CBS Turning Billboard-Ad Business Into a REIT

CBS Corp. (CBS) shares surged the most in 17 months after the company said it will convert its outdoor advertising division into a real estate investment trust and seek a buyer for the European and Asian parts of that business.

The owner of the most-watched U.S. television network gained 10 percent to $41.80 at 9:38 a.m. in New York, the biggest intraday jump since August 2011. If completed, the actions may be worth $3 a share to CBS investors, said Michael Morris, an analyst at Davenport & Co.

Real estate investment trusts, or REITs, 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 percent of taxable earnings to shareholders as dividends. CBS could split off the REIT as a separate stock to shareholders.

The moves “will unlock the tremendous value of these unique quality assets,” Chief Executive Officer Leslie Moonves said yesterday in a statement.

The conversion could be finished in the 2014 tax year, New York-based CBS said. The European and Asian businesses will be classified as discontinued operations as of Dec. 31, 2012.

To qualify as a REIT, a company has to invest at least 75 percent of its assets in real estate and obtain 75 percent 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.

Made Sense

“We studied this asset, and it’s a real estate business,” CBS Chief Financial Officer Joseph Ianniello said yesterday in an interview. “The REIT alternative started to make sense in 2012 as we studied it more.”

CBS’s outdoor business generated $1.38 billion in sales in the first nine months of last year, or 13 percent of the parent company’s revenue. Operating income more than doubled to $82 million in the period from $35 million a year earlier.

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.

Morris values 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 SA (DEC), 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.”

To contact the reporters on this story: Edmund Lee in New York at elee310@bloomberg.net; Andy Fixmer in Los Angeles at afixmer@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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