CBS Outdoor Seeks to Acquire Smaller Rivals After IPOAndy Fixmer
CBS Outdoor Americas Inc. will seek to buy smaller U.S. billboard companies following its $560 million initial public offering, ramping up competition with Lamar Advertising Co. and Clear Channel Outdoor Holdings Inc.
CBS Outdoor gained 5.4 percent to $29.50 at the close in New York, after selling 20 million shares at $28 each, according to a statement yesterday. That was the high end of the $26 to $28 range. Parent CBS Corp., getting the bulk of the proceeds, continues to own 83 percent after the sale, filings show.
The billboard industry is ripe for consolidation, with independent owners accounting for 36 percent of the U.S. market, said Jeremy Male, chief executive officer of the unit. CBS Outdoor’s estimated $50 million from the IPO, a credit line and a publicly traded stock provide currency for deals and a chance to stand out. CBS Outdoor, Clear Channel Outdoor and Lamar each have about a 20 percent share, he said.
“It’s a big opportunity,” Male said in an interview. “We can certainly use our infrastructure to better manage and market those assets.”
By splitting off from CBS and becoming a real estate investment trust, the business will have the ability to buy competitors in the 25 biggest U.S. markets and convert more locations to more-profitable electronic signs, Male said. At the IPO price, the company has a market value of $3.36 billion.
REITs have become a popular tool for companies to lower taxes and improve returns for investors. REITs don’t pay federal income taxes and are required to distribute at least 90 percent of taxable earnings as dividends.
For parent CBS, which plans to divest its stake through a tax-free transaction, the IPO and REIT conversion will provide about $5 billion for share buybacks and possible acquisitions. That sum includes the offering and $1.6 billion from CBS Outdoor borrowings. New York-based CBS, owner of the most-watched TV network, said in February it would buy back $2 billion of shares this quarter.
“We have been talking about this asset, should we sell, we had those conversations,” Leslie Moonves, CBS’s CEO, said in an interview. “This was a better value.”
After six months, CBS will begin an offer letting its investors exchange their stock for shares of the billboard company, Male said. The company intends to unload its entire CBS Outdoor stake, and will distribute any remaining stock to its shareholders, according to filings.
CBS Outdoor plans to pay a quarterly dividend of 37 cents a share, suggesting a yield of more than 5 percent based on the proposed offering price. The business will convert to a REIT once the former parent has divested.
For CBS, the added cash provides ammo for acquisitions. Moonves will “see what else is available in the content space” for purchase by CBS in addition to retiring stock.
“If something presents itself, our balance sheet will be in great shape and this infusion of cash will make it even better,” Moonves said.
The combination of buybacks and the planned exchange could shrink the number of shares in the media company by 30 percent, according to David Bank, an analyst at RBC Capital Markets.
CBS, controlled by Chairman Sumner Redstone, rose 2.2 percent to $62.83 today, valuing the media company at about $37 billion. The stock had declined 3.6 percent this year through yesterday. At the end of the fourth quarter, CBS had 615 million shares outstanding.
Goldman Sachs Group Inc., Bank of America Corp., JPMorgan Chase & Co. and Morgan Stanley managed the offering. They have an option to buy an added 3 million CBS Outdoor shares for $28 each.
For 2013, CBS Outdoor said net income increased 27 percent to $143.5 million on revenue that was little changed at $1.29 billion. Outdoor contributed about 8.5 percent of CBS’s revenue and 7.5 percent of operating profit.
After the share exchange, Moonves and other CBS executives plan to step down from the board and CBS Outdoor will rename itself, Male said, while declining to provide names that are under consideration.
Male was hired in September from JCDecaux SA, where he led operations in the U.K., Northern Europe and Australia, and served on the board. In July, CBS sold its billboard operations in the U.K., Ireland, France, Italy, the Netherlands, Spain and China to Platinum Equity LLC, a Los Angeles-based private equity firm founded by Tom Gores, for $225 million.
“This was the third time I had tried to hire him,” Moonves said of Male. “It’s really hard to find someone with his expertise in outdoor and who is a terrific leader.”
CBS Outdoor will have almost $1.6 billion in long-term debt following the offering, according to filings. That’s about four times operating income before some items, Male said. The company will have about $50 million in cash and a $425 million credit line. Eventually, the ratio of debt to earnings may shrink to 3.5, he said.
“We will declare ourselves a REIT, pay high dividends and produce cash we can use for corporate purposes or pay down debt,” Male said. “We would also expect our equity could provide a good currency that would be attractive in terms of future growth.”
The New York-based company will have about 2,500 employees worldwide, Male said. About 20 percent of staff will be for sales and marketing, he said.
About 87 percent of CBS Outdoor’s revenue comes from the U.S., with the rest from Canada, Mexico and Latin America, Male said. Contracts to sell ads for public transit provide about 30 percent of sales, with New York, Los Angeles and Washington the dominant sources, he said.
Digital billboards will be a higher priority, Male said. The electronic signs, now numbering about 400, or 1.5 percent of the inventory, contribute around 10 percent of U.S. revenue, he said. The company expects to add 80 to 100 electronic billboards, he said.
“That’s a good and growing part of our portfolio that we would expect to increase in the future,” Male said. “It’s very much a real growth driver.”
Moonves said CBS moved ahead with the split after deciding outdoor ads couldn’t be sold with its TV and radio stations.
“We tried many times,” Moonves said. “We tried in different local environments to sell radio, TV and outdoor together and it’s very hard to do. It’s a difficult task and there wasn’t a lot of success. This will not hurt radio or TV sales or outdoor sales, because there’s very little overlap.”