Company Town : Network of Woes : Westinghouse Has Hands Full With Deteriorating CBS

It’s hard to imagine any shareholder of CBS Inc. voting against the sale of the television network to Westinghouse Electric Corp. at a special meeting Thursday.

At more than $81 a share and a total of $5.4 billion--a 25% premium above the stock value before the bid--the offer is sweet. And it looks even sweeter today than when it was made in August.

CBS, already a distant third in the ratings, has fallen further behind ABC and NBC in the new fall television season, making investors and analysts even more dubious about Westinghouse’s ability to pull the network out of its pall without being buried under a pile of debt itself.

“CBS is imploding,” said one shareholder. “The ratings are much worse than when Westinghouse bought it.”

The investor predicted that Westinghouse’s stock, which has fallen steadily from the $30 range in 1990 and closed at $15.50 on Monday, would stumble into the single digits.

When Westinghouse bid for CBS in August, some analysts expected a higher bid to emerge from another entertainment company. But none came forward, underscoring a spreading conviction that advertising revenues have hit their peak are headed downward.

It appears almost certain that the deal will be completed, probably within weeks, as the Federal Communications Commission is expected to approve the transfer of station ownership.

In the meantime, Westinghouse has remained silent as CBS’ problems have worsened, giving few hints about how the company will make the network more competitive and more profitable.

A high-level CBS source said Westinghouse was well aware of the precarious state of the network when it made its bid in August. And analysts say the industrial giant is counting on tax credits of $3 billion to shelter income--and that asset sales of non-core businesses such as nuclear power generation and electronics systems could generate $3 billion, if necessary, to cushion its debt of $7.5 billion after the purchase.

Still, some of the skepticism in the market stems from Westinghouse’s own troubled history (it lost billions from bad real estate investments), its scattered focus and a broadcast orientation that could backfire with CBS.

Many broadcast executives and analysts believe the Pittsburgh-based industrial company will rely on cost-cutting formulas that helped improve its own TV and radio stations in the past four years. But as one rival station owner said, referring to the current chairman of CBS, Laurence Tisch: “Tisch already cut costs to the bone, so I don’t know what Westinghouse brings to the party. What was the last hit show that came out of Group W? And what happens when advertising contracts?”

Historically, network ratings have run in cycles, with those at the bottom regaining a top share and those at the top slipping. A mega-hit, by this logic, could help reverse CBS’ slide, just as “Seinfeld” lifted NBC from the dead and ABC knocked CBS off its pedestal last season.

The network won kudos this summer for hiring Leslie Moonves as president of CBS Entertainment, its programming arm, to cook up hits. As the head of Warner Bros. Television, Moonves sold a record number of new shows to the networks.

“Les is intelligent and as competitive a broadcaster as anyone,” said Don Ohlmeyer, president of NBC West Coast. “If anyone can turn it around, he can.”

But some analysts and industry executives wonder whether CBS has a comeback left. “Last time CBS went from third to first, ’60 Minutes’ was a top 10 show, ‘Murphy Brown’ was still in its prime, and they had the NFL, baseball and the Olympics,” said one network executive. “They have none of those today, and they are now on weaker stations in some markets.”

The loss to Fox over the last year of a group of longstanding affiliates hurt CBS ratings, particularly in markets such as Atlanta, Detroit, Cleveland and Milwaukee, where the network now airs on weaker UHF channels at the far reaches of the dial. In some markets, CBS shows reach half the viewers.

And the prospects of trading up has been narrowed as competitors have signed long-term agreements with affiliates and start-up networks have locked up the strongest remaining independent stations.

Another obstacle for CBS is the lack of existing hits or sporting events from which to promote its shows. At CBS, the only winning night is Saturday, although the people who tune in are older viewers, not the younger audiences CBS has targeted this year and that advertisers crave.

Perhaps the best illustration of the effects of the network’s prime-time weakness is the erosion in viewership of its late-night show hosted by David Letterman, which held a healthy lead over NBC’s Jay Leno show until this year. With fewer viewers watching CBS during prime time--and hearing promotions for his guests that night--Letterman’s ratings have fallen 25% from last year.

Another hidden side effect of weak viewership: on-air promotions, which can account for hundreds of millions of dollars in advertising time, fall on deaf ears.

Westinghouse’s plan to turn CBS around has not been detailed publicly, adding to the speculation and uncertainty. Michael H. Jordan, the chairman of Westinghouse, has declined to speak to the media since making the bid for CBS. In conversations with CBS employees and the network’s 200 or so affiliates, he has “done more listening than talking,” according to one source. But he has given some top CBS hands assurances that Westinghouse is prepared to make the necessary investments in programming, as well as in alternative forms of distribution, such as cable and new media, that CBS, alone among the networks, has ignored.

Known for his cautious and deliberate style, Jordan, a former management consultant, has said he is waiting for the government’s blessing to announce plans.

The silence has been particularly disconcerting for top managers at CBS, who are nervous about losing their jobs because of the overlap with Westinghouse in corporate management and the radio and TV stations groups. Nancy Widmann, president of CBS Radio, and Johnathan Rodgers, president of the CBS Television Stations group, are likely casualties, according to CBS sources. Eric Ober, the head of CBS News, could also leave because of the weakness of the network’s news and previous friction with Group W affiliate stations.

The biggest management question, however, is how Jordan will reward broadcast chief Willard Korn, the architect of the acquisition, without alienating Peter Lund, the CBS president who enjoys strong relations with affiliates. When the deal goes through, Lund stands to make more than $3 million in cash and stock options. But CBS sources say he is now negotiating a contract with the new owners and is interested in staying--although he is unlikely to report to Korn and is pushing keep the stations and the network under one reporting structure as it is now.

Sources believe that the combined television station group, which will number 15 and reach 33% of the nation’s viewers, more than any other company, will be consolidated under Korn. During his four years as head of Group W, profit margins at the stations have improved dramatically, from the mid-30% range to 45%.

Whether Korn will report to Lund is unclear. And some CBS sources said Jordan, at a recent meeting in Florida, was even ambiguous in responding to affiliates looking for assurances that Lund would stay.

“We are all frustrated that we are this close to the deed and all these things are unclear,” said the source.