ruling, we look forward to great success in the future.”
The outdoor advertising unit of CBS Corp said today that its initial public offering of 20 million shares will be priced at $28 per. With about 17% of the outstanding shares being offered, that values the company at about $3.36 billion. Trading in CBS Outdoor Americas Inc is expected tomorrow on the NYSE under the symbol “CBSO”, with the $560 million IPO ending on or about April 2. CBS Corp plans to divest its remaining shares through a tax-free split-off later this year and eventually convert the unit into a real estate investment trust.
CBS took another step toward becoming a pure content company today by agreeing to sell CBS Outdoor International for about $225M to Platinum Equity. The private equity firm’s irrevocable binding offer is “a key strategic milestone for CBS” that represents “very good value” says company chief Les Moonves. He said in January that he wanted to sell the overseas billboard business, and turn the U.S. and Canadian operation into a Real Estate Investment Trust (REIT). The price for the international unit was a pleasant surprise to Wells Fargo Securities’ Marci Ryvicker: With Europe’s economic woes, she says that she expected it to fetch no more than $170M. Platinum Equity CEO Tom Gores called the deal “a complex carve out that required real collaboration between buyer and seller with a strong emphasis on quality of execution.” He vowed to “move quickly to complete a seamless transition and create real value in this business.” CBS’ operation is one of the largest out-of-home advertisers in the UK, Ireland, France, Italy, the Netherlands, Spain and China. The unit was deemed a “discontinued operation” on CBS’ Q1 income statement; the company’s discontinued units lost $36M in the quarter before adding in a $16M income tax benefit. CBS shares are -0.6% in mid-afternoon trading.
The company’s stock is up about 10.3% this morning, to $41.86 — an all time high — as the smart money bets that CBS will repurchase shares after it carries out the complicated plan announced last night to restructure its billboard ad sales operation. But some wonder whether CEO Les Moonves will use the proceeds to hunt for acquisitions. An independent cable network or TV studio would “boost the company’s ability to create more owned content,” Nomura Equity Research’s Michael Nathanson observes. Moonves has said he’d be interested in Sony Pictures, although Sony insists it’s not for sale. Other possible targets include Hallmark, TV Guide Network, and AMC Networks, says Bernstein Research’s Todd Juenger. What about Starz, which Liberty Media just spun off into an independent company? While there’s “plausible industrial logic” for CBS to go after the premium cable service, Juenger notes that “CBS flatly denies any interest.” Meanwhile Pivotal Research Group’s Brian Wieser wonders whether Moonves’ decision to offload billboards suggests he might sell other seemingly non-core assets such as the Simon & Schuster book publishing division.
Shares are up 8.3% in after-hours trading following the announcement. Investors have long wanted CBS Corp to do something with the billboard unit, which didn’t seem to fit at a company focused on entertainment and news. CEO Les Moonves says he’s “enthusiastic” that the decision to turn the U.S. operation into a Real Estate Investment Trust, and sell the businesses in Europe and Asia, “will achieve significant value for our shareholders.” A REIT doesn’t have to pay corporate taxes but must give investors at least 90% of its taxable income. Last month, Moonves told investors that while CBS Outdoor is “a very good business”, CBS has “explored different options.” He added, though that there was “a very likely potential of keeping it and operating it and doing very well with it.” Analysts expect CBS to report that the Outdoor operation generated about $1.9B in revenue in 2012, up less than 1% vs 2011. Here’s today’s release:
Clear Channel Outdoor Holdings is considering buying CBS’ billboard division, a deal that would boost sales at CCO by nearly two-thirds. A person familiar with the matter told Bloomberg that CBS was approached by bankers interested in finding buyers for the billboard unit and agreed to listen to proposals. “Everyone is going to be looking at it and sizing it up, seeing if there’s value to be had,” said Clear Channel Outdoor’s CEO William Eccleshare. The Wall Street Journal, citing unidentified people with knowledge of the operation, reported previously that CBS is asking $6 billion for the unit, but Eccleshare said he’d be surprised if anyone agreed to pay that much. A spokesman for CBS declined to comment on Eccleshare’s remark.
Bankers are sniffing around for a deal that could provide CBS with anywhere from $4B to $6B according to reports in the Wall Street Journal and Bloomberg. The company is positioning itself in the catbird seat. It has signaled that it’s willing to listen to offers, but isn’t proactively soliciting them. “There’s definitely a lot of interest in Outdoor,” CFO Joseph Ianniello said last week at the Bank of America Merrill Lynch Global Telecom & Media Conference. “I will always look to maximize value, whether it’s through operations or through an M&A transaction. We’re very excited about the business, so we’re going to continue to operate it. If something comes along that makes some sense, we’ll let everybody know.” The usual suspects among potential buyers include Clear Channel Outdoor, JCDecaux, and private equity groups. But Clear Channel is deeply in debt, and a deal with JCDecaux could run afoul of European antitrust regulators. Investors shouldn’t count the cash yet, Wells Fargo analyst Marci Ryvicker warns: “We don’t believe a sale is imminent” she says, dismissing the buzz as mere “speculation.” In Q1 CBS’ outdoor ad unit had an operating loss of $2M, an improvement from the $12M loss a year ago, on revenues of $416M, up 7.3%. Ianniello says that ad growth for Outdoor is rising at a low single digit rate and should accelerate later this year as we approach the elections.