CBS Corp., a major player in U.S. television and North American out-of-home advertising, is making changes to its outdoor advertising division. The division is set to be come a REIT (real estate investment trust) and could become a separate stock.
European and Asian operations could also be sold.
Selling and splitting off the outdoor business entirely would leave CBS less reliant on ad sales and a more pure video production and distribution company, according to Brian Wieser, senior research analyst at Pivotal Research Group. “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,” he wrote in a research note.
“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,” Wieser wrote.
CBS’s outdoor operation is one of the largest vendors of ad space on billboards, digital signs, transit system posters and other out-of-home spots, with rivals including JCDecaux and Clear Channel Outdoor. It generated $1.38 billion in revenue in the first nine months of last year, or 12.8% of the parent company’s revenue. Operating income more than doubled to $82 million in the period from $35 million a year earlier – but remained just 2.8% of the parent company’s total.
The Wall Street Journal reported last June that bankers were evaluating interest in CBS Outdoor but that buyers were unlikely the meet the $6 billion price that CBS Corp. wanted. Clear Channel Outdoor said then that it would take a look. But CBS Corp. has now decided on a different path.
The moves “will unlock the tremendous value of these unique quality assets,” CEO Leslie Moonves said yesterday in a statement.
Real estate investment trusts have become a popular tool for companies to lower taxes and improve returns for investors. REITs don’t pay federal income taxes, with the understanding that they distribute at least 90% of taxable earnings to shareholders as dividends.
To qualify as a REIT, a company has to invest at least 75% of its assets in real estate and obtain 75% of its gross income from rents or interest on mortgages from financing property, according to the National Association of Real Estate Investment Trusts, a Washington-based trade group.
“We studied this asset, and it’s a real estate business,” CBS chief financial officer Joseph Ianniello said in an interview. “The REIT alternative started to make sense in 2012 as we studied it more.”
The company will seek approval for the conversion from the Internal Revenue Service this quarter. If the request is granted, the business would be converted in 2014, CBS said.
The European and Asian outdoor business could be sold in pieces, Ianniello said. That may draw more potential buyers. Michael Morris, an analyst at Davenport & Co., valued those businesses at about $400 million. “There are a number of potential moves from here,” said Morris, who recommends CBS shares. “The announcement is an initial step.”
JCDecaux, the world’s largest outdoor advertising company, could be a buyer for some assets, according to Paul Sweeney, senior media analyst with Bloomberg Industries. The company, based in Neuilly-Sur-Seine, near Paris, has been looking for deals to increase sluggish sales growth.
“This is a great move for CBS,” Sweeney said. “Outdoor advertising is an excellent free cash flow business.”