FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer

CBS To IPO Infinity

CBS Corp. (NYSE: CBS) dropped $1 5/8 to $27 5/8 this morning amidst the general market slide that has been taking place. Of interest, though, the company announced last week that it will sell up to 20% of its radio and outdoor advertising unit in an initial public offering. The company says the offering will bring in up to $3 billion, tax-free, and that it will use the cash to repay debt or reduce unfunded pension obligations of CBS. Under the plan, CBS will transfer to the unit, called Infinity Broadcasting, $750 million in debt taken on in the acquisition of American Radio Systems. Meanwhile, CBS will retain other long-term debt and pension obligations, which the IPO could potentially reduce by nearly 50%, increasing its interesting coverage ratio by a good amount.

One thing one could argue, though, is the company's contention that the deal results in "a lower burden of financial obligations in the aggregate for CBS." If the company does replace $3 billion in debt with equity, it has only shifted its obligations from one group of investors to another -- from lenders to equity holders. Since debt holders demand a fixed rate of return and are senior creditors, they also stand ahead of equity holders in liquidations and reorganization. For a higher expected rate of return, the company's obligation to equity holders is junior to the obligations it has to secured and unsecured creditors. In general, the post-tax cost of corporation's equity over the course of the century has been 11%. On debt, it has been much lower, in the range of 5%. If the blended pre-tax cost of debt that is being replaced is 9%, then its after-tax cost of debt is 5.85% (on the basis of a 35% tax rate). Replace it with equity and that obligation jumps to 11% after tax.

Just because the cost of equity is not explicitly stated on a company's income statement doesn't mean that it doesn't cost anything. The possibility of new shareholders in Infinity Broadcasting means that they will be looking for a certain rate of return on the equity they invest in that company. While the ratings agencies such as Standard & Poor's might like the move, that's because they look at companies from the viewpoint of lenders, not equity investors. While smaller interest expenses might make the equity of the company safer and thus less costly, on the whole the cost of the company's capital should actually rise after the transaction is accomplished. Certainly, killing debt is not a bad thing and this will allow the company to go forward with fewer obligations from the Westinghouse days. Overall, though, the drop this morning represents not a discounting of smaller financial obligations, but of greater financial obligations at CBS.

UPS

Oil and gas exploration and production firm Royal Dutch Petroleum Co. (NYSE: RD) rose $1 3/8 to $44 1/16 and Royal Dutch/Shell Group sibling Shell Transport & Trading (NYSE: SC) gained $1 3/16 to $33 3/8 on market rumors that the companies are talking about a merger with Texaco (NYSE: TX). Texaco rose $1 3/8 to $58 1/2.

Cardiovascular Diagnostics (Nasdaq: CVDI) was pumped up $1 1/8 to $6 7/8 on news that a unit of Chiron Corp. (Nasdaq: CHIR) has agreed to distribute certain Cardiovascular blood clot diagnostic testing products worldwide. Additionally, Chiron said it will buy $6 million of newly issued Cardiovascular shares at $10 a pop. Chiron was down $1/2 to $14 3/4.

TSI Inc. (Nasdaq: TSII) tacked on $1 to $8 3/8 after Barron's reported that strong demand for the company's air-quality and biological agents monitoring systems may result in better-than-expected earnings.

Implantable pain management products developer Advanced Neuromodulation Systems (Nasdaq: ANSI) advanced $9/16 to $6 1/2 after saying it expects "flat or modest" year-over-year revenue growth in the second half of 1998. The company also announced a strategic alliance with Sofamor Danek (NYSE: SDG) to develop deep brain stimulation products and said it will expand its current share repurchase plan by another 1 million shares.

Specialty property and casualty insurer Gainsco (NYSE: GNA) gained $3/8 to $6 15/16 after hiring Wasserstein Perella to examine "strategic alternatives," which may include the possible sale of the company.

Blockbuster video stores and Paramount movie studios parent Viacom (NYSE: VIA and VIA.B) tacked on $1 7/16 to $55 5/16 after saying it will repurchase up to $1.75 billion of one or more classes of its outstanding equity shares.

Fish oil and Internet company Zapata Corp. (NYSE: ZAP) moved up $13/16 to $12 13/16 after hiring Salomon Smith Barney to advise the company on its Internet-related acquisition program.

Metal products processor and distributor Reliance Steel & Aluminum Co. (NYSE: RS) rolled ahead $1 1/8 to $29 7/8 after increasing its share buyback program by 2.5 million shares to a total of 4 million shares.

Diversified food company ConAgra (NYSE: CAG) moved up $3/4 to $25 1/4 after receiving an upgrade to "U.S. recommended list" from "market outperform" from Goldman Sachs.

Specialty apparel catalog retailer Brylane (NYSE: BYL) picked up $2 1/16 to $27 1/16 after announcing a plan to buy back up to $40 million of its shares.

