CBS Buying CNET For $1.8 Billion; CBS Predicts $1 Billion Interactive Revenues By 2010

CBS will pay $11.50 a share for CNET. The all-cash deal represents a premium of 44% above the $7.95 CNET closed at yesterday. Will it be enough to satisfy JANA et al?

If you take the JANA team's argument at face value, this deal won't satisfy them -- they wanted significant structural and management changes, and from the looks of the release Les Moonves and Quincy Smith are simpling swallowing the existing operation whole. On the other hand, CNET hasn't traded above $10 for years, so the JANA team will be getting a very nice return over a relatively short time, which ought to ease their pain. Update: Based on a couple conversations we've had this morning, we don't expect the JANA group to say anything about this other than "Thank You, Mr. Moonves!"

Does the deal make sense for CBS? There's almost no synergy, operationally or brand-wise (see chart, with typo in headline, at bottom of release), between the two businesses. Despite Quincy's frenzied deal-making and hand-shaking over the last year or so, CBS doesn't have much of a digital platform to date.

But that's as good an argument for making the deal as any -- rather than trying to build your way on to the Web, why not buy it? And if the JANA guys are right, CNET isn't a dying asset -- it's just one that needs to be revitalized

During the conference call announcing the deal (transcript summary below), Les takes pains to praise CNET Neil Ashe as a great exec, and lets his CFO Fred Reynolds lay out the broad financial case for the deal. The gist: They can combine ad platforms and get some other savings to lower costs, and can boost revenue by exposing CNET advertisers to CBS and vice versa. They predict that the combined CBS Interactive/CNET unit will hit $1B in revenue by 2010 (News Corp.'s Fox Interactive will be about $100M shy of that this summer) and will be able to grow top-line in mid to high-teens, which comparable profit growth.

Asked about JANA and other agitating investors, Les didn't answer.

Update 2: Click here to hear Quincy Smith and Neil Ashe explain how and why the deal should work, and why they're not focused on cost-cutting.

Illustration by Andrew Mager via VW.

Call notes: Les Moonves, CBS CFO Fred Reynolds

Les: Reading from statement, most of which is repeated in release below. Will have the most recognizable, premium brands that reach out young demo. We've been extremely disciplinted about how deploy cash flow, and very few opportunities to buy big, profitable online buys.

Can use CNET boost existing businesses, launch new ones. Exposes us to fast-growing business. Can sell CNET brands via CBS sales relationships. Love international opportunities, including CNET's China footprint. People at CNET are a "key part" of what we're buying. Neil Ashe "as good an operator" as there is in the business. Thrilled to have him aboard.

Can be $1B revenue by 2010 and 2011 with nice margins. We'll break out combined CBS Interactive/CNET as a separate unit once deal done.

CFO: Cash tender, 155M shares outstanding. 2% breakup fee to CBS. Paying for the deal with cash in hand. "Quite comfortable" with closing this transaction.

IRR of 13% to CBS as soon as deal closes. "Very affordable" deal - will have "no effect - no effect" on dividend, and no impact on ability to increase dividend. High profits, revenue growth for combined unit in mid-to-high teens for years to come.

Q&A: Will Adjusted Ebitda guidance of 3 to 5% change. And strategy question: How does this correlate with tv/video distribution strategy - or is it a bolt-on?

Les: This absolutely fits with our strategy of having our content everywhere we can. It's about premium content, premium brands, just expanded over a wider universe. Totally a great new distribution system.

CFO: Guidance was for core business

Please talk about ad platforms. How will you integrate? Deal trims debt leverage. Does this mean more acquisitions going forward? Embedding video - doesn't really seem to be a question there.

Les: We have a lot of video. Can add entertainment to TV.com, news to News.com, etc. Re: ad platforms. Different systems in place; we'll take best in class and keep those. The ad platforms will be looked at very carefully.

CFO: We think they have very good yield management, and good ad force, good ad serving. We're good at big events like March Madness. Re: acqusitions - having a deal this size allows us to bolt-on smaller deals, but I don't see anything of this size out there.

Do you think that deal ends proxy contest?

Les: CNET board chair called us last night, he's thrilled.

Please talk more about CBSi/CNET combination and performance. Who's contributing what?

CFO: Won't do pro formas now. But you'll be able to see both CBS and CNET. CNET revs now would grow high single-digits low double, and costs growing low. CBS growing much faster off a much lower base. Mid-teens revenue growth, and certainly that in profit or higher as we stop reinvesting in some of the sites.

CNET's been very disappointing for past few years. What are your strategy for improving CNET revenue growth, margins?

