Sell Now? No Easy Answer for CBS’ Holders

Last week, CBS Inc. Chairman Laurence A. Tisch made a deal that he thinks CBS shareholders can’t refuse: The company will spend $2 billion to buy back 44% of its stock for $190 per share.

For anybody who bought CBS stock since last July, when it began to slide to $150 a share from $180, the tender offer represents a tidy profit. (Following Wednesday’s buyback announcement, CBS stock has rebounded slightly, closing Friday at $173 a share.)

But some investors may wonder if CBS shares will go higher and if they should hold out for a bigger payday.

Unfortunately, the answer is not straightforward. Wall Street analysts have different opinions. For some, it comes down to a gut feeling that Tisch can be taken at his word, that he won’t sell the network and that the shares will decline in price after the buyback. Others think that the buyback sets the stage for the network to be sold--and for a price well above $190 a share.

CBS said it would buy back 10.5 million of its 23.7 million outstanding shares. The Tisch family controls 5.8 million shares, or 24.8% of the stock, and the estate of company founder William S. Paley controls 1.3 million, or 8%.

Both will tender all their shares, so if the offer is fully subscribed--and CBS and its investment banker, Salomon Bros., expect it to be--their relative stakes will not significantly change.

Wall Street has joked that owning CBS stock is like investing in a money-market fund.

In recent years, the company has earned as much from its $3 billion in cash reserves as it has from operations, which include a TV network, five TV stations, 20 radio stations, two radio networks, a 50% stake in a home video company and 50% of a production facility in Studio City.

That’s because the “fundamentals” of CBS are not particularly good. Weighted down by $3.6 billion in TV sports commitments, the network is spilling red ink because advertising and ratings did not meet projections. The network will take a $170-million after-tax loss in the fourth quarter from its baseball deal alone.

Most analysts believe that the price of CBS stock after the tender offer will fall below $165 per share. How far down depends on the analyst, but a few even venture to say it might trade under $120.

The reason, analysts explain, is that the company will no longer enjoy the interest income from its $3-billion cash hoard, which earned CBS $180.7 million last year (after interest on debt) and $129.2 million through the first nine months of this year.

Tisch, sending a strong message that he won’t expand CBS beyond its core broadcasting business, will instead use the company’s cash hoard to repurchase stock.

After the buyback, CBS says, it will have $800 million in cash left, which is almost exactly equal to its debt load. Next year, earnings will be solely dependent upon operations, and one major profit center--the network--is already projected to lose money in 1991.

Peter Appert, a vice president at the C. J. Lawrence investment firm in New York, recommends that shareholders sell.

He reasons that the price of CBS stock will fall to about $145 after the tender “because they won’t have the interest income any longer.” The near-term outlook for network earnings is “lousy,” he said, and Wall Street is now focusing on how CBS will do in 1992.

For the longer term, however, Appert suggests that changes in federal regulations--the so-called financial interest and syndication rules--allowing the networks to sell lucrative TV show reruns, along with the elimination of most of the cash on the balance sheet, signals a “reasonably good possibility (CBS) could be sold.”

Appert calculates that CBS’ assets, if the company were sold, are worth $250 to $300 per share.

Richard Saler, assistant vice president at Lexington Management, a money management firm in Saddle Brook, N.J., admits to being “one of the bulls in this case.” He believes that “people will wrongly look at this company from an earnings standpoint in the next year.”

Saler is among observers who think that the relaxation of the fin/syn rules will open the door for a Hollywood studio to buy CBS--particularly Walt Disney or Paramount Communications.

“You have to look at what the franchise value of the network can kick out in a normal year, along with changes in fin/syn. Then earnings can be substantially higher,” he predicts.

But Richard MacDonald, a partner in the New York investment firm MacDonald Grippo Riely, is telling shareholders to unload the stock.

“We are recommending to our clients that they sell their shares now because the combined value of the tender offer and the stub left over afterwards will be lower than the current price of the stock,” he warns.

MacDonald’s advice is based on his calculation that the stock could go so far down after the tender offer that shareholders will not be able to get a decent price for what they have left, and the premium price of $190 that Tisch is offering does not make up for the difference.

The main culprit, he says, are the sports deals, which will cause the network to lose perhaps $125 million next year. “They’ve got very deep problems there,” he says.