CBS Inc. and Sony Corp. finally confirmed Tuesday what has been widely reported for several months--that the two companies are discussing the possible sale of CBS Records Group to the Japanese electronics manufacturer.
In a two-sentence statement, CBS said the price being discussed was $2 billion. Sony said its previous offer--also reportedly $2 billion--was terminated following the CBS board meeting Oct. 14 but that "serious discussions" had since resumed "based on a recent letter from CBS to Sony."
Following the Oct. 14 board meeting, CBS said it had reached no decision on the possible sale but was "continuing to explore alternate ways to maximize the short- and long-term shareholder values in its record operations." According to Wall Street analysts and record industry experts, however, the board was leaning toward spinning off the record divisions to CBS shareholders.
'Deal's Good as Done'
That, of course, was before the recent crash in the stock market, which caused CBS stock to plummet $42.125 a share to $152.50 on Oct. 19 and created an atmosphere that is hardly conducive to a new stock offering. Now the betting on Wall Street and in the record business is that the CBS-Sony deal is imminent if not already completed and awaiting full board approval.
"I would agree with that," said Fred Anschel, an analyst for the investment firm of Dean Witter Reynolds. "For CBS to confirm the price that's on the table would suggest that negotiations are fairly far along."
"If they say they're talking now, then the deal's as good as done," said one record company president who, like a number of his colleagues, asked not to be identified. Taking the CBS perspective, he said: "If you could pick up $2 billion when the market is crashing down all around you and cash is king, wouldn't you sell?"
According to Anschel, "the most obvious place for CBS to use that money would be in buying back some of its own stock. They'd have $1.4 billion after taxes on the sale, and they already have $1.2 billion sitting there." Previously, sources said the CBS board was concerned with the estimated $600-million tax liability that would result from a $2-billion sale.
Opinions are divided on whether the CBS Records Group is worth $2 billion. The unit is expected to report pretax profit of about $200 million for 1987, which would put the purchase price at roughly 10 times pretax earnings--a good deal on its face.
But CBS' current profits from its record operation represent an almost 10-fold increase from five years ago, and few in the record industry think the company can sustain such a high level of earnings very far into the future. CBS is benefiting from having new records by its two most popular artists--Michael Jackson and Bruce Springsteen--in the stores simultaneously. It may be years before either artist has a follow-up record in the marketplace.
"Outside the big hits, their share of the best-seller charts has been pretty poor recently," said Mark Riely, an analyst for the New York investment firm of Eberstadt Fleming. "CBS needs four albums in the Top 20 to make a halfway decent showing. Right now, I think Warner Communications has a broader mix of artists contributing to its success."
Few Top Albums
This week, CBS-distributed labels--Columbia, Portrait and Epic--account for only seven of the top 40 albums on Billboard magazine's chart of best-selling recordings, while Warner-distributed labels account for 12.
However, some in the industry think the $2-billion price is fair. "It's worth any price because, like the Mona Lisa, there is only one," said one former top CBS Records executive. "It's impossible to build another one like it, and they are going to miss it because it's part of the synergy and what's made that corporation work over the years. TV may be the heart and soul of CBS, but records are one leg anyway. Will the company ever work as well without it? I'm not sure."
"I think it's a smart deal for Sony but a bad deal for CBS and the record industry in general," said one record company president, echoing the sentiments of nearly every industry professional surveyed in recent weeks. They fear that Sony's bid is a backdoor way of introducing its digital audio tape, or DAT, technology into the U.S. market. CBS Records has been at the forefront of the fight to keep DAT out, refusing--along with the other major companies--to license its vast catalogue of music for use on DAT cassettes.
"It's a dangerous combination because Sony's main thrust is hardware, and the mentality of a hardware manufacturer does not lend itself to risks and rhythms of a creative business," said Capitol Records President Joe Smith. "Perhaps the only saving grace is, if they make this huge investment, why would they do anything to endanger the record business?" Even one Wall Street investment analyst admitted he was "troubled" at the prospect of a sale. "Financial considerations aside, this is the granddaddy of the American record business. If it's sold to the Japanese, there will only be a few major American record companies left--MCA, Warner and A&M. Yes, it bothers me. I think it will be a shame."