Is CBS Worth the Price? Westinghouse Thinks So

Westinghouse appears to be alone in its willingness to pony up more than $80 a share for CBS, raising questions about whether it would be overpaying for the network, especially if the advertising boom were to give way as economic growth slows.

Yet executives who have analyzed CBS say Westinghouse may be able to justify such “a full price” because of the network’s unrealized potential: Its station group under-performs those of the other two networks, it has slipped behind Fox Broadcasting to take fourth place in the ratings, and it would give Westinghouse a beachhead for its syndication business.

“It’s not cheap,” said John Tinker, an analyst at Furman & Selz. “They may be counting on taking the network from third to first. CBS stations are notorious for being badly managed. But if we have an economic recession, those assumptions become very risky.”

While the financial community has speculated that another party might enter the bidding, such a scenario appears unlikely. Walt Disney Co., which had talks with CBS last year, has been unwilling to pay the $80 price demanded by Laurence Tisch, chairman and 20% owner of the network. An executive close to Barry Diller, who bid for CBS last year, said Wednesday that Diller is not interested at that price.

The wild card is Ted Turner, the aggressive head of Turner Broadcasting, who tried last year to strike a deal with NBC but was unwilling to share control with its owner, General Electric.

“It makes more sense for Turner than for any other content provider,” said one executive close to him. “And he’s the only one who would buy on passion, pay more than he should, and then figure out a way to make the returns.”

But Turner’s shareholders, particularly Time Warner, have been reluctant to make a network bid.

One stock trader noted that Wall Street remains skeptical that a deal will take place at all. CBS closed at $71.25 on Wednesday, up 25 cents, on a day the Dow industrial average fell $57.41.

Westinghouse is believed to have secured $2 billion of the $5 billion in financing it needs to make a formal offer for CBS.

Wall Street has been skeptical about whether the diversified company, which owns power-generation, defense and broadcasting interests, could take on any more debt to buy CBS. The $2 billion it has secured from Chemical Bank and J.P. Morgan is believed to be secured against CBS’ operating cash flow.

The remaining $3 billion will be harder to secure, though analysts said Westinghouse could pledge assets to be sold to get bank backing. Among the easiest to sell, according to analysts, is its electronics systems, a healthy cash generator, which made $165 million in profit last year.

Since Michael Jordon took over as head of Westinghouse two years ago from PepsiCo, he has been shedding assets, reducing debt and trying to redirect the company after a brush with bankruptcy caused by bad real estate loans. Executives at CBS say Westinghouse wants to make broadcasting its core business.

Westinghouse owns some of the oldest stations in the country, and while it is not considered a progressive operator, it has enjoyed average returns from its stations.

The seven CBS stations, however, make returns well below their rival networks. For instance, while Capital Cities/ABC makes 50% returns, CBS’ margins are in the high 30% range. Tinker estimates that better management of the stations could be worth $60 million a year.

That figure could be higher factoring in savings from elimination of management redundancies by combining station groups. Together, the CBS and Westinghouse stations reach 32% of the country’s television viewers. The federal limit is now 25% but could be raised to 35% under telecommunications reform legislation now before Congress, which is expected to become law this fall.

That kind of coverage would do wonders for building Westinghouse’s syndication business, which has never really taken off.

The two companies have been talking for the last year as part of an alliance they set up last July. Under the pact, Westinghouse agreed to affiliate its five Group W television stations with CBS under long-term contracts in exchange for air time on CBS’ seven stations for shows the two partners would develop and distribute together.

If a new owner could turn the CBS network around, the difference between being third in the ratings and first is worth perhaps $400 million a year, analysts estimate.

Both Wall Street and Hollywood sources said no other serious names are surfacing outside of Westinghouse.

Although many have assumed that Seagram Chief Executive Edgar Bronfman Jr. might eventually add a network to his recently acquired MCA, he is considered unlikely to bid now. For one thing, Seagram is still digesting its acquisition of 80% of MCA from Matsushita Electric Industrial.

In addition, Bronfman is riding a wave of favorable reviews from investors for his $5.7-billion deal, which Wall Street is increasingly viewing as a savvy acquisition. Seagram’s stock has climbed nearly $10 a share in price since early April when the deal became public, closing at $35.25 on Wednesday.

Nicholas Heymann, who follows Westinghouse for Natwest Securities, speculated that Westinghouse might acquire CBS for its stations, with the eventual goal of divesting the network side to a party such as Seagram or Turner that is more interested in the content side of the business.

“I continue to believe that Westinghouse doesn’t have the appetite for being in the network business,” Heymann said.

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Times staff writer Jane Hall in New York contributed to this report.