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A $5bn bid that has Wall Street worried

Westinghouse's interest in CBS has left analysts cold. Michael Marray reports
THE CBS chairman, Laurence Tisch, has spent a lot of time over the past few years denying that the television network is for sale. His problem is that hardly anybody believes him, and the latest approach from the industrial conglomerate Westinghouse Electric has convinced many on Wall Street that Mr Tisch is finally about to sell out.

Westinghouse has sounded him out over an $80 (pounds 50) per share all-cash offer, which would put a price tag of around $5bn on CBS. Last week, Westinghouse was trying to line up support from commercial banks such as Chemical Bank and JP Morgan, both of which are big lenders into merger and acquisition deals.

The desirability of a take-over of CBS by Westinghouse is, however, being widely questioned. Some shareholders at the conglomerate want to see a further slimming down of the company, and a reduction in its debt levels rather than a highly leveraged acquisition. And analysts who track CBS worry that Westinghouse may not have the right credentials to turn the troubled network around.

At one time, CBS was known in industry circles as the Tiffany Network, because of its dominance of American television. But recent years have seen it slump into third place, behind NBC and ABC. New hit television series and fresh ideas are badly needed, especially when Rupert Murdoch's Fox Television is rapidly gaining ground as the fourth network and the proliferation of cable channels is stealing viewers away from all the networks.

Disillusionment with Mr Tisch, who assumed control of CBS in 1986, is rife among employees. Eighteen months ago CBS was badly caught out by Fox , which swooped to buy the rights to broadcast American football games within the National Football Conference. The loss dealt a severe blow to CBS ratings, and despite popular shows which have included David Letterman, Northern Exposure, Murphy Brown, and Dr Quinn, Medicine Woman, there have been no recent CBS blockbusters. Sweeping changes are due for the approaching autumn season.

Westinghouse, which is based in Pittsburgh, has interests in power generation, defence electronics and refrigeration products. Its existing broadcasting activities are held in the Group W subsidiary, which owns five television stations in cities including Boston and San Francisco, four of which are CBS affiliates. By adding CBS-owned stations to the Group W stations, 32 per cent of Americans would be within its combined reach. This is actually higher than the 25 per cent maximum allowed under current regulations, but moves toward deregulation in Washington DC are expected to result in these ceilings being raised. Both CBS and Westinghouse also have a powerful presence in radio.

Group W clearly has lots of television industry expertise to bring to the table. However, it is not a leading player in creating programming, and this could be a big drawback, given the need to inject new life into the CBS viewing schedule.

From a financial point of view, there are also concerns about the level of debt that Westinghouse would have to take on to buy CBS. The Westinghouse balance sheet has been hobbled with excessive debt ever since a disastrous 1980s foray into financial services, and over the past few years the company has been conducting regular asset sales in order to reduce its leverage.

Last week, the rating agency Standard & Poor's reacted to the reports of a potential deal by placing its rating of Westinghouse on credit watch - with negative implications. An S&P analyst noted that the current rating reflects expectations of more debt reduction, commenting that "a debt- financed acquisition of CBS would result in a reversal of progress toward debt reduction targets and would cause debt leverage to remain at aggressive levels for an extended period."

For these reasons, some Westinghouse shareholders have concluded that a run at CBS is not a good idea, and that $80 a share is too expensive. So does this mean that Mr Tisch should sell? "If someone offered me $80 and I was Larry Tisch, I'd say thank you and take the money," says Dennis McAlpine, analyst with the New York brokerage Josephthal Lyon & Ross. He adds that Westinghouse "would have to sell something big" in order to reduce its debt load after an acquisition.

CBS shares soared $4.125 to $69.75 last Monday, as word of the deal first entered the market. They closed the week at $75.25. This is still below the $80 bid level being talked about, which indicates that arbitrageurs on Wall Street are still not fully convinced a deal will be closed. But the market does believe that Larry Tisch is a willing seller - if the price is right.