A New Spin : Sale of CBS Records Gives Tisch $2 Billion to Spend, Sony a Chance to Start Digital Tape

Now what?

That’s the big question being asked on Wall Street and all over the entertainment industry in the wake of the announcement Wednesday that CBS Inc. has agreed to sell its records division--the largest and most successful in the world--to Sony Corp. for $2 billion. What will CBS President Laurence A. Tisch do with that big chunk of cash? What effect will the sale have on both the broadcasting and recording industries?

Experts say Tisch has a number of options--use the money to buy back some CBS stock, acquire more TV stations or perhaps even a movie studio, issue a big cash dividend or sit on the money for a while. Experts disagree, however, on which of those options he will choose.

“It’s very frustrating from an analyst’s point of view, because Tisch has always been very close-mouthed and he’s never given any hint as to the rationale behind doing this sale,” said Fred Anschel, an analyst for the New York investment firm Dean Witter Reynolds. “But I doubt that he’s going to buy back stock, because the price is too high for him right now.”

CBS shares, reversing a sharp run-up Wednesday in anticipation of the sale, closed Thursday at $167.50 on the New York Stock Exchange, down $7.75. Sony closed at $34.25 a share, off $1.375.

“Tisch’s style would be to buy shares, and I think ultimately he will do that, but at a slow pace,” said Sean McGowan, an analyst for the New York investment firm Balis Zorn Gerard. “He does not want to trigger shareholder lawsuits into the change of control of the company, which could happen if he buys in too fast.”

According to McGowan, it is more likely in the near term that Tisch will “focus on increasing the number of TV stations CBS owns.”

Tisch has spoken several times of his interest in acquiring additional television stations in major markets. As a practical matter, CBS may buy two to five more stations in sizable markets, said David Fuchs, a CBS senior vice president.

But Tisch loathes overspending, and he has also said he considers current prices for TV stations to be far too high. “He’s said the company is interested in buying stations as a general proposition, not that the time is right,” Fuchs said.

Some analysts agree that the time isn’t right. “It’s still a seller’s market for TV stations,” analyst Anschel said. “Even after the crash, there hasn’t been a single announcement of a TV station coming on the market. So I think Tisch is going to sit on the cash. He’s a very smart man, and whatever he’s going to do, it’s probably going to be smart.”

Under Tisch, CBS has undergone a major restructuring since last fall, selling its magazine, book and music publishing units for about $1.2 billion. After an estimated $600-million tax bite on the records division sale, CBS will be left with close to $3 billion in cash.

According to analyst McGowan, a potential buyer with that much cash in hand “could have an upward impact on the value of TV stations. But Tisch is a patient buyer who doesn’t like to pay too much for earnings,” he said. “He can wait out the cycles.”

Experts point out, however, that Tisch can’t buy too much in the way of TV stations. CBS already owns stations in four major markets--WCBS in New York, KCBS in Los Angeles, WBBM in Chicago and WCAU in Philadelphia--that reach an estimated 19.3% of the nation. Under FCC rules, a network’s owned and operated stations can reach no more than 25% of the nation’s population.

The sale of the records division is expected to bring more layoffs at CBS. Some say the company may dismiss several hundred employees in its legal, administrative, personnel and other sections as it sheds support staff that has helped run a unit that accounted for more than half of the company’s 18,000 employees.

The effect of the CBS sale on the recording industry in general has been a matter of hot debate since word of the CBS-Sony negotiations surfaced months ago. Many record industry executives are horrified at the idea of a Japanese manufacturer of consumer electronics--notably the dreaded digital audio tape--owning the No. 1 record company.

“The fostering of great artistic creativity has yet to be demonstrated as a hallmark of Japanese corporations,” said one record company president who asked not to be identified. “Originality has never been their strong suit.”

Until the sale, CBS Records was allied with the other major record companies in opposing the introduction of DAT into the U.S. marketplace. Fearing that the near-perfect recording capability of the new technology will lead to untold millions of dollars in lost sales due home taping and counterfeiting, the record companies have been lobbying Congress for laws that either would place a royalty on the sale of blank DAT cassettes or require an anti-copying device to be placed in DAT machines. (Ironically, the anti-copying device was developed by CBS.) The major record companies also have been united in their refusal to license their vast catalogues of music for use on digital audio cassettes.

Many in the industry think the reason Sony was willing to pay so dearly to acquire CBS Records is that the Japanese firm saw it as a way to break the impasse--a Sony-owned CBS could be expected to quickly license its music for DAT use, thereby forcing its smaller competitors to eventually go along.

In a telephone interview Thursday, CBS Records President Walter Yetnikoff scoffed at the notion that Sony had “any ulterior DAT motive.”

“They’re not going to spend $2 billion to buy a record company and then turn around and do something silly,” he said. “Even prior to this acquisition talk getting serious, Sony told us they would like to arrive at a mutually agreeable solution to the DAT issue. They expressed that to me a number of times.”

Sony issued a statement Thursday that seemed aimed at calming the record industry’s fears. The company said it “will continue to devote its efforts to developing hardware, letting the records group control the development of software, or records.” It stated that “Sony will not try to force the records group to end its outspoken opposition to digital audio tape.”

“Yeah, that’s what Sony says, that they wouldn’t do anything to hurt the record business,” snorted another record company president. “But I don’t believe that for a minute, because the success of DAT or something else may mean a great deal more to them in terms of potential rewards.”

Asked if he was still opposed to the introduction of DAT into the U.S. marketplace, Yetnikoff responded: “As of now, yes.” But he added: “I think that Sony’s corporate ownership of this company is going to prove beneficial to a DAT resolution, one that’s great for everyone.”

Bhaskar Menon, the chairman of Capitol Industries-EMI Inc. and an outspoken critic of DAT, also defended Sony. “It’s not as if this is a Japanese shipbuilding company,” he said. “In its joint venture with CBS in Japan, Sony has been in the record business for a number of years and in fact is the No. 1 company in the world’s No. 2 market. Sony itself is one of the world’s most successful companies. So I think it would be unreasonable to assume that they have not evaluated the potential impact of DAT on the record business and that they would lightly take risks that would devalue their assets.”

Still, Menon said: “The structure of the industry has undergone overnight a very major change. Now only one worldwide record distribution company--Warner Communications--is American-owned. Two of the five companies--CBS and Polygram--are owned by consumer electronics firms. And this is first time that a Japanese company has actually entered into ownership of a Western entertainment software company. These are matters of some considerable import.”

William K. Knoedelseder Jr. reported from Los Angeles and Paul Richter reported from New York.

CBS RECORDS REVENUE In millions of dollars

1978 1,145 1979 1,287 1980 1,338 1981 1,218 1982 1,066 1983 1,159 1984 1,265 1985 1,230 1986 1,490