Aging Tiffany Network Fumbles for Brass Ring and Comes Up With Oprah

King World probably won't hurt CBS, but it's hardly the Fountain of Youth that investors want.
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The geezer network and the geezer syndication company agreed to a geezer marriage this morning, and Wall Street reacted by gumming down a couple of prunes and settling in for a nice long nap.

Confirming rumors that had been reported everywhere from

TheStreet.com

to your Aunt Katie's monthly newsletter,

CBS

(CBS) - Get Report

said Thursday it would buy

King World Productions

(KWP)

, which syndicates

Wheel of Fortune

and

Jeopardy

to television stations nationwide, for $2.4 billion in stock. CBS will exchange 0.81 shares of its stock for each of King World's 74 million shares, a ratio that values King World at roughly $32 per share.

But in midday trading Thursday King World was roughly flat at 31, while CBS fell 1 3/8 to 39 7/16. Volume in both stocks was above average but not extraordinary.

At first glance, the deal looks like a steal for CBS. For its $2.4 billion investment, the network gets a debt-free company with close to $1 billion in cash on its balance sheet and more than $150 million in annual bottom-line profits. In fact, King World's profits will almost equal those of all of CBS this year (though the CBS figure is distorted by its high noncash depreciation and amortization charges).

Put another way, CBS is using stock that trades at almost 30 times free cash flow, or earnings after all cash expenses including interest and taxes, to buy a company whose equity trades at less than 12 times free cash flow, factoring out both King World's cash hoard and the interest it generates. As a result, the deal will immediately boost CBS's cash flow per share by as much as 10%, according to

Merrill Lynch

analyst Jessica Reif. (Reif rates CBS a buy; Merrill helped underwrite CBS's recent sale of shares in radio subsidiary

Infinity Broadcasting

(INF) - Get Report

.)

"This is a huge deal for us in free cash flow," CBS CEO Mel Karmazin said on a conference call with reporters Thursday morning. But investors appear worried that the deal, while nice in the short-term, won't do much for CBS over the long haul.

First, Oprah Winfrey's talk show provides more than one-third of King World's revenue, and Winfrey is only committed to stay on the air until 2002. And even if Winfrey does agree to keep enlightening America five times a week, there's no guarantee anyone will care: Her viewership has steadily eroded over the last two years in the face of increased competition from downscale amusements like Jerry Springer. In other words, CBS is buying King World just as its biggest revenue generator is losing steam.

Second, CBS said today that it would run King World as a separate division alongside

Eyemark

, its own syndication division. While Karmazin called that "duplication" a positive, saying both Eyemark and King could add value to his company as separate organizations, the decision eliminates most of the back-office savings that investors normally expect when two companies combine.

Finally, King World does nothing to solve CBS's most pressing problem, the fact that its network draws primarily older viewers. Advertisers aren't particularly interested in reaching older audiences, reasoning that most of them already have strong brand preferences. Additionally, oldsters aren't exactly hard for advertisers to reach. They watch more television than anyone else.

The result: Even though CBS is the highest-rated network, commercials on its primetime shows go for barely half the price of those on

NBC

, which draws a much more demographically appealing audience. And this may come as big shock, but the audience that watches King World's three big shows -- Oprah,

Wheel of Fortune

and

Jeopardy

-- isn't exactly filled with Generation Xers. So while King World probably won't hurt CBS, it's hardly the Fountain of Youth that investors want.