In July, CBS Corp. (CBS) — trading at $52 with a market cap of $23.2 billion — took the first step toward taking public its flagging radio business. CBS Radio plans to raise about $100 million in an IPO. At its peak, CBS, which began in 1927 as a radio company, owned close to 200 radio stations.
Once a dependable contributor to the company’s bottom line, the radio business has suffered due to growing competition from satellite radio and streaming services. CBS Radio lost $136.5 million in 2015 as revenue fell 6% to $1.23 billion. The bulk of revenue, about 75%, was from local advertisers and 25% from national advertisers.
CBS Radio is one of the country’s leading radio broadcasters with 117 stations serving 26 major markets. Its stations offer a variety of programming from news, talk and sports to a wide range of music styles. Many of the stations are affiliates of the Westwood One radio network; CBS Radio owns nearly 10% of the radio programming syndicator.
In addition to traditional broadcasting, many CBS stations broadcast digital over-the-air signals, along with online streaming and on-demand content. CBS Radio stations reached an audience of more than 65 million people per week in 2015, making it the second largest radio group in the United States as measured by audience and revenue.
The spin-off will take place in two stages: CBS initially will offer less than 20% to the public in an IPO, but then will separate CBS Radio in a tax-free “split-off.” CBS will offer its shareholders the option to exchange their shares of CBS for shares of CBS Radio. This is similar to how CBS unloaded its billboard business, now known as Outfront Media (OUT). By spinning off its radio business, CBS is reducing its dependence on advertising revenues. The terrestrial radio business is shrinking, with ad revenue falling and the industry being upended by the rise of digital media.
CBS Corp. is a media conglomerate with television, radio, online content and publishing operations (see “Organizational structure”). Its portfolio is anchored by CBS Broadcasting, which operates the #1 rated CBS television network, along with a group of local TV stations. CBS also owns cable network Showtime and produces and distributes TV programming through CBS Television Studios and CBS Television Distribution. Other operations include CBS Radio, CBS Interactive and book publisher Simon & Schuster. CBS spun off its cable networks and movie studios to Viacom in 2006 and completed the spinout of its outdoor advertising business in 2014. Chairman Emeritus Sumner Redstone controls CBS Corporation through National Amusements.
The CBS television network has consistently generated strong broadcast ratings relative to its peers during the past several years. The success and stability of the network attract advertisers. CBS owns valuable sports rights, including the National Football League, the NCAA’s March Madness and college football. This popular programming gives CBS leverage in negotiations with pay TV distributors for retransmission fees and with advertisers. CBS owns one of the more successful television production studios.
What is it all worth? Our sum of the parts valuation suggests the split-off will create value for shareholders. We value CBS Radio at $3.4 billion. This is based on a premium multiple of 11x 2017 EBITDA considering its national radio broadcasting reach and zero-debt balance sheet. We value CBS Corp. consolidated equity value at $30.74 billion or $66.25 per share, representing a 27% upside from the current market price of $52.