CBS' Outdoor Business Converting To REIT

By Will Ashworth | January 15, 2013 AAA

In a move to unlock value for shareholders, CBS (NYSE:CBS) announced Jan. 16 that it was splitting off its Americas outdoor advertising business into a real-estate investment trust (REIT); secondarily it will attempt to sell its European and Asian outdoor businesses. In the works for many months, CBS hopes to make it all come together by early 2014. What does this mean for shareholders?

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Adding Value
It's hard to imagine a publicly traded media company that's delivered more value to shareholders in the past five years than CBS. Yet here we sit with CBS undertaking a very complicated and lengthy process that will focus the company on content creation, which is the lifeblood of its business. CEO Les Moonves has been unequivocal in his assertion that its outdoor business wasn't a segment it was interested in building and barring unforeseen circumstances, it will become stronger in the next 12 months through addition by subtraction.

CBS and Peer Group - Total Return 2007-2012

Company

Cumulative Total Return

CBS

47.3%

Walt Disney (NYSE:DIS)

59.6%

News Corp. (Nasdaq:NWSA)

26.0%

Time Warner (NYSE:TWX)

14.4%

Cumulus Media (Nasdaq:CMLS)

-289.1%

Clear Channel Outdoor Holdings (NYSE:CCO)

-129.2%

What's the Outdoor Business Worth?
RBC Capital Markets analyst David Bank values CBS' global outdoor business at $5 billion to $6 billion. Others suggest as much as $8 billion, but that would be a big stretch for a business that's barely growing. By putting in motion this two-step process, however, CBS tells potential buyers interested in its entire outdoor business that it expects serious offers only. It also said that it's prepared to split the outdoor business into two pieces to maximize shareholder value. For the first nine months ending September 30, 2012, the outdoor business generated just 12.7% of revenue and even less operating income before depreciation and amortization at 8.8%. Only its Simon & Schuster publishing business does less. It's very likely that the publishing arm also could be sold in the next 12 months. Between the two, investors can expect at least $6 billion from the process and likely more.

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Where Will Proceeds Go?
Moonves is on record as having an interest in Sony Pictures should Sony (NYSE:SNE) decide to put its film and television up for sale. One estimate I've seen puts the value at $7.6 billion, which definitely makes the acquisition possible. If you consider CBS' profits on a segment basis, however, the real drivers of growth are its cable networks - Showtime, CBS Sports Network and Smithsonian Networks - which weren't even broken out in its financial reports until 2010. I'd be more tempted to go out and get other popular cable network(s) such as HGTV and Food Network, both owned by Scripps Networks Interactive (NYSE:SNI), or even a slightly smaller acquisition such as AMC Networks (Nasdaq:AMCX). After all, that's where the TV business is headed.

Stock Price
Whatever happens in the next 12-18 months, it's clear that analysts are upbeat about the news that CBS is selling off its outdoor business. No less than five analysts covering its stock either reiterated their "buy" ratings or upped their target price for the next 12 months based on these developments. CBS is now trading above $40 for the first time in its seven-year run as a public company. It will be hard-pressed to reach $50 in 2013, but once the REIT gets done in 2014, I don't see why it wouldn't move quickly to $60. Especially if it makes an acquisition investors are happy about.

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The Bottom Line
Moonves appears to have CBS firing on all cylinders at the moment. Imagine what would happen if the economy was actually growing by more than 2% or 3% of GDP. Focusing on its core business, I don't see why the good times can't continue indefinitely.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

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