Entertainment

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

CBS has already created some of the most popular sitcoms and dramas on television ("Big Bang Theory," "NCIS," "Homeland"). Now, at nearly 90 years old, the broadcaster has the opportunity to become one of the most exciting investments in entertainment media. 

American TV
Top TV shows nationally this year by average viewership
Source: Nielsen
Note: Includes live TV, DVR and video on demand for seven days after broadcast. Reporting period from Jan. 1 to March 30, 2016.

Shares of the $25 billion corporation rose 18 percent this year through Tuesday, the largest return among its closest rivals. After the close of trading, it reported first-quarter results that beat analysts' estimates as advertising revenue and affiliate fees at the broadcast network both climbed more than 40 percent. The Super Bowl and Grammy awards played a large part, but even ignoring football, ad sales were up 12 percent.

Show Time
CBS shares have outpaced peers this year
Source: Bloomberg

CBS predicts retransmission fees (the money it receives from cable, satellite and other pay-TV providers to air its channels) will top $1 billion this year and reach $2.5 billion by 2020. It's also targeting $800 million in annual revenue from its new CBS All Access and Showtime apps over the next five years. All good -- but Les Moonves, the CEO and chairman, has a few more levers he could pull to further boost performance.

The first has to do with taking advantage of CBS's financial leverage. The company is looking to spin off (or sell, if there's a compelling offer) the radio station business, which Bloomberg Intelligence estimates may be worth $2.9 billion based on a peer's valuation. Revenue growth, coupled with the cash that could come from the divesting radio, would allow CBS to take on more debt and increase share buybacks. It spent $2.8 billion on repurchases last year and has $2 billion left under the current program. Analysts from Nomura estimate that if CBS were to modestly raise its target leverage ratio, in 2017 it could buy back almost as much stock as it did last year, providing for an additional 2 percent boost to its earnings-per-share forecast. 

debt-ebitda-CBS-Tara-final

Another possible option: collapse the dual-class ownership structure. Sumner Redstone, the media mogul who controls both CBS and its sibling Viacom, is about to turn 93 this month and his health is said to be deteriorating. Just this week, he was ordered by a judge to answer questions in a videotaped testimony for a trial beginning Friday regarding his mental competency.

Redstone was stripped of the chairman position at both companies in February. If he's deemed mentally incapacitated or dies, a family trust that includes his daughter Shari will take over his holdings. Moonves moved into the chairmanship role with her blessing, but whether they can negotiate creating a single class of stock is a different story. For CBS, it would signal a new era in which it's no longer under Redstone's thumb and could choose its own future -- whether that involves a big merger or other decisions that require his nod currently. 

CBS-pie-tara

Shareholders would certainly welcome it. Despite the recent revenue gains and positive growth outlook, CBS shares still trade at a discount to many of its peers, in large part because the dual-class structure leaves them with little say. Although, its valuation isn't quite as low as Viacom's, the business from which CBS split a decade ago.  

PE-CBS-Tara

CBS is further enhancing its value proposition relative to Viacom, which makes it even less likely that recent speculation of a deal to bring them back together will come true. But that doesn't rule other possibilities. For one, a CBS and Time Warner tie-up looks increasingly interesting.

While Viacom -- the owner of MTV, Comedy Central and Nickelodeon -- continues to struggle in its cable TV and movie studio businesses, Time Warner has CNN (a 24-hour news station, which CBS doesn't have), HBO (with hits like "Game of Thrones") and TNT (which airs NBA basketball games). On Wednesday before the market opened, Time Warner reported results that beat estimates, including better-than-expected revenue from HBO.

Asset sales, buybacks, a single class of stock, M&A: It's likely CBS will entertain one or more of these options. The question is, which one will Moonves go for first?

--Rani Molla contributed graphics to this story.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net