CBS' Aussie acquisition offers limited upside but a sturdy hedge, analysts say

Sydney Opera house at night
Australia's TV market is a tiny fraction of that in the U.S., which limits the upside of CBS' acquisition of Ten.

CBS’ plan to acquire Australian broadcast network Ten offers somewhat limited upside, but ample downside protection given that Ten is a buyer of CBS shows that are in financial trouble, Wall Street analysts said.

The deal, announced over the weekend, saw CBS outmaneuver Australian media executives Lachlan Murdoch and Bruce Gordon, whose own bid had been tangled up in regulatory issues. (Murdoch is co-chairman of News Corp.)

In addition to Ten’s linear channel, the deal includes digital terrestrial channel Eleven, of which CBS already owns a 33% stake, as well as Tenplay, Network Ten’s digital streaming service. CBS said it will use Tenplay’s footprint to launch CBS All Access, marking the second international territory it will explore after Canada.

While financial terms were not disclosed by either party, analysts said that the fact CBS is buying Ten out of receivership after years of losses means it likely agreed to repay the company’s $123 million in debt in exchange for its assets. Most assessments emphasized the attractiveness of that price.

The deal is “modest in size but interesting,” wrote FBR & Co. analyst Barton Crockett. “We give CBS the benefit of the doubt on this given its skill at programming in the U.S. and the fact that this is an English-speaking market where CBS already sells a lot of its content.” The digital aspect is more circumscribed, he cautioned, given that Australia’s population of 24 million is tiny compared with the U.S. population of 323 million.

Crockett says if the streaming service is on track to top 4 million subscribers, when combined with Showtime, by 2020 (as CBS predicts), Australia could add about 5% of that, or 200,000, due to Ten’s local promotional muscle. Even that small fraction would be worth roughly $20 million in annual revenue.

RBC Capital Markets analyst Steven Cahall said the deal made sense, as CBS is already very familiar with Ten's business. "CBS supplies content to Ten and is its largest unsecured creditor," he noted in his report. "CBS also owns a 33% stake in Ten's digital channel, Eleven."

Barclays, which has a neutral rating on CBS stock, issued a report noting that not only is Australia a small market (roughly 8.7 million TV households, barely above New York City alone, with 7.2 million) but Ten is the No. 3 network player, with just 20-25% of OTA viewing. “Ten is loss making and is burning cash as a result of weak revenue growth in spite of investing in high-cost content,” the report said. Consequently, “for CBS, this transaction is unlikely to be viewed as a source of any major strategic upside.”

CBS shares, which have been trading in the $62 to $64 range of late, slipped a few cents on the news.