CFO: We think that they have the asssets to do that, they've revamped a number of the sites. Combining with us is good because there's very little overlap with our advertisers (auto, pharma, etc), but CNET audience demo very attractive to our advertisers. And then they reach advertisers (electronics, etc) that we don't. Other efficiencies: One public co instead of two. Combining some ad platforms, etc.

Given MSFT/YHOO, other consolidation, does this make you big enough on the Web?

Les: We just tripled our digital platform. Are there possibilities to do tuck-ins? But right now, we have taken a major leap forward. We are very happy with the cards we're holding now.

CFO: We're now a top 10 Internet company. Could we be a top 5 over time? Sure. But would be through growth, not acquisition.

Les: Remember! Premium content!

Release folllows

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CBS CORPORATION TO ACQUIRE CNET NETWORKS, INC.

CBS to Become a Top Ten U.S. Internet Company with Unparalleled Content and Reach, Boasting Approximately 200 Million Monthly Unique Users Worldwide

CNET Networks' CNET, ZDNet, GameSpot.com, TV.com, CNET News, UrbanBaby, BNET, CHOW and Search.com, Among Others, To Be Combined with
CBS Corporation’s National and Local Interactive Businesses

NEW YORK and SAN FRANCISCO, May 15 — CBS Corporation (NYSE: CBS.A and CBS) has entered into an agreement to acquire CNET Networks, Inc., it was announced today by Leslie Moonves, President and Chief Executive Officer, CBS Corporation. Under the terms of the agreement, CBS will make a cash tender offer for all issued and outstanding shares of CNET Networks for $11.50 per share, representing an equity value of approximately $1.8 billion. The acquisition will make CBS one of the 10 most popular Internet companies in the United States, with a combined 54 million unique users per month, and approximately 200 million users worldwide.

"There are very few opportunities to acquire a profitable, growing, well-managed Internet company like CNET Networks," said Moonves. "CBS stands for premium content and unparalleled reach, and CNET Networks will add a tremendous platform to extend our complementary entertainment, news, sports, music and information content to a whole new global audience. Together, CBS and CNET Networks will have significant additional exposure to the fastest-growing advertising sector and can accelerate our growth through a number of new content, promotion and advertising initiatives. We could not be more pleased with the prospect of adding CNET Networks and its tremendous team of people to the CBS family. I look forward to working with Quincy Smith, Neil Ashe and the considerable combined talent at both companies, as we build upon our success."

Based in San Francisco, CNET Networks owns many of the Internet’s leading entertainment, news and information sites including CNET, ZDNet, GameSpot.com, TV.com, mp3.com, CNET news.com, UrbanBaby, CHOW, Search.com, BNET, MySimon and TechRepublic. The company, which reported significant profits in 2007 on revenues of $406 million, has a large international footprint, particularly in China.

Upon closing, CNET Networks' sites will be combined with CBS's stable of dynamic and growing interactive businesses. These include CBS.com, CBSSports.com, CBSCollegeSports.com, MaxPreps.com, CBSNews.com, last.fm, Wallstrip, MobLogic, CBS Radio and CBS Television Stations digital media platforms, and the distribution network of the CBS Audience Network, which is made up of more than 300 partner Web sites and reaches 82% of all online users in the United States.

"The core businesses of CNET Networks and CBS Interactive represent near perfect category symmetry in premium online content," said Quincy Smith, President, CBS Interactive. "Together we will have a terrific opportunity to not only grow our established businesses, but to build new attractive verticals of content as well. This is the beginning of an era for both CBS and CNET Networks; plus, it’s going to be great to work with Neil and his team, many of whom I have known for many years."

"We're thrilled to join CBS and combine our interactive media experience with CBS's world-class content," said Neil Ashe, Chief Executive Officer, CNET Networks, Inc. "CNET Networks operates some of the most important premium online brands, serving the most sought after online audiences. Today's announcement brings together two organizations that complement each other and working with Leslie, Quincy and the talented people at CBS, we look forward to taking our business and our brands to the next level."

"We look forward to completing the acquisition of CNET Networks and the terrific benefits it brings to CBS as Quincy, Neil and their combined teams build upon our success," Moonves concluded. "At the same time our strong cash flow allows us to pay among the highest dividends in the industry, and we are committed to continue to pay our attractive dividend to return value to shareholders."

The Board of Directors of CNET Networks has unanimously approved the merger agreement and unanimously recommends that CNET Networks stockholders accept the tender offer and tender their shares.

The transaction is subject to customary conditions and is expected to be completed in the third quarter of this year.