Stephen’s Posterous

A Los Angeles Times Blog reported that Sumner Redstone and his privately held company, National Amusements Inc., has negotiated its debt restructuring.

However, it was revealed in a regulatory filing on May 5, 2009, that both Viacom and CBS are used to secure Mr. Redstone's $1.46 billion in debt. Mark your calendar as the debt must be repaid by December 31, 2010. National Amusements is still working on selling its 1,500 plus movie theaters, but this may not be enough to retire the debt.

If Viacom and CBS stock rise in value, Mr. Redstone will be in a better position to pay off his debt rather than liquadate is entire holdings.

On May 1, 2009, the Wall Street Journal said that Viacom reported a 34% slide in their first-quarter net income to $177 million as it's cable-television advertising sales took a hit. It counts on advtertising for 30% of its annual revenues.

International home entertainment revenue dropped 26% or $60 million leading the company to warn in an SEC filing that this weak market may continue through 2009 and affect its home entertainment revenue. The article pointed out that Viacom stated that it is seeing signs of stabilization in the current market after a sharp decline in the first quarter.

On May 6, 2009, Viacom was trading between $21.93 and $22.80. The 52-week high is $40.26, and the 52-week low is $13.00. CBS was trading between $7.35 and $7.92 with a 52-week high of $25.00 and a 52-week low of $3.06.

When Liberty Media executives joke, the markets roar. So appeared to be the case on April 17, 2009, when CBS stock soared 20%. The big rise undoubtedly was influenced by hopes about an ad rebound, which likely accounted for the lift in all big media stocks the week of April 13. But the surge on April 17, in CBS may have received an extra kick from a jesting comment made by Liberty CEO Greg Maffei at an investor meeting April 16.

Asked what Liberty might do as an encore to its well-received investment in Sirius XM Radio, Mr. Maffei joked that Liberty might buy Sumner Redstone's controlling stake in CBS, sell off its broadcast-TV stations and turn the CBS broadcast network into a cable network.

Even if he was serious, such a plan has certain impracticalities. Mr. Redstone has ruled out selling. And unwinding the stations' affiliation agreements with the network couldn't be done overnight. Even so, it's a good bet anyone who had sold CBS short didn't appreciate Mr. Maffei's humor. Source.

The analysts said they hadn't heard of any fundamental news pushing up shares of CBS Corp, but some pinned the double-digit percentage gains on hopes that the broadcast-advertising market may have reached a bottom.  The hopes were based on comments about the advertising market by Gannett Co. Inc. (GCI) and Media General Inc. (MEG) during recent conference calls, which analysts characterized as less pessimistic than in recent quarters.

"Although lower, our advertising category stabilized over the course of the quarter, both here and in the U.K.," Gannett Chairman and CEO Craig Dubow said on a call Thursday, according to a transcript provided by FactSet Research. Media General, meanwhile, said on a conference call, according to a transcript provided by FactSet, that it has seen some stabilization in its revenue forecast in the last two to three weeks, which could reflect better consumer confidence.

Still, Gannett, the largest U.S. newspaper publisher, said on April 16, that its first-quarter profit plummeted 60% because of further declines in classified and other advertising at its newspapers and television stations.And early on April 17, Media General said its first-quarter loss widened slightly from the year-earlier quarter on costs related to job cuts and other special items, as well as steep declines in advertising revenue at its newspapers and television stations.

Despite the gains, CBS stock is still far below the 52-week high it set last May of $25. CBS' gains Friday outpaced those posted by other media companies, including Gannett, which rose 7.8% to $3.88, and New York Times Co. (NYT), which surged 13% to $6.69. Meanwhile, Media General was recently down 13% to $2.58.

Analysts say CBS is the media sector's most-heavily exposed company to the advertising market, and as a result, its shares have fallen more than its peers in the last year.

Source.

Caris & Co. is upgrading shares of CBS (ticker: CBS) from Average to Above Average, not only because the stock has fallen materially away from our price target, but because at current levels, the equity is reflecting a free call option on a future advertising recovery.

Stated simply, and based on a slightly revised sum/parts analysis, Caris & Co. believes CBS' equity now reflects terminal value for Showtime only. All other assets, the syndication business, the interactive business, and the Outdoor business, plus old media assets like spot TV and Radio, investors now have the chance to own for free.

To review, Caris & Co. downgraded CBS to a Below Average rating last October when overall business conditions at the time made it completely apparent that CBS was not going to make its fiscal 2008 guidance. Upon slashing its dividend 81% in tandem with its fiscal fourth-quarter earnings just four weeks ago, Caris & Co. upgraded CBS to an Average rating for the simple reason that the stock had achieved our price target of $5 and was fairly valued.

