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Announcement:

Moody's says CBS's announcement to dispose its radio business is credit negative but will not impact credit ratings

16 Mar 2016

New York, March 16, 2016 -- Moody's Investors Service said that CBS Corporation's ("CBS") plan to explore strategic options to separate its radio broadcasting business is credit negative but will not impact its Baa2 senior unsecured long-term debt rating, Prime-2 commercial paper rating or the stable outlook due to the company's intermediate-term revenue growth opportunities and continued commitment to its 2.75x reported leverage target. Yesterday, CBS's Chairman and CEO, Mr. Leslie Moonves, announced at the company's investor day that management will begin to explore strategic opportunities for the radio business as part of its efforts to reduce footprint in the radio broadcasting industry.

According to Moody's, disposition of a revenue and cash flow generating asset will result in a higher risk credit profile due to reduced scale of businesses and bondholders will lose added protection from a valuable asset and earnings streams. Although details regarding the divestiture and use of proceeds is still unclear at this time, we anticipate that CBS will use most if not all of the proceeds to return capital to its shareholders, while continuing to maintain debt-to-EBITDA at or below its stated leverage target of 2.75x (approximately 3.1x with Moody's standard adjustments). To maintain that target, it is possible that some of the proceeds could be used to reduce indebtedness. Absent any debt reduction, the loss of EBITDA from the radio business will result in an uptick in leverage in the short-term, but based on the company's upbeat guidance for top-line growth over the next five years, we expect that growth in EBITDA from its other business segments will offset the absence of earnings from radio, such that Moody's adjusted leverage is sustained below the 3.25x downgrade threshold. The company expects to generate incremental revenues of $3.75 billion from its four growth pillars (retransmission fees/reverse comp, international syndication, OTT and skinny bundle/delayed viewing monetization) by 2020. These revenues are typically highly remunerative with solid margins that largely go to the bottom line. Notably, even if the company is successful in generating half of the expected incremental revenues from its four growth pillars and assuming an EBITDA margin of 22% (CBS's consolidated reported EBITDA margin for 2015) on these revenues, we estimate it will generate incremental EBITDA of roughly $400 million or close to half of the $844 million of reported EBITDA achieved by the Local Broadcasting segment in 2015. This is the segment which includes both the broadcast television and radio stations owned by CBS. Accordingly, we think that growth from new opportunities and ability to leverage its premium content across multiple and emerging distribution platforms, both domestically and internationally, will allow CBS to offset for the loss of scale and earnings from its radio asset.

Exposure to advertising spending is one of the key rating drivers which we take into consideration while evaluating credit risk profiles of companies in the media and entertainment sector. Local broadcasting accounts for 19% and 28% of the company's revenues and reported EBITDA and is highly dependent on cyclical advertising revenues and vulnerable to economic downturns. Hence, a divestiture of the radio business will result in a decline in the company's exposure to advertising from the current level of 50% to 45%. We believe that local advertising from broadcast television and radio stations is hyper cyclical during consumer led economic contractions that disproportionately impact smaller businesses heavily, and which take much longer to recover. According to the company, assuming CBS meets its target of $3.75 billion in incremental revenues from new growth drivers, advertising spending revenue will further come down to around 40% by 2020. As we have stated in numerous publications, one of the key constraints weighing on CBS's credit profile is its exposure to cyclical revenue streams such as advertising, which has historically exceeded that of its peers by a wide margin. Moody's recognizes steps taken by management to increase revenue from stable sources, improve margins and reduce volatility in earnings. CBS has made notable progress in closing the gap with its peers on exposure to advertising spending, which accounted for over 70% of its revenues in 2007. CBS's advertising revenues of 45% (excluding radio) is still high compared to the diversified media peer group average (for 2015) of 22%. With the disposition of its radio business and increase in contractual revenues, we believe the company will continue to narrow the gap on advertising revenues, which should allow the company greater financial flexibility within its current credit ratings. Moody's cautions, however, that underperformance at the company's other businesses, specifically the CBS Network, that results in lower than expected growth in affiliate fees, subscriptions and content licensing revenues, will necessitate a reduction in absolute debt levels in order to offset the negative credit implications from radio's divestiture. Moody's will continue to monitor developments and comment further as management makes progress in its evaluation of strategic alternatives for its radio broadcasting business.

CBS Corporation, with its headquarters in New York, is among the world's largest media companies with revenues from four business segments: Entertainment, Cable Networks, Publishing and Local Broadcasting. Revenues for 2015 approximated $13.9 billion.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Neil Begley
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
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Moody's says CBS's announcement to dispose its radio business is credit negative but will not impact credit ratings
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