CBS (NYSE:CBS) has now stated that it has re-negotiated the broadcast rights with the National Football League (NFL) and extended the contract for another 9 years. The NFL has also extended deals with other networks such as Disney’s (NYSE:DIS) ESPN, at a much higher price. Although the financial terms haven’t been disclosed for CBS-NFL deal, the league has been attempting to negotiate a 60% rise in its fee from its broadcast partners including CBS, NBC and News Corp’s (NASDAQ:NWS) Fox. 
If we assume that the deal has gone as intended by the NFL, there could be downside to CBS’ stock if it is not able to adequately cover the increased costs by improving ad pricing for the CBS network, increasing its re-transmission fee or indirect compensation by increasing carriage fee for its cable networks.
Maximum Downside – 20%
CBS pays about $623 million annually for the NFL.  A 60% increase to this fee will amount to an extra spending of about $374 million annually by the company. This will reduce the company’s cash flows by an equivalent amount. Given the company’s discount rate, this leads to estimated value reduction of about 20%, implying a price of about $26.80.
So what can the company do to mitigate the impact?
Unlike cable networks, CBS Network primarily depends on ad revenues and can not simply pass on the costs to its customers in terms of higher carriage fee. However, the popularity of re-transmission fees has gained in recent years, and CBS could potentially charge extra from pay-TV service providers in the form of a re-transmission fee or work on charging additional premiums for advertising, especially during NFL games. There also exists an opportunity for CBS to indirectly compensate for higher costs for broadcasting by increasing carriage fee for its cable networks.
Our price estimate of $33.52 for CBS, implies a premium of more than 25% to the market price.Notes: