CBS Inc., sending a strong signal that it does not plan to diversify beyond its core business of broadcasting, said Wednesday that it will spend $2 billion to buy about 44% of the company’s own stock from shareholders.
The move was widely seen to reflect CBS Inc. Chief Executive Laurence A. Tisch’s disenchantment with the high prices being paid for such assets as movie studios, cable networks or other emerging segments of the entertainment and media business.
CBS has been sitting on a cash hoard of $3 billion that it accumulated three years ago when Tisch ordered the sale of the company’s record and magazine divisions. Investors wanted Tisch to make a big acquisition or begin disbursing the proceeds to shareholders.
The company said it would buy back up to 10.5 million of the company’s 23.7 million outstanding shares at $190 per share. The stock recently has traded in the $165 to $170 per share range. Earnings per share would be reduced because of the loss of interest income from the cash reserves, despite there being a smaller number of shares outstanding after the buyback, the network said.
Although traders bid up CBS stock on the news--the shares closed at $175.50, up $5.625--Standard & Poor’s put the company’s $790 million in debt on its Creditwatch list “with negative implications.” S&P; noted that the cash reserves have been a “cushion” and “represented an important support” in the firm’s ratings of CBS debt.
The stock buyback was prompted in part by the Oct. 26 death of CBS’ chairman and patriarch, William S. Paley, who controlled 8% of CBS Inc.'s stock. Trustees of the Paley estate had been negotiating with CBS to sell back to the company a portion of the estate’s shares to pay tax obligations.
On Wednesday, the CBS board elected Tisch chairman, giving him the title that had been held by only two people in the company’s 62-year history.
Tisch, in a prepared statement, said the offer gives shareholders a “premium over recent market prices” but still allows a “substantial equity investment” in CBS stock. The tender offer will begin in the next several days and expire Jan. 22.
In a meeting with senior CBS executives in New York, Tisch repeated that he had no plans to sell the network, a popularly held assumption among many outsiders. He also said that a merger would not be attractive because of accounting rules.
New York-based Loews Corp., which is controlled by Tisch and his brother, Preston Robert Tisch, owns 24.8% of CBS Inc. stock. The Tisch family is estimated to have paid an average of $127 for each of the 5.8 million CBS shares held by Loews.
Both Loews Corp. and the Paley estate would tender their shares, CBS said, but only a prorated portion would be acquired, leaving their stakes in the company essentially unchanged. Tisch has stated that he would not boost his stake above 25%.
One danger for Tisch in moving above 25% is that it might trigger a “change in control” rule of the Federal Communications Commission, which would mean CBS would have to sell certain radio or TV stations.
Using the network’s huge cash reserves to buy back the stock runs counter to previous statements made by Tisch, who had always professed that he wasn’t anxious to spend the cash. When pressed about what he would do with the money, Tisch would answer that it “doesn’t burn a hole in my pocket” adding that it “earns money every day.”
According to executives at CBS, the network had been looking for ways to invest its $3-billion cash reserves and considered several major acquisitions in addition to a stock repurchase plan. But Tisch’s refusal to pay premium prices, and his view that such prices are unjustifiable in the current economy, led him to conclude that CBS’ own hammered stock was the best investment, the executives said.
CBS will still have about $800 million in cash after the tender offer is completed, which company executives said would be enough to fund current operations and buy TV stations, prices for which are beginning to weaken.
“The immutable conclusion is that it doesn’t look like CBS is going to be a major buyer of assets any time soon,” said John Reidy, a media analyst with Smith Barney, Harris Upham & Co.
Reidy and other analysts dismissed speculation that CBS planned to repurchase stock to deflect an unwanted takeover attempt. They also downplayed the theory that Tisch was actually peddling the company and had set $190 as a “floor” below which no offers would be considered.
Tisch “is a very direct individual, and if he wanted to sell the company, he wouldn’t do it in such an obscure way,” said Solomon Bros. analyst Edward Atorino.
Not all analysts, however, were convinced the issue was that straightforward.
“I think there’s not a great deal of conviction yet as what the real agenda here is yet,” said Jeffrey Logsden, an analyst with Seidler Amdec Securities in Los Angeles. “It’s unclear whether he’s just using the cash (to buy stock), smoking out a buyer or fending off a tender offer.”
CBS repeatedly has been rumored to be a takeover target for Walt Disney Co. Although there is reason to suspect conversations have taken place--the Tisch family has long been friends with Disney Chairman Michael D. Eisner’s family--people close to Tisch maintain that he sees no advantage in combining with a Hollywood studio.
A stock buyback is the latest step in shrinking of CBS since Tisch took control of the network in 1986. During the past decade, CBS has been pared down from a media and entertainment conglomerate with interests in toys and musical instruments to a struggling network with a handful of TV and radio stations.
A stock buyback comes just as the third-place network has been reeling from a series of strategic miscalculations. In a gamble to “buy” ratings, CBS has committed $3.6 billion for the TV rights to such high-profile sports events as football, baseball and the Winter Olympics. But lower-than-expected ratings, coupled with short league playoffs and World Series, has contributed to CBS incurring nearly a $100-million pretax loss in the first year of the contract.
Revealing that the problems were even more serious than previously disclosed, CBS also said Wednesday that it would take a $115-million writeoff in the fourth quarter from losses steming from its four-year, $1.06-billion Major League Baseball contract.
CBS further revealed that its losses from baseball earlier this season totaled $55 million. Last month, the network said it would lose money in the fourth quarter, even after generous interest income from its cash investments, due to lower advertising revenues at the network and stations, baseball losses, and increased news costs.
LOEWS’ INVESTMENT IN CBS In 1986, Loews Corp. over a period of several months acquired about 5.8 million shares of CBS Inc. stock for an estimated average price of $127 per share. Loews’ total investment thus came to about $744 million for a 24.8% stake in CBS.
CBS has paid annual dividends of $3 per share in 1987, $3.35 in 1988, and $4.40 in 1989 and 1990. Based on Loews’ 5.8 million shares, the company has received about $89 million in dividend payments.
If the tender offer announced Wednesday is fully subscribed, Loews will sell about 2.6 million shares back to CBS for $190 per share, or a total of $495 million.
Loews’ initial investment: $744 million
less dividends: -$89 million
less payment for tendered shares: -$495 million
Current net investment: $160 million