CBS Corporation’s Issuer Default Rating is not affected by the announcement that the company is pursuing strategic alternatives for its radio business, according to Fitch Ratings. CBS had approximately $8.5 billion of debt outstanding as of Dec. 31, 2015.
While potential transaction details have not been disclosed, Fitch expects that CBS will structure a transaction in a leverage neutral manner and that the company’s financial policy, namely its commitment to a leverage target of between 2.5x-2.75x, remain unchanged. Fitch anticipates that the majority of proceeds received by CBS in connection with the radio divestiture will be distributed to shareholders and that the company will take steps to reduce debt to maintain leverage in line with Fitch’s 2.75x gross leverage target for the current ratings.
From Fitch’s perspective, the potential divestiture of the radio business is aligned with CBS’ content-centric business strategy, which focuses on more stable and recurring revenue streams and positions the company to reduce its exposure to more volatile advertising revenues. The company’s exposure to advertising revenues declines to 45% pro forma for the divestment of its radio business from approximately 50% during the year ended Dec. 31, 2015.
The anticipated exit from the radio business would enable the company to focus on long-term revenue growth opportunities and de-risk its business model by reducing its exposure to volatile advertising revenues. CBS highlighted its plan to leverage its content-centric strategy to increase revenues by an incremental $3.75 billion through 2020. The company intends to capitalize on its strong content position to drive long-term revenue growth in retransmission and reverse compensation and international distribution while capturing revenue growth opportunities presented by changing media consumption patterns and emerging devices with over-the-top video services, skinny bundles and monetization of time-shifted viewing.
CBS is the second largest operator of radio stations in the U.S. with 117 radio stations, with a majority concentrated in the top 25 largest radio markets. Fitch estimates that CBS’s radio business generated approximately $1.3 billion of revenue during 2015, representing 8.8% of consolidated revenues. Radio segment revenues declined 6% during 2015 reflecting the weak advertising environment, fewer radio stations, and lower political revenues. Fitch believes that secular headwinds will continue to dampen the operating profile within the radio segment. Listenership will remain under moderate secular pressure from competitive alternatives, and Fitch anticipates low- to mid-single-digit annual advertising revenue declines (excluding digital).
Competitive alternatives and new Internet and mobile entrants will reduce time spent listening to terrestrial radio, although the audience reach should not decline substantially. Any decline is expected to be partially offset by modest pricing growth. Advertiser demand will remain, given the large core audience, the medium’s local reach, its targeted nature and low cost.
CBS’s capital structure and credit protection metrics remain stable and within Fitch’s expectations for the current rating. However, CBS’s leverage target diminishes the capacity and financial flexibility the company has at the current rating level from Fitch’s perspective. However, Fitch expects that CBS will continue investing in its core businesses and growth initiatives and support shareholder returns within the context of managing to its leverage target. Fitch calculates consolidated gross leverage at 2.6x as of the latest 12 months (LTM) ended Dec. 31, 2015.
CBS’s ongoing investment in content and programming holds the highest priority in terms of capital allocation. Share repurchases continue to be the centerpiece of CBS’s capital allocation strategy and the primary tool the company will use to achieve its leverage target. Shareholder returns that exceed free cash flow (FCF) generation are incorporated into the current ratings to the extent that leverage remains below Fitch’s 2.75x total leverage threshold.
Positive rating action would likely coincide with CBS adopting a more conservative financial policy highlighted by a gross leverage target of 2.25x or lower. Moreover, Fitch needs to observe meaningful progress in CBS’s efforts to transform its revenue mix and reduce its reliance on cyclical advertising revenues. Meanwhile, CBS will need to demonstrate that its operating profile can sustain itself amid ongoing competitive pressures, changing media consumption patterns and evolving technology platforms.
Negative rating actions are more likely to coincide with discretionary actions of CBS management including, but not limited to, the company adopting a more aggressive financial strategy which increases leverage beyond 3x or event-driven merger and acquisition activity that drives leverage beyond 3.5x in the absence of a creditable deleveraging plan.
Additionally, negative rating actions could result should Fitch begin to observe a negative impact from alternative content distribution platforms and other forms of entertainment that is significantly larger than our expectations. Other negative triggers include a weakening of the company’s television studio’s ability to produce desired television content, or secure programming on its television networks that consistently delivers viewing audience and related advertising revenues.