Now, with the stock at $3.83, deep-value investors have the opportunity to pick up a liquid media name with an equity value reflecting only the Showtime asset, which continues to grow its sub-base annually in the mid-single-digit range on the afterglow of a string of hits, which include Weeds, Dexter, The Tudors and Californication. Amazingly, Californication is commanding $1 million per episode in foreign syndication.

The easy rebuttal to the argument will be that the majority of CBS' ad-supported business are under secular siege. That's true for CBS' TV station and Radio station businesses, but is certainly not true for Outdoor, which is not going away, and Interactive, the latter of which grew revenue 218% in the fiscal fourth quarter. Suffice it to say, with Showtime now worth $3.88 per share in the latest iteration of our sum-of-the-parts analysis, the market is valuing all other assets effectively at zero, which Caris & Co. believes is near-term inefficient.

In tandem with still tough overall macro conditions, Caris & Co.has been steadily ratcheting fiscal 2009 projections down throughout the bottom half of 2008, and into fiscal 2009, and are doing so yet again today, though this time due to foreign-exchange adjustments as a result of CBS' Outdoor advertising exposure to the London Tube [subway system].

Caris & Co.'s fiscal 2009 revenue estimate moves from $13.2 billion to $13.1 billion, and as a result, Caris & Co.'s fiscal 2009 earnings-per-share estimate moves from $1.00 to 90 cents. Consensus at this point is 85 cents with a range on the Thomson Reuters grid between 69 cents and $1.10.

Caris & Co.'s 12-month price target of $5 continues to be supported by a target enterprise value/earnings before interest, taxes, depreciation and amortization [Ebitda] multiple of five times, but also an updated sum-of-the-parts analysis, which supports $5 in value, with Showtime worth $3.88 out of the $5. In addition, given management's recent cost-cutting announcements, we now have CBS trading at a levered free-cash-flow yield of 9.06%, a full 650 basis points ahead of 10-year Treasuries.

The moniker of CBS being the "most-watched" network is no lie. In terms of total viewers, CBS is the most-watched English-language broadcast network of the six currently measured by Nielsen, providing viewers with some of the nation's highest-quality entertainment, news and sports programming.

Popular shows include CSI: Crime Scene Investigation, CSI: Miami, CSI: NY, NCIS, Cold Case, Two and a Half Men, Survivor, The Late Show with David Letterman, 60 Minutes and the AFC Football package.

CBS takes an efficient game-theory approach to prime-time programming, meaning a balanced mix of company-owned shows, e.g., CSI, licensed shows, e.g., Two and a Half Men, and shows that are sold to other networks, e.g., Medium. Placing too many company-owned shows on a prime-time schedule can be very risky and can amount to substantial losses if the shows are canceled.

While bears on CBS will argue that CBS' prime-time schedule is sound, its daytime schedule is suffering in the ratings. That said, 50% of revenue within the core TV business is derived from prime time, 8pm-11pm. The balance is split evenly between daytime and "early fringe," 5pm-8pm.

Unlike its peers such as Disney (DIS), News Corp. (NWSA), Time Warner (TWX) and Viacom (VIAB), CBS derives substantial revenue and cash flow from an envious asset base of Outdoor signage, domestically and internationally. Unless some sort of technology arises that makes automobiles an obsolete technology, the case for the validity of Outdoor advertising is a strong one.

Source.

Feeling unnerved by disappearing dividends? Tobacco stocks might be your fix.

Even long-standing dividend payers are cutting cash distributions to survive the recession. Tumbling stock prices make many dividend yields temptingly high, but also unlikely to last. Dow Chemical cut its payout for the first time in 97 years. CBS had a 20% dividend yield until it slashed the payout last week. General Electric's 13% dividend yield looks wobbly.

But loyal smokers of top-selling cigarettes should let tobacco companies maintain or even raise dividends. The key is choosing companies with strong balance sheets and brands that have maintained market share.

Take Altria Group. The maker of market-leading Marlboro cigarettes offers a dividend yield of 8.3%. It will need to pay $1.28 a share this year to keep the dividend steady, or 75% of expected earnings. In cash terms, that is $2.6 billion, leaving $875 million in free cash flow left over, according to UBS analyst Nik Modi. That residual amount would be enough to meet the $740 million in debt due in 2009.

Altria's capital structure should allow it to keep distributions generous. Even after levering up to acquire smokeless-tobacco maker UST, Altria has $11 billion in net debt, less than two times last year's earnings before interest, taxes, depreciation and amortization. Altria shares trade at 9.0 times this year's earnings, and it has limited capital spending requirements.

Of course, litigation risks linger. That partly explains why Altria's credit rating is at the bottom of the investment-grade spectrum. But the worst of the court battles are probably past. Altria has managed legal battles for many years, but says it has paid just $108 million in claims. That left room to raise dividends regularly.

