CBS Inc. today announced a plan to buy back $954.8 million of its stock -- a maneuver designed to block Atlanta broadcaster Ted Turner's hostile takeover bid for the company.
The company said it will offer $150 a share, made up of $40 in cash and $110 in notes, for 21 percent of its outstanding common stock. CBS also said the recapitalization will include the sale of $300 million of the company's assets within a year, a $20 million reduction of annual corporate overhead expenses by 1987 and the private sale of $123 million of a new issue of preferred stock to five corporations.
The CBS plan includes several provisions that block Turner's current bid for the company by restricting the amount of debt it can have on its balance sheet. CBS said this this would block Turner's highly leveraged offer. The debt restrictions are contained in the agreement with the five corporations for the sale of the new issue of preferred stock.
In addition, since the CBS stock buyback will increase the company's debt initially to $1.3 billion, it derails Turner's leveraged offer by using up some of the company's excess borrowing capacity. In a leveraged bid, an acquirer uses borrowed funds to acquire a company anticipating repaying those funds from the acquired company's assets and earnings.
Unless Turner is able to carry out a successful legal challenge to the plan, he ultimately will be forced either to sweeten his offer by including cash, drop the bid altogether or scrap the current effort and try to gain control through a proxy fight at next year's annual meeting.
Instead of cash, Turner's current bid offers CBS stockholders a complex package of securities, including high-yielding junk bonds, in exchange for their stock.
Wall Street analysts have estimated that Turner's bid is worth about $150 a share. He has said he will not purchase any CBS shares until he receives approval from the Federal Communications Commission, which is not expected before this fall. Sources close to Turner said that if he sweetens his offer, the revised bid will probably not be made until after he clears the FCC.
CBS Chairman Thomas H. Wyman appeared before more than 100 analysts in one of the company's studios here today to explain the stock buyback.
"We are not going to produce one more soap opera here today," Wyman said. " . . . This is obviously a historic day for CBS. The offer is very simple and very straightforward.
"The purpose is to provide CBS shareholders with the opportunity to receive a considerable premium over recent market prices of CBS shares for a significant portion of their shares 21 percent while retaining a substantial equity investment in the company. Our board of directors has approved this offer unanimously and has recommended that shareholders tender all their shares to CBS pursuant to this offer."
Wyman said the source of funds for the cash portion of the offer will be about $123 million from the private placement of preferred stock and about $137 million in short-term borrowing. Morgan Stanley & Co., the CBS investment banker, has advised the CBS board that, in its opinion, the CBS offer is a clearly preferable financial alternative to the proposed Turner offer.
The five companies that have agreed to buy the new issue of stock are Prudential Insurance Co., Raytheon Financial Corp., Northwestern Mutual Life Insurance Co., American General Corp. and American International Group Inc.
Since terms of the preferred stock placed with these companies say that CBS cannot increase its debt-to-overall-capital ratio beyond 0.75 (the company's total debt may not equal more than three-quarters of its total capital), these companies can be viewed as friendly partners who are helping CBS fight Turner's bid or any other highly leveraged bid for the company that does not have the approval of the company's directors. A highly leveraged bid that has the support of the company's directors could still succeed since the board has the right, under the plan announced today, to suspend the restriction on debt.
Turner's investment banker, E. F. Hutton merger department head Dan Good, said the CBS plan is a management entrenchment device designed to take away the right of the company's shareholders to vote on Turner's proposal in order to preserve current management.
He said the overall value to CBS stockholders is about $120 a share, noting that the CBS stock price closed today at $118 5/8, up 1 1/8. He said the economic terms of the stock buyback are not a "show stopper" for Turner, given the superior value of his bid, and said Turner is seeking a temporary restraining order in an Atlanta court to block the "entrenchment aspects" of the proposal.
"This most recent action by CBS finally acknowledges that inherent values in the company exceed the recent market price for CBS shares, and that shareholders are entitled to realize some of that value," Turner said, in a statement.
"The CBS offer is only for a fifth of the outstanding shares, and carries a signficantly lower face value than our $175 offer," Turner said. "We believe that our offer for all of the outstanding shares is far more attractive to shareholders . . . and therefore we intend to pursue our offer vigorously. The financing arrangements proposed by CBS involve the granting of poison pill, voting and other rights which attempt to have the effect of frustrating the right of CBS shareholders to consider our offer."
Analysts generally responded to the CBS plan by saying it would force Turner to add cash to his bid, if he can raise it.
"The ball is in Turner's court now," said First Boston analyst Rich MacDonald.