CBS Agrees to Buyout Bid by Westinghouse : Entertainment: $5.4-billion merger would create biggest TV, radio empire. But the deal faces obstacles.

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Just a day after the Walt Disney Co. announced that it would buy the nation's most successful television network, Westinghouse Electric Corp. stepped up on Tuesday with an offer to pay $5.4 billion in cash for CBS Inc., the only remaining independent network and the weakest of the Big Three.

The merger, already approved by both companies' boards, caps two weeks of speculation and would create the largest TV and radio station group in the country. It would put the Tiffany network back into the hands of broadcasters after nearly 10 years under investor Laurence A. Tisch. Tisch, who will not have a role in the new company, stands to make about $700 million on his 20% stake in CBS--on top of the hundreds of millions he has already withdrawn.

The new company, which would be called Westinghouse/CBS, would be run by Westinghouse Chairman Michael H. Jordan, who hinted Tuesday that the Pittsburgh, Pa.-based company would sell some industrial assets to concentrate on broadcasting. Together, CBS and Westinghouse own 15 television and 39 radio stations that reach about one-third of the country's listeners and viewers, more than either NBC or Capital Cities/ABC.

The combination is the clearest sign yet of how new federal rules governing broadcasters are reshaping the industry. The CBS/Westinghouse merger comes as lawmakers prepare to relax longstanding rules on media ownership: Today, a single company can control stations that reach up to 25% of the nation's viewers, but that limit may soon be raised to as much as 50%. For its part, Disney's proposed $19-billion acquisition of Capitol Cities/ABC Inc. was driven largely by the easing of restrictions on network ownership of television programming.

Under the agreement announced Tuesday, CBS stockholders would receive $81 a share, well above the $66 at which it was trading before word of the deal surfaced. But completion of the merger is far from certain. Regulatory approval could present obstacles because the combined company exceeds current station ownership limits. Westinghouse also is deeply in debt and still lacks more than $3 billion in bank financing needed to close the deal.

"There are some question marks," said Jeffrey Logsdon, an analyst at the Seidler Cos. in Los Angeles. "Westinghouse is making a defined corporate strategic decision. But it's a big, big move for them."

Unlike the highly praised Disney deal, analysts also believe a competing bidder could torpedo the Westinghouse bid.

Tisch dismissed the idea: "I've given my love to Mr. Jordan," he said in a rare light moment during an otherwise somber press conference at New York's Waldorf-Astoria Hotel.

The announcement was overshadowed by the lingering excitement in the entertainment industry and on Wall Street over the Disney/Cap Cities merger, which combines the leading studio and theme park operator with the most profitable network and television distributor.

Downbeat Mood

At CBS, the mood was less than upbeat. "Everyone is walking around feeling depressed, especially after Disney," said one CBS executive. "These guys from Westinghouse feel like small-town businessmen, and they're going to have to sell off so many things just to buy CBS. How is this positioning for the future?"

Disney adds impressive production and programming clout to Cap Cities' ability to deliver those products to customers. But the Westinghouse/CBS combination plays only on distribution strengths: the new company lacks the credentials in making the TV shows and movies that media analysts say are essential for taking advantage of its new reach.

What is more, Cap Cities enjoys more global scope than CBS, which is essentially a bare-bones network. Cap Cities/ABC commanded a price four times higher than CBS because it includes the most profitable network and stations, as well as cable networks with global customers and a host of trade magazines and newspapers.

Westinghouse, however, is arguably paying more for CBS based on the profitability of the two networks. Tisch has demanded at least $80 a share since he began shopping for a buyer in the last year.

The stock market on Tuesday continued to react favorably to the Disney deal, and also rewarded Westinghouse for coming forward with the anticipated offer. Disney shares rocketed $2.875 to a record $61.50, pulling Cap Cities shares up $3.25 to $119.50. CBS closed unchanged at $77.75, while Westinghouse shot up $1.25 to $14.875 in late trading.

Vague Vision

Jordan, who was brought in from Pepsico two years ago to turn around the ailing Westinghouse, was vague in outlining his vision for CBS. But he did say he might seek a strategic alliance in programming, possibly invest in cable networks and international television, and invigorate management of CBS stations as Westinghouse had with its own. He said there would be layoffs to reap savings, but did not say how many.

It is unclear where Westinghouse would get the more than $1 billion in new investments some analysts estimate are needed to revive CBS, whose growth has been stunted by cost-cutting measures under Tisch and whose ratings have slipped dramatically. In fact, CBS's rich legacy in news gathering, pioneered by Edward R. Murrow, and its dominance of TV for more than two decades under founder William S. Paley were mere historical footnotes to Tuesday's deal.

