CBS Outdoor - Successful IPO Of This CBS Subsidiary

Apr.19.14 | About: Outfront Media, (OUT)

Summary

Leader in billboard advertising.

Parent company CBS is squeezing out as much cash as possible.

Investors are attracted to a generous dividend, yet I have valuation concerns.

CBS Outdoor Americas (CBSO) jumped the IPO bandwagon at the end of March. Shares of one of the largest lessors of advertising display in the US, Canada and Latin America saw a successful debut, followed by solid trading action in the weeks following.

Despite the successful debut I remain cautious as earnings stand to fall significantly in 2014 amidst stretched valuations.

The Public Offering

CBS Outdoor owns many billboard displays, populated in major metropolitan as well as high-traffic locations. As a matter of fact, CBS owns 330,000 displays in the US alone, often located in very prominent locations.

CBS Outdoor sold 20 million shares for $28 apiece, thereby raising $560 million in gross proceeds. These proceeds are earmarked for its shareholders, in this case parent company CBS (NYSE:CBS).

The offering was solid, with bankers and the firm trying to sell shares in a $26-$28 price range ahead of the offering. Solid demand resulted in a pricing at the high end of that range.

Some 17% of the total shares outstanding were offered in the public offering. At Thursday's closing price of $30.42 per share, the firm is valued at $3.7 billion.

The major banks that brought the company public were Goldman Sachs, Bank of America/Merrill Lynch, J.P. Morgan and Morgan Stanley among many others.

Valuation

CBS Outdoor is a daughter company of CBS which following the offering will continue to hold a 83% stake in the business. What is interesting to shareholders is that the new company aims to become a REIT later this year as it owns over 75% of its assets in real estate, allowing it to forfeit corporate income taxes as long as it pays out fat dividend checks to investors.

Revenues for the year of 2013 came in at $1.29 billion which is up by merely 0.7%. Earnings did manage to increase by 26.5% towards $143.5 million. What is important to know is that CBS Outdoor took on $1.6 billion debt earlier in 2014 to satisfy its parent company which used the proceeds to repurchase shares. Accounting for the interest payments which are due on these loans, net earnings in 2013 would decrease towards $88 million.

The vast majority of the IPO proceeds are transferred towards CBS as well. CBS Outdoor holds $30 million in cash but is able to retain another $150 million in an agreement with CBS. Of course $1.6 billion in debt remains for a net debt position of roughly $1.4 billion.

The $3.7 billion equity valuation values the business at 2.6 times annual revenues and 26 times earnings for 2013. This price-earnings ratio will undoubtedly increase this year as interest payments make a meaningful dent to the bottom line.

Investment Thesis

As noted above, the offering of CBS Outdoor has been a success as shares were priced some 3.7% above the midpoint of the preliminary offering range. Shares actually continued to gain ground in the weeks following the offering, trading some 12.7% above the midpoint of the IPO range.

CBS Outdoor has an extremely solid position in a diverse market. It holds over 23,000 lease agreements while it has over 20,000 customers resulting in great diversification. While the industry is traditionally boring, new developments will also have an impact to the business. CBS Outdoor has increasingly focused on digital billboards, but these efforts are relatively small in relation to the total outlet inventory as investments in these new billboards are rather expensive.

Of course changing habits by consumers, who are spending more time online and watching their mobile screens, could impact the effectiveness of this traditional form of advertising. Yet, I am most turned off by a high valuation in terms of traditional price-earnings ratio, partially the result of the recent leverage incurred. What is promising is that CBS Outdoor will initiate a $0.37 quarterly dividend, ahead of its ambitions to turn itself into a REIT later this year. This proposed dividend results in a yield which approaches the 5% mark.

Of course, CBS is able to pay a generous yield as the firm generates healthy cash flows. Yet I am not convinced to pick up shares in this offering as payouts are very high, especially under a possible REIT structure, which combined with the leverage leaves investors exposed in an advertising downturn or when industry mechanics might drastically change.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.