This brings us to our other local business, RADIO. As you know, for a while now, we’ve been reducing our footprint here. Today, we are announcing here a bigger step in this regard: we will begin to officially explore strategic options for RADIO as a whole. Just as we did when we separated Outdoor, the aim here is to unlock value for our shareholders. There are a number of different options for doing this, and we’ll be looking at all of them. We’ll be prudent and judicious as we go, as we are in all such endeavors. And we’ll take our time as we did with Outdoor and make sure we do it right. We don’t have a lot more information to give you on this initiative right now. What I can say is that when we’re through, we’ll have done something that’s right for shareholders of CBS and for the CBS RADIO business as well.
No timeline, no details, not even a ’22 minutes and we will give you a spin’. Certainly, with so many Wall Street analysts present that wasn’t going to slide:
Dave Miller, Topeka Capital Markets.
Hey, guys, very nice presentation. Joe, on the radio disposition, could you talk about the basis of the assets? What type of tax implications there might be? We’re talking about assets that are decades old here, obviously. And what, if anything, does this do to the commitment behind the pace of the buyback that you outlined on the last call and the free cash flow generation going forward? And I have a follow-up.
Joseph R. Ianniello (COO)
Okay. Obviously, David, we’re not going to answer the basis question for a number of reasons, which I’m sure you’re aware. We’re at the early stage of the transaction, so we’re going to take our time. As Les said, we’re going to get it right. So there’s obviously a number of paths that we have to pursue. I think again, we’ve given you our share buyback, so that will stay unaffected for 2016. So again, there’s all options are on the table, but again, this is really at the early stage of what that is, and we’re going to be smart about it.
Hmmm, no dice, but if at first you don’t succeed, try, try a different angle?
Jessica Reif Cohen
…I just wanted to go back to radio. Obviously, it’s great cash flow but no growth. So I was wondering if you could comment on whatever you do, sales, spin-out, IPO, however you decide to go, if you could comment on how much leverage do you think you could handle. And what — and I don’t know if you can say, but uses of cash, if you could talk at all about that and time frame.
Joseph R. Ianniello
Look, it’s the early stages again. Obviously, we see leverage put on at other radio companies in where that — where they are. So we’re going to create a radio company to live on into the future. It is a fine business. It has a very high margin, significant cash flow. Audiences’ listenership is flat. So all of those options — spin, split, reverse march [morris], trust, transactions, sales are all available to us. I think again, we want to be pragmatic in our approach, and this is Day 1 of that. So we don’t want to kind of get ahead of ourselves and start talking about things prematurely.
In case it isn’t clear yet, management doesn’t know (or isn’t willing to share) what its plans are for the business because the process is still in the early stages. While a sale is certainly an option, there appear to be a number of possible hurdles to that path. First, the WSJ notes that finding a buyer for its entire portfolio might be difficult due to regulatory concerns. Its major competitors overlap in many geographies and are already quite large so adding CBS’ assets could be highly problematic. Additionally, as alluded to in one of the analyst questions above, the competition carries a lot of debt, potentially making a large acquisition untenable. Finally, while the company wouldn’t comment on its basis, a low basis could generate a significant tax liability which isn’t considered very shareholder friendly.
While the company could address some or all of these issues by selling off its assets in pieces or pursuing different structures, it seems like following the model of its Outdoors separation or something similar (straight spinoff) would make the most sense at this stage. As a reminder, the company listed a portion of its holdings in its outdoor advertising business, CBS Outdoors – it has since changed its name to OUTFRONT Media (OUT) – back in 2014 and distributed the rest of its shares via exchange offer later that year.
Radio’s best days are behind it as new technology and competitors from space (satellite) have taken large chunks of its audience. The business still generates a healthy amount of free cash flow, but it’s certainly in the decline phase of its business cycle. CBS was forced to take a sizable writedown in its radio business this year and this could be a way to extricate itself from managing a declining business. A classic good business/bad business split. Furthermore, CBS is trying to lessen its dependence on advertising and shedding radio would certainly help on that front. According to COO Joe Ianniello, a separation would drop revenue from advertising from 50% to 45% – progress.
If a spinoff is pursued, it will be interesting to see the investor appetite for a standalone radio business. There are a number of public competitors such as iHeartMedia (IHRT) – the former Clear Channel – and Cumulus (CMLS), and they don’t seem to be performing very well. Both of those companies do carry hefty amounts of leverage so perhaps there may be a way for CBS to conjure up some shareholder value in a transaction. As Mr. Moonves continually noted, this is still in the early stages, so there will be plenty of time to evaluate the deal once a path forward is chosen.
Disclosure: Author holds no position in any stock mentioned.