DOWNS

The nation's fourth largest airline Northwest Airlines (Nasdaq: NWAC) fell $2 3/16 to $28 as a strike by about 6,000 pilots that started Saturday continued into its third day, causing the airline to cancel flights at least through Tuesday. The strike could cost Northwest, which has been rescheduling passengers on other airlines, more than $15 million a day, according to one analyst quoted by Reuters.

Technology stocks tumbled this morning, leading the Nasdaq downward. Dell Computer (Nasdaq: DELL) was cut $9 1/4 to $109 1/2, Intel (Nasdaq: INTC) slipped $2 to $75, Cisco Systems (Nasdaq: CSCO) slipped $5 to $89 11/16, Microsoft (Nasdaq: MSFT) shed $3 7/8 to $101 3/8, Apple Computer (Nasdaq: AAPL) lost $1 13/16 to $32 3/8, Sun Microsystems (Nasdaq: SUNW) was trimmed $1 1/4 to $41, and Compuware (Nasdaq: CPWR) dipped $1 3/4 to $48 1/4. On the New York Stock Exchange, IBM (NYSE: IBM) fell $3 11/16 to $118 7/8, Hewlett-Packard (NYSE: HWP) slid $1 9/16 to $49 15/16, and Gateway (NYSE: GTW) pulled back $3 13/16 to $49 9/16.

Internet stocks also suffered. Yahoo! (Nasdaq: YHOO) dropped $7 9/16 to $75 1/2, Lycos (Nasdaq: LCOS) was pounded for a $3 3/16 loss to $26 11/16, Amazon.com (Nasdaq: AMZN) headed down $11 5/8 to $94 1/4, America Online (NYSE: AOL) fell $7 7/16 to $88 13/16, Netscape Communications (Nasdaq: NSCP) lost $2 1/16 to $21 7/16, Excite (Nasdaq: XCIT) was deflated $3 5/16 to $27 1/4, Infoseek (Nasdaq: SEEK) slid $1 1/2 to $19 11/16, CMG Information Services (Nasdaq: CMGI) was cut $6 1/2 to $43 1/2, and MindSpring Enterprises (Nasdaq: MSPG) shed $3 5/8 to $21 1/8.

Drug companies also took a beating this morning. Pfizer (NYSE: PFE) was dragged down $4 7/16 to $97 3/16, Eli Lilly (NYSE: LLY) dropped $3 to $69 1/2, America Home Products (NYSE: AHP) fell $3 7/16 to $52 7/8, and Warner-Lambert (NYSE: WLA) tumbled $3 15/16 to $70 9/16.

Camera maker Polaroid Corp. (NYSE: PRD) had a Kodak moment of sorts this morning, losing $2 15/16 to $31 3/8 after Barron's quoted Michael Katz of Reynard American Partners as saying the company's earnings estimates are too high and its stock could fall up to 50%. Katz, who is short on the stock, predicts Polaroid will earn about $1.00 per share next year, compared with the analysts' mean estimate of $3.28 per share.

Thrift holding company Matrix Capital Corp. (Nasdaq: MTXC) plunged $5 1/2 to $9 after announcing it will not be acquired by Fidelity National Financial (NYSE: FNF), which gained $1 1/8 to $30 1/16. The companies agreed to terminate their agreement after determining that they may not be able to obtain regulatory approval for the merger. Instead, Matrix and Fidelity have entered into a funds deposit agreement under which Fidelity will maintain at least $250 million in deposits at Matrix's depository institution subsidiary Matrix Capital Bank in exchange for warrants to purchase up to 150,000 Matrix shares.

Hong Kong Telecommunications (NYSE: HKT), the main phone company in the Special Administrative Region of China, was disconnected for a $1 1/4 loss to $17 3/16 after Hong Kong's Hang Seng index dropped 7.1% as it appeared the government stopped buying shares to prop up the market there.

Lennar Corp. (NYSE: LEN) slid $3 1/8 to $20 7/8, Pulte Corp. (NYSE: PHM) shed $2 13/16 to $30 15/16, and MDC Holdings (NYSE: MDC) dipped $2 1/2 to $15 5/8 after Morgan Stanley Dean Witter lowered its ratings on the home builders to "neutral" from "outperform," citing expectations that the U.S. housing market has reached its cyclical peak.

Machinery company Columbus McKinnon Corp. (Nasdaq: CMCO) sank $2 1/2 to $17 7/8 after warning that fiscal Q2 EPS will fall short of expectations by $0.30 to $0.35.

Automotive occupant safety systems company Breed Technologies (NYSE: BDT) plummeted $2 1/16 to $8 1/16 after announcing it will delay releasing its Q4 and fiscal year 1998 earnings report as it works out how to record repositioning and other special charges with the SEC.

Full-service distributor of microcomputers, peripherals and software products CHS Electronics (NYSE: HS) lost $13/16 to $13 3/16 despite saying that the economic turmoil in international markets has had only "marginal impact" on sales and profitability, and that it is "comfortable" with analysts' expectations for Q3 and Q4.

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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool Editing Brian Bauer (TMF Hoops), another Fool Bob Bobala (TMF Bobala), a Fool's Fool Jennifer Silber (TMF Amused), Fool at last