CBS has begun converting its outdoor segment in the Americas to a real-estate investment trust (REIT) and will also divest the segment’s business in Europe and Asia. The goal is to increase shareholder value. Indeed, shares rose some 9% after the news came out.
As part of the REIT conversion plan, CBS will submit a request for a private letter ruling from the IRS in Q1. If the ruling is granted, the conversion could be completed in the taxable year beginning in 2014. The other part of CBS’s outdoor business, in Europe and Asia, will be divested and presented as a discontinued operation as of 12/31/12.
CBS CEO Les Moonves said Wednesday that the initiatives are intended to “unlock the tremendous value of these unique quality assets.”
Here are some excerpts from what the analysts are saying—mostly positive:
— Neil Begley, SVP/Corporate Finance Group, Moody’s Investors Service: “…the contemplated REIT conversion may be negative for credit as it reduces the company’s financial flexibility, but the company’s Baa2 senior unsecured rating has adequate flexibility to withstand these transactions: If CBS were to lever up the new REIT entity consistent with most publicly traded REITs and return a majority of the proceeds to shareholders without any further material debt reduction, its consolidated leverage would increase and reduce the financial flexibility within its rating. Meanwhile, a sale of its international outdoor business would have only a moderate impact on the company’s credit profile, since in Moody’s view, the outdoor segment’s profitability comes from its domestic business, and its sale would decrease the company’s total exposure to cyclical advertising revenue. We believe CBS has long maintained interest in exiting the outdoor business at the right price, and as such, it is likely that it will ultimately spin or split-off the REIT. In our view, this would be credit negative in that the company would be losing valuable profit-generating assets.”
— Marci Ryvicker, Wells Fargo Media Analyst: “It’s REIT-astic!…The REIT conversion is the real value driver here in our view – although the international sale is nice too. We reiterate our Outperform rating and raise our valuation range to $45-47 from $43-45. We value the Americas segment at $6.8B post conversion. Applying a very conservative 14x multiple, our total REIT equity value is roughly $5B. Part of our assumption entails CBS levering the outdoor asset by roughly 3.5x – which would equate to $1.6B of incremental debt. Adding this $1.6B to our $5B equity figure equates to a $6.8B enterprise value.
Post the REIT conversion is when the REAL monetization occurs. We think the post-conversion period is when it gets most interesting for shareholders, as CBS can further monetize outdoor in one of two ways: 1) via an outright sale (strategic or private equity) or 2) via an IPO. In either case, we see lots of cash coming to the parent company (about $6B), which is likely to be plowed into a buyback.”
—Brian Wieser, Senior Research Analyst, Pivotal Research Group: “In light of this news, our price target for CBS is raised from $49 to $51. As more details become available, further upside may become more readily evident. We initially assume $4 billion of value for Outdoor in advance of information which will allow for more fully refined estimates. We can crudely estimate that the European and Asian activities could be worth $1bn while we are assuming the Americas assets as worth $3 billion. These estimates presume that European and Asian activities would be valued at 5x EV/EBITDA (approximately where a likely bidder for the assets, JC Decaux trades; this further implies that EBTDA margins could rise towards JC Decaux levels, well above where they likely are presently). They further presume that the Americas business could get to a mid-20s margin on current revenues with a 10x EV/EBITDA multiple (below where Clear Channel Outdoor trades).
This news may highlight the potential for additional asset pruning (i.e. by way of selling the company’s book division, Simon & Schuster). Disposing of outdoor advertising will have the effect of reducing the company’s exposure to advertising, long a source of volatility for the company’s operating results. In fact, during the third quarter, if we exclude outdoor from the company’s revenue totals, advertising would have accounted for less than half (49.2%) of total revenues, rather than the 56.5% the company actually generated.”