Split of Outdoor Business Will Help CBS Reduce its Reliance on Advertising Sources


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CBS Corporation ( CBS ) is nearing the completion of its outdoor business split. In June, the company announced plans to divest 81% ownership in CBS Outdoor Americas. Last week, the company announced the final exchange ratio of 2.1689 shares in the new company for each Class B share of CBS tendered. This is the final step in the split process of its outdoor business.

We believe that the split of outdoor business is a step in the right direction, as this will take the revenue contribution of non-advertising income to 50% for CBS. This is significant for the content companies as less reliance on advertising income and accelerating growth from non-advertising sources can ensure stable growth outlook in the long run.

CBS' outdoor business generated revenues of $1.3 billion in 2013. The estimated EBITDA margin of 34% for outdoor segment translates into EBITDA of $438 million, representing 10% of CBS' overall EBITDA for 2013. The outdoor segment contributes close to 7% to CBS' value, according to our estimates. We will soon be updating our model to reflect the impact of split.

See our complete analysis for CBS

How Is The Outdoor Business Trending?

CBS Outdoor Americas offers outdoor advertising that includes advertisement via billboards (including digital) as well as advertisements on bus stops, metro stations, buses and cabs. It operates outdoor advertising structures in more than 100 markets in North America. The company's America outdoor revenues have increased slightly from $1.23 billion in 2010 to $1.3 billion in 2013. CBS divested its Europe outdoor business last year for $225 million.

CBS Outdoor Americas was spun off as an independent company in March 2014.  It reported independent results for the first quarter with 3% year-over-year growth in revenues to $288 million. The EBITDA was $76 million, reflecting margins of 26%.

Growth in the Outdoor Industry and What Does the Split Mean for CBS?

The outdoor business derives revenues from advertising, which has been trending well over the past few years. While the overall North America advertising revenues grew by 1.5% in 2013, outdoor media advertising increased by 5% due to growth in digital platform. The outdoor media advertising will grow by 5% in 2014, according to a report by Magna Global. Global outdoor advertising revenues will grow at an average annual rate of 4.7% and reach $40 billion mark by 2018.

CBS currently derives more than 55% of its revenues from advertising income while content licensing, affiliate and subscription fee make up for the rest. The advertising trends are uneven driven by occurrence of political campaigns and sports events. It is thus important for content owners to increase its reliance on more stable source of income such as subscription and affiliate fees. The split with outdoor business will ensure stable growth for CBS in the long run. Moreover, CBS Outdoor Americas will become a real estate investment trust (REIT), which is a popular tool to lower taxes and improve returns for investors. It must be noted that REITs don't pay federal income taxes, they rather distribute minimum of 90% of taxable earnings to shareholders as dividends.

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