Westinghouse already has about $3 billion in debt and will take on at least $3 billion more in a merge. The merger's missing programming link has led some analysts to predict that Westinghouse may not be CBS's final home. While analysts expect the Disney marriage to consummate because few suitors could match the $19-billion price or offer such a perfect fit of assets, many believe Westinghouse could become an acquisition target itself if another bidder doesn't spoil the deal first.

'Predator or Prey'

"This is part of the aggregation of forces in the entertainment industry and a reordering of the universe," said Fred Roberts, president of F.M. Robert & Co., a mergers and acquisition investment banking firm in Los Angeles. "With the blurring of lines between telephone, cable, TV and computers, and the merging of content producers, there has to be a next step for Westinghouse, maybe combining with a studio like MCA. It's survival of the fittest so you have to move fast. You are either the predator or the prey."

In fact, Ted Turner, the head of Turner Broadcasting Systems, a large cable programmer, joked last month that if he couldn't amass the financing quickly enough to buy CBS, he would aim for Westinghouse.

What's driving the race is stiff competition, rising costs and federal deregulation. Entertainment companies like Disney, Viacom and Time Warner, which in turn are buying retail outlets, cable systems, TV stations and networks to put their products into people's hands. Production companies lacking such outlets, like Turner, MCA Inc., which is owned by the Seagram Co., and the Sony Corp. could find less shelf space for their products.

"The Disney announcement raised the bar for the size media companies need to be to compete," said Michael Wolf, a partner at Booz Allen & Hamilton.

In addition to a deal-spoiler, the uncertain financing and regulatory hurdles make for a shaky deal. Jordan said the company had raised $1 billion each from J.P. Morgan and Chemical Bank and was optimistic that an additional $3.4 billion could be raised before the sale closes. The company could borrow against future asset sales, which Jordan said would raise $1 billion to $2 billion over 18 months.

Analysts have speculated that Westinghouse's defense electronics division might fetch a high price because it is healthy, but Jordan seemed to suggest that cash generators would not be on the hit list, though he wouldn't say what was.

A bigger question is whether the deal will get a regulatory green light. Federal rules prevent one chain from owning TV stations that reach more than 25% of the nation's viewers. While Congress is nearing agreement on legislation that would raise the threshold to 35% and perhaps as high as 50%, passage is not guaranteed, meaning Westinghouse might be forced to divest radio and TV stations.

Another Bidder?

And the two-to-four months Jordan estimates it will take to get approval to transfer broadcast licenses from CBS to Westinghouse could give another bidder the window to step in. Westinghouse has agreed to pay CBS shareholders a premium on their stock, as they wait for regulatory approval. The premium begins accumulating on Aug. 31 and Logsdon said that could add $1.62 a share to the $81 price over 4 months.

For Westinghouse, the purchase is a last-ditch attempt--and the third restructuring since 1992--to turn around the company after an ill-fated and costly foray into financial services in the 1980s that forced it to take a $750-million write-off in 1994. "Jordan is heading into his third year of a three-year turnaround without results and is looking to leverage his best asset," said Nicholas Heymann, an analyst at NatWest Securities Corp.

Heymann worries that Westinghouse won't get top price for its asset sales because it is a forced seller.

Under the stewardship of Willard Korn, who joined the company in 1990, Westinghouse's Group W radio and TV station group has improved profit margins to 45% of revenues, making it second only to ABC in performance. By contrast, CBS stations reap returns in the mid-30%.

CBS has been profitable under Tisch. But, since taking control of the network in 1986, Tisch has made cuts in staff and sold off assets, such as the CBS record division and the publishing house. His "broadcast-only" strategy has been criticized by analysts--and frustrated some of his own executives, who felt that CBS could protect itself against bruising recessions by diversifying into cable and hedging its bets with new technologies.

Under Tisch, the network rose from third to first place in the prime-time ratings. He wooed David Letterman to late-night on the network by paying him $14 million a year.

But Tisch offended affiliates by suggesting that their compensation to carry CBS programs be cut, and when ratings slid, eight strong stations defected to Fox. The network also lost the NFL Football franchise. And it stayed too long with a strategy of pursuing older viewers in prime time, costing ratings and advertising revenues.

To improve its station lineup, CBS forged an alliance with Westinghouse to jointly operate four TV stations in exchange for long-term affiliate agreements.

Jordan said that venture allowed his relationship with Tisch "to mature" and led to the Westinghouse bid on Tuesday.

Despite CBS's weakness, Westinghouse is paying a higher price for the network than Disney is for ABC, according to some analysts. The deal values CBS at nearly 14 times cash flow, compared with a multiple of about 11 for Cap Cities, which is the stronger company.

The assumption, however, is that CBS is worth more because its cash flow can only improve if its fall schedule helps ratings. Cap Cities shareholders also are receiving shares of Disney, which analysts say should pay off over time.

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