CBS Plans to Split Radio, TV Businesses

In an effort to improve its stock price and tap into the rich values on Wall Street for radio assets, CBS Corp. plans to form a new company for its radio and billboard operations and sell 20% of it to the public.

The proposal, which is part of a broad restructuring that would include staff reductions, was praised on Wall Street as an astute financial move to protect CBS’ highly profitable radio group, the nation’s largest, from troubles at the television network, which some analysts have estimated will lose $100 million or more next year.

Stock offerings are becoming a trend among diversified media companies looking to unlock the value of assets buried within their walls. News Corp. is selling 20% of its Fox television and studio operations to the public, while Barry Diller’s USA Networks plans to spin off its Internet assets this year. Viacom is expected to sell 20% of its recovering Blockbuster Video unit in 1999.

Under the plan announced Thursday, which is expected to raise roughly $1.5 billion by year-end, CBS will retain an 80% ownership stake in the new radio company, which will be called Infinity Broadcasting. CBS is reviving the name of the radio group it bought early last year from Mel Karmazin, who became the company’s largest shareholder as a result of the sale and is now its president and chief operating officer.

In addition to his role at the parent company, Karmazin will be chairman and chief executive of the new Infinity, which is expected to generate $1 billion in cash flow in 1999 from 155 radio stations across the country. That is more than half of all of CBS’ cash flow.

“The two main reasons for this transaction are to unleash the value of radio and to create an acquisition currency that would be valued better than our peers,” said Karmazin, who has been frustrated that CBS shares have been trading at multiples below many of its radio peers due to troubles at the network.

Wall Street applauded the plan. While the stock market took a drubbing, CBS shares rose $2.06 on the New York Stock Exchange to close at $29.25. It was the biggest gainer among stocks in the Standard & Poor’s 500 index.

CBS stock has dropped 30% year-to-date on worries about losses at the network, which, starting this fall, will be paying an unprecedented price for a contract with the National Football League in an effort to attract the younger viewers for which Madison Avenue pays a premium.

While radio stocks typically trade at 20 to 22 times cash flow, CBS is valued at a multiple of cash flow in the mid-teens. In a presentation to analysts Thursday, Chief Financial Officer Fred Reynolds said that CBS’ current market value of just less than $20 billion does not even reflect the true value of the radio group alone. He said the television group, along with the company’s two country-music cable TV channels, is worth an additional $10 billion.

In addition to realizing the value of the radio segment, Karmazin said the transaction should help “clear up all the speculation” in recent months that he would sell the network to a company such as Viacom or Time Warner. “Make no mistake,” Karmazin told analysts, “the CBS-TV network is my favorite asset.”

Karmazin reiterated promises that the network would be profitable in 1999, but admitted that a massive cost-cutting effort would be necessary to achieve that goal. He declined to specify how many employees would be let go, but said the company would take a charge of up to $70 million to cover severance packages in the third quarter.

Analysts said savings of $90 million more would come from reductions in programming budgets. As an example, Karmazin mentioned that the network would no longer be buying expensive programs such as “Cybill,” “Murphy Brown” and “Family Matters.”

Karmazin added that he would use the new radio stock to further his expansion, with analysts mentioning Jacor Communications, the nation’s third-largest radio group, as the most likely acquisition target. Chancellor Media Corp. and CBS have both been rumored to be interested in purchasing the company, which is controlled by real estate mogul Sam Zell, and analysts say CBS has been unwilling to use undervalued stock to make the purchase.

While the new Infinity may well have its sights on Jacor, some observers speculate that Karmazin instead may use Westwood One, a company in which CBS owns a 25% stake, as the acquisition vehicle to sidestep potential antitrust problems. Karmazin is president and chief executive of the Los Angeles-based radio network.