KEY RATING DRIVERS
--The business risks inherent in CBS' operating profile along with Fitch's expectation that the company will maintain a conservative financial policy strongly position the company's credit profile within the current rating category.
--CBS' capital allocation strategy that continues to favor shareholder returns is incorporated into the ratings.
--Growing content licensing and distribution, affiliate and subscription revenues are improving CBS' revenue mix and are in line with the company's long-term objective to increase non-advertising revenue sources to 50% of total revenues.
CBS' credit profile is strongly positioned within its ratings category providing the company with a material level of financial flexibility. In the absence of a formal leverage target, Fitch expects the company to maintain its rational approach to managing its leverage and to retain its conservative financial policy in the context of capital allocation strategy and participating in merger and acquisition activity.
Consolidated leverage increased to 2x as of the LTM period ended
Share repurchases continue to be the centerpiece of CBS' capital allocation strategy. With annual free cash flow (defined as cash flow from operations less capital expenditures and dividends) expected to range between
From Fitch's view, the pending separation of CBS Outdoor Americas and related transactions are in line with CBS' overall strategy to become a content centric business, grow non-advertising revenues and create a revenue base that is more stable and recurring. The contemplated transactions will reduce CBS' exposure to cyclical advertising revenues. Fitch believes that CBS' revenues generated from advertising will reduce to approximately 54% following completion of the transactions from 58% as of year-end 2013.
Fitch believes that CBS has sufficient capacity within the current ratings to accommodate a modest increase in its leverage expected from the anticipated separation of CBS Outdoor Americas. Fitch estimates that CBS has received approximately
Retransmission consent and reverse compensation revenues are among CBS' fastest growing revenue streams. Retransmission and reverse compensation revenues provide a stable and recurring element to CBS' revenue base which mitigates some of the volatility associated with advertising revenues. Additionally the high margin characteristic of these revenues will strengthen the company's operating profile. CBS aims to close the pricing gap between its current retransmission rate charged to MVPDs and the rates charged by other leading cable networks as CBS believes the current retransmission rates do not accurately reflect the relative value of the content broadcast by the network. To that end CBS expects its retransmission consent / reverse compensation revenue will grow to
CBS' ratings reflect the strong competitive position of the CBS television network and studio as well as largely stable demand for CBS' various advertising platforms. The broadcast network, owing to its ratings strength, is well positioned to capture large viewing audiences amid an increasingly fractured media landscape. Fitch believes that demand for the television studio's content remains strong across all major end markets.
CBS' position as a leading television broadcast network and owner of an impressive inventory of content provides the company strategic options that would likely mitigate potential negative implications of an
Fitch's ratings for CBS continue to be supported by a strong television and radio station presence in the top 25 U.S. markets, leading positions in first-run syndication, a robust library and pipeline of off-network syndicated programming and an increasing portion of carriage and re-transmission revenues. Re-transmission fees, and increasingly, reverse network compensation, remain a small portion of overall revenues but will make an increasingly meaningful contribution to operating profits, as they are stable, recurring and high incremental margins.
Rating concerns include an above average exposure to cyclical advertising revenue and the company's capacity to adapt to ever-changing media consumption patterns and technology platforms. Additional concerns center on the company's ability to balance escalating programming expense and production costs with the requirement to consistently deliver programing that drive incremental share of an increasingly fragmented viewing audience while maintaining or expanding operating margins.
Fitch continues to believe that CBS is well positioned to address the secular threats and opportunities presented by emerging alternative distribution platforms and continued audience fragmentation across the media and entertainment landscape. The emergence of alternative methods for the distribution, storage and consumption of content, attributable in large part to technology advances, has driven changes in consumer behavior presenting both risks and opportunities to CBS and other large media companies. CBS'
Fitch also believes that large, well-capitalized content providers, such as CBS, will remain crucial to the industry. Fitch expects CBS will continue to distribute its owned content rationally and with the goal of maximizing its long-term profitability and franchise value. Further, in Fitch's opinion the proliferation of new distribution platforms and methods of consumption (smartphones, tablets) will continue to create new demand windows for CBS' content that Fitch believes are recurring and have growth potential.
CBS' liquidity position is strong and supported by
Positive rating action would likely coincide with CBS adopting a more conservative financial policy highlighted with a gross leverage target of 2.25x or lower. 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 discretional actions of CBS management including, but not limited to, the company adopting a more aggressive financial strategy or event driven merger and acquisition activity, that drive leverage beyond 3.5x in the absence of a credible de-leveraging 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 Fitch's expectations or a weakening of the company's television studio's ability to produce desired television content, or secure programming on its television networks that consistently deliver viewing audience and related advertising revenues.
Total debt at
Fitch has affirmed the following ratings with a Stable Outlook:
CBS Corporation (CBS)
--Long-term IDR at 'BBB';
--Senior unsecured at 'BBB';
--Short-term IDR at 'F2';
--Commercial Paper at 'F2'.
--Long-term IDR at 'BBB';
--Senior unsecured at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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