CBS-CNET: The Logic Of The Deal

This story was written by Joseph Weisenthal.
CBS' (NYSE: CBS) acquisition of CNET (NSDQ: CNET) for $1.8 billion is already prompting some predictable shoulder shrugging from folks wondering why they went with a (here come the scare quotes...) "web 1.0" company and not some hip young thang. Look: There was no MySpace out there at $580 million. If you know of one, tell Leslie Moonves about it now and maybe you can have Quincy Smith's job. Buying up internet companies poses a standard tri-lemma: growth, meaningful revenue and affordabilitypick two. CBS picked affordability and revenue in exchange for a company with limited growth prospects. They might have bought something else for a lot less money, but without any clue of when or if it could return them a buck. The company decided it needed a major platform to help CBS Interactive get more in the game, and realistically, wasn't going to be that. As Moonves told Staci this morning: "This accelerated our process quite a bit. We could have continued buying this and that and other Last.FMs and we said this is a great way to jump start our position in the internet world."

-- Money: On today's call, CBS management said CNET would have revenue of $450 million and EBTIDA of $92 million in 2008. It expects to see an internal rate of return of about 13 percent, and by the 2010-2011 time frame, revenue of about $1 billion (caveat investor: beware those $1 billion revenue predictions). It's true they didn't get it cheap: At 20x '08 EBITDA, it's richer than, say, 14x for WebMD (NSDQ: WBMD) (number courtesy of Citi analyst Jason Bazinet), but CNET offers a lot more, strategically, than the other big, freestanding content sites.

-- Opportunities: Once they have the platform in place, there will be opportunities for more purchases. As suggested on the call, we probably won't see another digital purchase of this size from CBSone is enough for nowbut this makes buying smaller, more speculative startups are more feasible prospect, because now it has the base to plug them into. (BTW, Digg?) Also, there are opportunities to do more with advertising. CNET's content appeals to a tech crowd, sure, but basically it appeals to a young(ish) crowd and/or a crowd with money.

-- Bottom line: This deal fits with past comments Moonves has made about digital purchases. He's never had any interest in paying 10x (or more) revenue for a social networking just because it's the flavor of the month. But on the other hand, as we have said in the past, it needed to make a significant purchase. Perhaps the content matchup leaves a bit to be desired, but in terms of meeting CBS' needs and criteria, this was the buy.

By Joseph Weisenthal