CBS Outdoor deal shows value of a very old 'mobile media' strategy

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Outdoor billboard owned by the advertising company CBS Outdoors Americas is seen in Leucadia
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An outdoor billboard owned by the advertising company CBS Outdoors Americas is seen in Leucadia, California …

The keenest minds in New Media are honing their sharpest technical tools to capture local advertising dollars aimed at mobile consumers. Ironic, then, that some of the best plays on local and mobile ads can be found in the oldest, and flattest, of Old Media: billboards.

The $690 million acquisition Monday by CBS Outdoor Americas Inc. (CBSO) of the largest privately held billboard business from Van Wagner Communications shows the abiding attractiveness of putting ad messages in front of bypassing eyeballs.

CBS Outdoor became independent of media megalith CBS Corp. (CBS) through an initial public offering in March, and has nicely outperformed the market since then, with a 22% gain from its $28-per-share offer price. The shares added more than 3% Monday, closing at $34.52,  on the news of its Van Wagner purchase, which shows the market’s enthusiasm for consolidation in this mature but still appealing business. (The stock was down around 1% in early Tuesday trade.)

CBS Outdoor and its biggest publicly traded competitor, Lamar Advertising Co. (LAMR), both converted to real estate investment trusts recently, as soon as the IRS blessed the idea that billboards and other public display advertising players were basically real estate companies. This allows the companies to distribute nearly all profits tax-free to investors, who in recent years have gorged on REIT stocks in search of attractive and growing streams of cash income. CBS Outdoor and Lamar shares now carry indicated dividend yields based on expected payouts in the coming year of between 4.5% and 5.5%.

[Clear Channel Outdoor Holdings (CCO), the largest billboard firm by revenue, carries a daunting debt load and remains controlled by radio giant CC Media Holdings (CCMO), a credit-bubble-era leveraged buyout; it pays no dividend.]

An attractive market

The outdoor-advertising business (which includes such things as bus-and-train ads in addition to billboards) accounts for only about 5% of spending on all media, but is a surprisingly attractive market.

It is exceedingly hard to challenge the entrenched billboard companies by erecting new display structures. Nearly all billboards have either been grandfathered in under old zoning laws or are specifically allowed under the 1965 Highway Beautification Act.

According to a thorough write-up on Lamar, posted on the invitation-only investment-idea site Value Investors Club, outdoor-ad spending has grown at an 8% annualized rate since 1980. The continued trend toward urban living and the difficulty of otherwise reaching people as they drive or walk are additional points in the industry’s favor.

Of the half-million billboards in the United States, only about 1% have digital displays. This is a growth opportunity, as a greater proportion of billboards can be converted to high-tech screens over time. CBS Outdoor executives recently said 1.5% of its inventory is digital, yet this category kicks in some 10% of revenue.

Some 80% of these companies’ revenues are collected from local advertisers, which limits competition from larger media venues such as television. Local ads are considered a potential bonanza for digital-media companies, which helps explain the towering valuations of companies such as Yelp Inc. (YELP) and the once-bright promise of Groupon Inc. (GRPN). Yet billboards in heavily traveled locations continue to command high prices, helping the likes of CBS Outdoor and Lamar to reap profit margins well above 30%.

The main risk to outdoor-advertising companies is broad weakness in the economy, rather than competition from higher-tech media formats. Leases on billboard space are brief, and in the recession, demand fell off sharply.

The REIT factor

In several respects, the leading billboard operators are embracing the current market mode of using financial engineering, cheap debt and methodical acquisitions to extract value from a slow-growth business. Recasting themselves as REITs immediately boosted their market valuation, as avid yield investors mechanically pay more for a dollar of cash flow than non-REIT shareholders. Companies as disparate as document-storage outfit Iron Mountain Inc. (IRM) and server-farm operator Equinix Inc. (EQIX) have sought REIT status. The companies have taken advantage of generous credit markets to raise cheap debt. And now both CBS and Lamar are intent on leading a further consolidation of the industry.

CBS used some of that inexpensive debt to buy the Van Wagner assets. Because the purchase was made at a substantially cheaper multiple of profits than CBS Outdoor stock trades for, the deal will immediately add to future earnings growth.

Analysts are confidently predicting that Lamar will be active in M&A as well. There is one large privately owned player out there, called Fairway Outdoor. Lamar CEO Sean Reilly has publicly said the company is in the market for acquisitions of up to about $500 million in size. More than a third of the billboard industry is controlled by independent operators, which could be rolled up by one of the big three.

Most media-merger headlines involve cable, satellite and entertainment-network operators vying to command consumers’ screens. But some of the most active deal making is among companies who control what’s seen in their windshields, and the consolidation could well continue to be a boon to investors.

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