CBS Outdoor Not Ready to Have Name on the Big Board

Although Friday's debut of billboard advertising giant CBS Outdoor Americas as a newly minted public company was well-received by the market, with its shares opening at $28 each and rising more than 5% on the day, investors may want to pause before jumping into this IPO because it may not be the larger-than-life opportunity it's being hailed as.

Source: CBS Outdoor America.

The billboard business was the square peg CBS had been trying to fit into the round hole of its media empire, but it's long been apparent the outdoor advertiser really didn't mesh well with what was a content company. It has some attractive components to it, not least of which is some prime real estate for its signage, and though it represented about 13% of CBS's revenues, it was a much smaller piece of the profit picture. Further, because CBS Outdoor's target market is really local in nature while the media company's is national, few synergies were realized between the two and the billboard company found itself constantly fighting for attention and capital allocation.

As an independent company, CBS Outdoor will be able to make those decisions for itself, which though improved, doesn't mean it still warrants an investment by you.

Three companies account for three quarters of the entire industry's revenues. CBS Outdoor generated $1.29 billion in 2013 or less than half of the $2.95 billion in revenues Clear Channel Outdoor realized, and comparable to the $1.25 billion Lamar Advertising made last year. France's JCDecaux is the world's largest outdoor company, but it generates just under $650 million globally from billboard revenue and less than $250 million of its total revenues come from North America. Of those three, Lamar is the growth leader, enjoying a 5.6% increase in revenues over 2012 compared to a 1% increase at Clear Channel and virtually flat revenues for CBS.

With some 330,000 signs across the U.S., Canada, and Latin America, CBS Outdoor certainly has vast coverage including in many major markets, but not nearly the span Clear Channel has with its 675,000 signs (Lamar has 145,000 signs in 44 states, Canada, and Puerto Rico). Industry growth, though, will be slow at best as government regulations on sign placement, while limiting the risk competitors can step in, also squelches how far the companies themselves can expand other than by acquisition.

Digital billboards are seen as a growth opportunity, generating for CBS Outdoor three to four times the revenue per sign the static displays do. At the end of 2013, it had 373 digital displays and was converting ever more of its signage to digital as a key component of its organic growth strategy. However, I think that has its limits.

Source: Wikimedia Commons.

When the Burma Shave roadside sign advertising campaign ended in the early 1960s, it was not because billboard advertising was ineffective, but rather the modern interstate highway system had allowed vehicle speeds to increase to such a degree that it made it hazardous for motorists to try and read the signs -- and a liability for Philip Morris that owned it.

Today, motorists are apt to speed by a digital sign in the same way and it will have less impact with the motorist because it is a constantly changing ad. Sure, they'll be able to get onto signs that may otherwise have been off limits, but each exposure will be commensurately less valuable. It's no longer become a matter of how many cars pass by, though that's obviously important from a placement standpoint, but rather how many eyeballs actually look at a sign and as new studies examine their effectiveness, it could have far reaching implications for how much advertisers can charge.

As for CBS Outdoor itself, its former media parent saddled it with $1.6 billion in debt that it's using to buyback its own stock. While CBS will initially retain 83% of the outdoor company's stock, it will distribute that to shareholders within six months, which could serve to depress shares should they decide to dump them. Afterward, however, the billboard company plans to convert to a real estate investment trust that will be required to distribute at least 90% of its profits to shareholders. 

There may be a time that buying into CBS Outdoor America will be a good move, but I think that is still down the road yet after it converts to REIT status. Although acquisitions may allow it to grow -- a merger between it and Lamar would seem to make a lot of sense, though antitrust hurdles could be problematic -- this is a slow growth industry where digital innovation only allows it to go so far. I'll be driving past this IPO for the time being.