CBS Corp.'s Deal for Australian Network Is Company's "First Meaningful" Int'l Acquisition, Analyst Says

THR 100 List 2017 - Leslie Moonves - Publicity-H 2017
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Wall Street observers chime in on what the planned takeover means for the company led by Leslie Moonves.

CBS Corp. surprised many on Wall Street when it unveiled a deal late Sunday U.S. time to acquire troubled Australian free-to-air broadcaster Network Ten.

The transaction, for which financial terms weren't disclosed, will give it control over Ten’s main network, its two digital terrestrial channels Eleven and One and catch-up TV streaming service Tenplay

RBC Capital Markets analyst Steven Cahall in a report said the deal made sense, as CBS is already very familiar with Ten's business. "CBS supplies content to Ten and is its largest unsecured creditor," he wrote. "CBS also owns a 33 percent stake in Ten's digital channel, Eleven."

Explaining the benefits of the acquisition, he wrote: "The deal is expected to boost CBS' international distribution footprint while also giving it a platform to roll out All Access in Australia."

Moody’s analyst Neil Begley, in a report about CBS Corp.'s continued development of new revenue streams, highlighted that it has become less dependent on advertising revenue in recent years, but the Ten deal will slightly boost the percentage of revenue it gets from advertising.

"During the last 17 years, CBS hit its peak exposure in 2006, when 72 percent of its revenues came from advertising. To put that number into perspective, over the 12 months ended June 30, only 44 percent of total revenue came from hyper-cyclical advertising sales, pro forma for the recent proposed acquisition of Network Ten." Analysts estimated the deal would boost advertising to 45 percent of CBS Corp.'s total revenue.

About the Ten deal, Begley said: "CBS's addition of Network Ten in Australia is credit positive as it will bolster the company's international diversity and distribution and is a good use of cash, though it adds back a modest amount of advertising cyclicality to its mix."

FBR & Co. analyst Barton Crockett wrote that "CBS surprised us this weekend by announcing a deal to buy one of Australia's three main broadcast networks in a transaction that represents CBS' first meaningful international acquisition that we can recall." He concluded: "Our checks suggest a deal that is modest in size but interesting." 

He said that checks with finance and industry sources suggest an Australian report that CBS is buying Ten by repaying $123 million of debt "is about right."

Ten's loss before interest, taxes, depreciation and amortization (EBITDA) for the last 12 months amounted to about $11 million on revenue of $516 million, the analyst said. "CBS believes EBITDA can be improved to an attractive acquisition multiple by more efficient spending on programming," Crockett argued. "We give CBS the benefit of the doubt on this given its skill at programming in the U.S. and the fact that this is an English-speaking market where CBS already sells a lot of its content."

How big an opportunity is CBS' planned launch of CBS All Access in Australia? "Ten could be a big help for CBS All Access in Australia as a source of local promotion for All Access, local content and ad sales staff," Crockett said. "But Australia, with a population of 24 million, is a fraction of the market opportunity in the U.S., which has a population of 323 million."

Concluded the analyst: "So, if CBS All Access in the U.S. can top 4 million subs by 2020 (CBS' readily attainable goal), then Australia probably has an opportunity that is maybe 5 percent of that, or about 200,000 subs, or $20 million or so in annualized revenues."