Citi disses CBS’ (CBS) acquisition of CNET Networks (CNET) Citi is sceptical that CNET will be able to maintain its high CPMs after being integrated into the CBS machinee. Also, growth at both companies has been flattish for several quarters, and given the current softness in ad sales, there’s little reason to expect that the two can accomplish together what they couldn’t accomplish alone:
Purchase price implies 18x ’08E EBITDA, a premium to other on-line content plays like Bankrate (RATE) at 12x and WebMD (WBMD) at 14x.
A bid for traffic, but pricing risk is high – We suspect CBS is trying to build a more formidable presence on the web. But, key CBS challenge will be sustaining premium CPMs. We estimate CNET generated about $12 per thousand page views (RPM) in 2007, well above rivals.
CNET free cash flow flat from ’06 to ’07 – CNET (US$7.95; 2S) generated $32 million in free cash per share during the last two years, despite 10% topline growth over same time period. Expect near-term pressure to CBS equity – Based on the premium CBS paid, we expect CBS to trade down about $0.80 today. ($3.55 premium per CNET share x 152 million CNET shares / 674 million CBS shares).
Maintain Hold and $23 target price – After the recent sell off, we think CBS’ shares are closer to fair value. However, M&A risk and sluggish ad growth continue to keep us on the sidelines.