News: Analysis & Commentary: DEALS
TOO BIG A STRETCH?
How bad have things gotten for CBS? Try finding the Tiffany Network in Detroit. Motor City viewers used to tune to Channel 2 for such CBS fare as Murphy Brown and National Football League games. Now, they must climb to Channel 62, WGPR, an erstwhile UHF Christian station whose call letters stand for "Where God's Power Reigns." Once they find the weaker signal, they'll notice that football has gone to the Fox Network, local news is absent, and the CBS lineup is glaringly short on such hits as NBC's ER or Friends.
Kinda stinks, huh? Well, now contemplate selling nuclear power plants to China, or torpedoes to a downsizing Navy. Given the choices, Westinghouse Chairman Michael H. Jordan has developed a taste for Tiffany, no matter how many cracks. After months of speculation that Ted Turner, Barry Diller, or even Edgar Bronfman would swoop in to cut a deal with CBS Chairman Laurence A. Tisch, Jordan appears ready to pay an estimated $5 billion for the network. If he can raise the money to finance such a bid--no sure thing--and get over some regulatory issues, it would mean "a total change in strategy and focus," says Salomon Brothers Inc. analyst Russell L. Leavitt.
Neither Westinghouse nor CBS will confirm the talks, but reports say Chemical Bank and J.P. Morgan are prepared to ante up $2 billion to back such a bid and are lining up syndication partners to provide loans for the deal. Jordan, still stuck with a mountain of debt and a $1 billion unfunded pension liability, likely would have to sell assets such as the company's defense electronics unit to pay for the purchase. CBS's cash flow will help appease lenders, even as ratings agencies threaten to downgrade Westinghouse Electric Corp. debt below its current junk status. "Westinghouse is a so-so credit," says one interested banker, "but CBS has so many hidden values that it could be a damn gem."
A damn expensive one, anyway. As remarkable as Westinghouse's gamble would be, even more remarkable is the likely $80-a-share price. Such an offer would come as sweet vindication for Tisch, who has watched the value of his network climb even as its operating fortunes have fallen: The company's profits dropped 53% in the second quarter, and it has skidded to third place in the ratings--fourth among younger viewers. Grumbles the head of one CBS affiliate: "He may not know much about broadcasting, but we all should be so stupid as Larry Tisch."
Tisch could walk off with an enormous profit. But for Jordan to make this gamble pay off, he'll have to fix CBS's distribution problems and revamp its limp programming lineup, all the while managing a prodigious pile of new debt. Westinghouse, which established the country's first commercial radio station, Pittsburgh's KDKA, in 1920, has plenty of experience in broadcasting--its highly profitable Group W unit owns 18 radio stations and 5 TV affiliates. Still, turning around the ailing network will take "time, effort, manpower, and money," says a CBS executive.
Already, Westinghouse and CBS are chummy. They formed a joint venture last year to co-own their TV stations in several markets and to invest $500 million in more of them. They're also hoping to produce programming together, and a radio deal is in the works, say sources close to the companies. The partnership joins their advertising sales forces and provides a base of 13 allied TV stations that guarantees distribution to shows the companies produce. Together, the Group W and CBS stations reach about one-third of the U.S. audience. Rules now limit one company to 25% market penetration, but pending legislation would raise that limit.
Ever since he came to Westinghouse from PepsiCo Inc. in 1993, Jordan has admired the broadcast group, which pumps out a quarter of the company's earnings on 10% of sales. It has been so healthy, in fact, that many Westinghouse watchers wondered whether Jordan might sell it, at a premium price, to clean up the company's tattered balance sheet. "It could have happened," admits Group W Chairman William C. Korn.
Instead, Jordan stuck with broadcasting, even though he figured he'd have to double the group's size to be a true player. Rupert Murdoch's raid last year on eight CBS affiliates provided an opportunity to do just that--cheaply. After the raid, Jordan and Korn saw CBS needed new stations. So they switched Group W outlets in Philadelphia, Boston, and Baltimore from other networks to CBS in return for CBS's participation in the sweeping joint venture. That gave Westinghouse a powerful partner to develop programming and pursue more stations--and a chance, as Korn says, "to grow with 50 cents dollars."
Was Jordon lured to buy the whole thing by Tisch's salesmanship? After all, the CBS chairman can point to "up-front" ad sales for the coming fall season that are up a record 12%, to $1.3 billion. Tisch also has worked to shore up the network's programming, which caters heavily to older audiences. Since last year, he has ponied up about $30 million to lure both NYPD Blue developer Steven Bochco and Leslie Moonves, the former head of TV production for Warner Bros. Inc., who developed ER and Friends.
Fixing the programming problems, however, will take years not months. CBS isn't particularly strong on any night in prime time. Lacking football, moreover, the network still has nothing on Sunday to lead into 60 Minutes. This fall, CBS is trying to court younger viewers with shows such as Bless This House, which stars raunchy comedian Andrew (formerly Dice) Clay. But even CBS executives admit they're probably two years away from a big rebound. And they still have to fix situations like Detroit, where new affiliates need to build market presence from scratch.
RAZOR THIN. For Jordan, though, the choices are bleak. His power businesses face fierce competition in an oversupplied world market. Europe's markets are protected, and in Asia, where powerhouses such as General Electric, Mitsubishi, and Siemens are clamoring for footholds, margins are razor thin. These tough conditions led Jordan to predict a tumble of 30% to 40% in second-quarter earnings. Future growth in these old-line businesses hinges on emerging markets, such as China and Russia.
So why not dwell instead on the huge amount of cash that CBS's TV and radio throw off--60% of the network's $490 million in cash flow this year. That haul, says Merrill Lynch & Co. analyst Jessica Reif, covers the interest on the network's less than $650 million in debt 13 times over and leaves room for up to $3 billion in new leverage. Add in more than $2.5 billion of tax-loss carryforwards Westinghouse enjoys that could shelter CBS's earnings, and a financing is doable. Question is, are Jordan and his shareholders trading one set of headaches for another.
With debt under control, Westinghouse CEO Michael Jordan hasn't had much trouble lining up interested backers for its potential $80-per-share cash bid for CBS. The rest of the money could come from asset sales and from dipping into the Tiffany Network's own healthy cash flow.
THERMO KING A jewel, since the refrigerated-transport unit grows steadily. 1994 sales: $877 million.
KNOLL GROUP This long-troubled furniture company is inching into the black. 1994 sales: $567 million.
ELECTRONIC SYSTEMS A diverse $2.5 billion division facing Pentagon cuts. 1994 sales: $2.5 billion.
POWER GENERATION The fossil-fuel group has a promising joint venture in China. 1994 sales: $1.7 billion.
ENERGY SYSTEMS Westinghouse's nuclear-power division faces flat sales and lawsuits. 1994 sales: $1.23 billion.By Stephen Baker in Pittsburgh and Michael Oneal in New York, with Ronald Grover in Los Angeles