Launching its long-awaited counteroffensive against Ted Turner's takeover bid, CBS on Wednesday announced complex plans to buy back 21% of its outstanding shares for $150 each in cash and securities, or a total of $954.8 million.
Securities analysts who examined the CBS proposal agreed that it could sound the death knell for Turner's existing bid, which offers speculative "junk bonds" with a face value of $175 for each CBS share.
"This pretty much slams the door on Mr. Turner," said Edward Atorino, an analyst for Smith Barney, Harris Upham & Co.
But the Atlanta cable-television entrepreneur vowed to press on with his $5.2-billion, no-cash offer despite the CBS counterproposal.
CBS will offer $40 cash and a 10.875%, 10-year note with a face value of $110 for up to 6.37 million of its 30.66 million shares outstanding. Analysts said that, when they are resold on the bond market, the notes might be discounted to as low as $100 per share, thus putting the real value of the offer at $140.
On Wall Street, the proposal drew less than a ringing endorsement from investors. Although CBS was the most active stock Wednesday on the New York Stock Exchange with 2.1 million shares changing hands, the stock closed up only $1.125 at $118.625 after being up by as much as $4 earlier in the session.
Plans Sale of Assets
Some analysts suggested that, after waiting more than a month for CBS' move against Turner, investors were somewhat disappointed that the network wasn't offering to buy more stock. Speculation in recent weeks had suggested that CBS might try to buy 50% or more of its shares.
The network said that it plans to repay part of the short-term debt that it will take on to finance the plan by selling enough of its assets to raise $300 million after taxes. Officials declined to say which assets may be sold.
The company also said it will try to reduce its overhead expenses by $20 million per year from projected levels, but it did not say how it will achieve that goal.
The $954.8-million buy-back offer also includes "poison-pill" provisions that could raise legal and financial obstacles to Turner's offer.
Under terms governing the issuance of $700.1 million in notes to shareholders, those notes come due immediately if CBS' total debt exceeds 70% of its net worth (assets minus liabilities). Further, the terms of an issue of $123 million in convertible preferred stock placed Wednesday with five institutional investors to help finance the stock repurchase give those investors the right to legally block any move to increase the company's total debt to 75% of its net worth.
Turner's bid, which has a face value of $175 per share but a market value estimated by analysts at as little as $120, would raise CBS' debt ratio to more than 80%. The network's repurchase plan would leave its debt at 50% of total capitalization after the proposed sale of assets, company executives said. CBS's long-term debt currently amounts to 20% of total capitalization.
Turner May Need Cash Backer
The offer by Turner could still be revitalized if the Federal Communications Commission clears him as a prospective network owner, as many broadcast industry observers now believe is likely. But CBS' latest move places particular pressure on Turner, whose Turner Broadcasting System operates Cable News Network, to find a cash backer for his bid.
His apparent inability to do so earlier forced him to make an offer with no cash paid to shareholders for their CBS stock.
Such a backer may be even harder to find now that CBS' counteroffer is on the table. The CBS tender offer, which opened Wednesday, is scheduled to expire July 31--well in advance of Turner's offer, which expires Sept. 30.
Furthermore, as analyst Richard McDonald of the investment firm First Boston Corp. argued, the "poison pills" placed within the offer may force Turner into a costly court battle to overturn the debt restrictions.
"They're going to try to make it very expensive for him," he said.
In a separate action Wednesday, CBS filed suit in U.S. District Court in Manhattan alleging that Turner made "material misrepresentations" in the prospectus for his takeover offer. The allegations are similar to those made by CBS in earlier litigation against Turner.
The latest suit seeks an injunction barring Turner from buying more CBS shares.
Turner's bid also is threatened by a bill passed by the New York Legislature requiring that any takeover of a company incorporated in the state--as CBS is--be approved by the votes of two-thirds of the shares outstanding. Such takeovers have normally required a majority approval vote. The legislation has not yet been signed by Gov. Mario Cuomo.
In a statement, Turner criticized the CBS offer for having a lower face value than his.
"We believe that our offer for all the outstanding shares of CBS is far more attractive to shareholders than the blended value of CBS' partial self-tender offer and therefore intend to pursue our offer vigorously," the statement said.
The statement also said that Turner will challenge CBS' poison-pill provisions in the courts and before regulatory agencies.
Raise Debt Level
Some anti-takeover maneuvering by the network--particularly a repurchase of shares and the sale of some assets--has been expected on Wall Street since CBS became the focus of speculative interest early this year. Since the fourth quarter of 1984, CBS shares have risen from the $80 level to more than $120 at one point last spring.
Wednesday's repurchase plan aims to rectify one of the company's major vulnerabilities to takeover bidders: its low level of debt, which encouraged raiders to attempt to purchase the company by borrowing against its own assets.
"The debt covenants will temper tendencies by anyone to restructure CBS in a way that would be financially imprudent," CBS Chairman Thomas H. Wyman said at a meeting Wednesday with Wall Street securities analysts.
The deal also will increase the relative holdings of CBS' largest shareholder, its founder, William S. Paley, 83. Paley, who controls about 6.4% of the company's shares, agreed not to tender any of his shares in return for an option allowing him to sell up to 434,000 shares, about 21% of his holdings, for $150 in cash at a later date. The repurchase will effectively boost Paley's stake in the company to 8.1%.
Wyman made no pretense that the offer was not meant to counterpunch Turner's bid.
"It would seem to me it would be extremely difficult to imagine the present Turner Broadcasting offer being implementable if this is in place," he said. "Our judgment is that the preferability of our offer (to Turner's) is manifest."
But Wyman said the offer is also a reaction to the sharp run-up in the prices of all broadcasting stocks in light of the coming merger between American Broadcasting Cos. and Capital Cities Communications and the planned purchase of Metromedia's broadcast stations by Australian businessman Rupert Murdoch.
21% Drop in Real Net Income
Among the pitfalls of the network's defensive actions are their effect on corporate earnings, which are likely to become more volatile because of the company's greater debt.
CBS executives said they expect earnings per share this year to be about the same as the $7.15 per share recorded in 1984. That represents a drop of about 21% in real net income, however, because there will be a 21% drop in the number of shares. The network says it expects profits to rise by 25% in 1986 over 1985 and by 20% in 1987 over 1986.
Conjecture on Wall Street about CBS' possible asset sales has focused on CBS' toy division, a unit that last year posted the only loss of any company division. CBS later reorganized the unit's management. But the sale of the toy division is not likely to produce the entire $300 million that the company is seeking.
Wyman declined to comment on what assets the network is contemplating selling.
"We have a fairly specific list of possibilities," he said.
Wyman did say that none of the sales would have a material effect on the company's three "core businesses"--broadcasting, recorded music and publishing--although he did not rule out sales in those fields. Analysts speculate that the company could liquidate some of its radio stations or even a low-growth television station.
Of the financing for the cash portion of the repurchase, CBS said that $137 million would come from short-term borrowing and $123 million from the sale of 1.25 million shares of preferred stock--convertible to common at a ratio to be determined later--to five institutions.
Those investors, and the amount of preferred that they bought, are: Prudential Insurance Co. of America, 300,000 shares; Raytheon Financial, 250,000 shares; Northwestern Mutual Life Insurance, 250,000 shares; American General, 250,000 shares, and American International Group, 200,000 shares.