A higher federal excise tax on cigarettes starting April 1 will hurt tobacco companies. But Altria already is passing part of the cost on to consumers, even as it adjusts relative pricing to reduce the risk of consumers trading down. A pack of Marlboros now costs about 40% more than a generic alternative, compared with a roughly 70% premium a few years ago.

Investors seeking faster growth might consider Lorillard, maker of Newport, a menthol-flavored cigarette. Newport is the second best-selling cigarette in the U.S. behind Marlboro and the only major brand posting sales growth. Lorillard's dividend yield is 6.1% based on last year's earnings, but the company's $1.1 billion net cash position gives extra assurance. Lorillard trades at 11.3 times this year's expected earnings.

The group of tobacco companies within the S&P 500-stock index has outperformed the index every year since 2000, according to Standard and Poor's. Now is no time to call it quits.

Source.

CBS's decision to cut its dividend by 80% is sure to send some income-oriented shareholders sprinting for the exits. It wouldn't be a surprise if Sumner Redstone ends up following them. Admittedly, the CBS chairman has vowed not to sell any more shares. But he can change his mind, particularly if there was a buyer available.

A sale would be the logical follow-up to his decision to split CBS from Viacom in 2005. It is understandable that he didn't sell right away. CBS's dividend surely helped service Mr. Redstone's personal debt.

But now his annual CBS dividend income will drop to $14 million from about $76 million. That could last a while. CBS said Thursday that given the uncertain credit markets, it wants to be able to "self fund" all of its debt maturities between 2010 and 2012, which total $3.2 billion. UBS estimates CBS's free cash flow through 2012 will total only $3.6 billion.

Even when the economy recovers, the secular shift of ad dollars from broadcasting to other media suggests CBS's earnings won't return to their past highs. Of course, it would have made more sense for Mr. Redstone to sell when CBS was trading near $35 in mid-2007, instead of its current price around $5. But if history is any guide, he won't let that stop him.

Consider: Mr. Redstone's Viacom said in late 1999 it wouldn't unload its majority stake in Blockbuster unless the video chain's shares, then trading around $15, rose above $20. Blockbuster shares hit $29 in 2002. But Viacom didn't decide to divest until February 2004, with the shares around $17. Still, he made the right call. Today's price: just over a buck.

Source.

Sumner Redstone, under pressure to restructure his family company's $1.6 billion in debt, said Thursday that "substantial progress" had been made in talks with banks.

"An agreement acceptable to all parties is now within reach," the 85-year-old Redstone said during a conference call to discuss Viacom Inc.'s quarterly earnings.

Leslie Moonves sometimes gives the impression he could see a glass as half full even if it was upside down. But the advertising slump is surely testing even his optimism.

That is why what CBS says about its dividend next week, when it reports earnings, will be significant. A reduction would be an acknowledgment that despite the CBS CEO's frequent upbeat statements, such as his Jan. 6 comment that he felt "much more optimistic" in 2009 than in 2008, CBS wants to preserve cash to meet $1.6 billion of debt obligations due next year.

That the environment demands such action is clear. Just Wednesday, TV station owner Sinclair Broadcast Group said it was suspending its dividend while predicting station revenues will drop more than 20% this quarter. And with CBS shares now trading with an implied dividend yield of 18%, Wall Street is clearly expecting a dividend cut.

The only real question is by how much. Mr. Moonves affirmed as recently as December his intention to "pay a solid dividend for the indefinite future." But in January he also noted, "we will do what's necessary to keep our businesses flowing" and would "look at our free cash flow."

On that basis, eliminating the $725 million dividend payout is probably necessary. Sanford C. Bernstein forecasts CBS's free cash flow will drop to $800 million in 2009 from $1.2 billion in 2008.

A big cut won't help Sumner Redstone, CBS's heavily indebted controlling shareholder, who has received about $88 million in dividends in the past year. But as family shareholders in newspapers have found, long-term health trumps short-term needs.

Source.

It is a not so Happy Thanksgiving for Mr. Redstone as he is looking at selling all of his 1,500 National Amusements cinema chain after receiving some interest from potential buyers. Breakingviews.com reported that publicly-traded Regal Entertainment and Cinemark have an enterprise value equivalent to about $400,000 per theatre screen so National Amusement’s 1,500 screens could be worth about $600 million. Mr. Redstone believes that he can get $1 billion from the sale. He owes $1.6 billion, of  which $800 million matures on December 19, 2008, but the deadline could be extended. Mr. Redstone may have to sell more CBS and Viacom stock. Breakingviews.com said that this is similar to the fate of several cash-strapped Russian oligarchs who leveraged their stock holdings only to lose everything when stock markets crashed. CBS is down 80% and Viacom is done about 67% for 2008. It appears Mr. Redstone may be interested in selling CBS stock, but would prefer not selling Viacom stock. This is a follow-up on a previous post. Source.