Most importantly, Shari Redstone may have missed the contract window
Shari Redstone, president of National Amusements and majority shareholder of Paramount Global, walks to a morning session at the Allen & Company Sun Valley Conference in Sun Valley, Idaho, July 12, 2023.
David A. Grogan | CNBC
Shari Redstone may have missed her window.
Paramount GlobalThe majority shareholder is open to a merger or sale of the company at the right price, people familiar with their thinking say. And she has been open to it for several years, said the people, who asked not to speak publicly because the discussions are private.
Spokespeople for Redstone and Paramount Global declined to comment.
The problem was finding the right deal for shareholders. Market conditions have made a transformative transaction difficult at best and highly unlikely at worst.
“The market is clamoring to reshape and consolidate media companies’ portfolios,” said Jon Miller, CEO of Integrated Media and senior advisor to venture firm Advancit Capital, which co-founded Redstone. “But due to immediate concerns about advertising sales, subscription video counts and debt costs, the risk of large-scale transactions is now high. Nobody wants to transact at the current market valuations of these companies.”
Paramount Global is an archetype for the media industry’s consolidation problem. The company consists of Paramount Pictures, the CBS broadcast network, 28 owned-and-operated local CBS stations, the Paramount+ streaming service, the free ad-supported Pluto TV, “Star Trek,” “SpongeBob SquarePants,” MTV, Nickelodeon and Comedy Central, BET and Showtime. It also owns the physical Paramount studio lot in Los Angeles, California.
From the perspective of the sum of all parts, the company has a strong hand. Many of Paramount Global’s assets would fit well into larger media companies.
“Paramount has a tremendous amount of assets in their content library and they own some pretty significant sports rights in the form of the NFL contract, Champions League soccer and March Madness,” Guggenheim analyst Michael Morris told CNBC last week.
“But they’re still losing money on their streaming service,” Morris said. “You need to bring these things together, get the content right-sized, drive revenue through pricing and market penetration, and then we can see investors getting excited about this idea again.”
Declining revenue due to accelerating pay-TV cord-cutting, continued streaming losses and rising interest rates have left Redstone in a bind. The company’s market cap has fallen to $7.7 billion, nearly the company’s lowest valuation since Redstone merged CBS and Viacom in 2019. At the time, that deal gave the combined company an edge Market value of about $30 billion.
It’s unclear whether staying the course will help change investor sentiment. Warren Buffett, CEO of Berkshire Hathaway, one of Paramount Global’s largest shareholders, told CNBC in April that streaming was “not a really good business.” He also noted that entertainment company shareholders “really haven’t done that well over time.”
Paramount Global’s direct-to-consumer businesses lost $424 million in the second quarter and $511 million in the first quarter. The company reports its third-quarter results on November 2nd.
CEO Bob Bakish said 2023 will be the highest-loss year for streaming. Paramount Global cut its dividend from 24 cents per share to 5 cents per share to “further improve our ability to deliver long-term value for our shareholders as we move toward streaming profitability,” Bakish said in May.
Wells Fargo analyst Steven Cahall suggested earlier this year that Bakish should shut down the company’s streaming business entirely, even though Paramount+ has more than 60 million subscribers.
“We believe Paramount Global is worth much more as either a satisfied arms dealer or a break-up for sale story,” Cahall wrote in a note to clients in May. “Great content, misguided strategy.”
Big Tech lifeline
Paramount CEO Bob Bakish speaks with CNBC’s David Faber on September 6, 2023.
CNBC
Paramount Global executives remain hopeful that a major technology company such as Apple, Amazon or alphabetwill view the collection of assets as a way to bolster their content ambitions, people familiar with the matter say.
Paramount+’s 61 million subscribers could help outsize an existing streaming service like Apple TV+ or Amazon’s Prime Video, or give Alphabet’s YouTube a stronger presence in subscription streaming beyond Sunday Ticket and the National Football League’s YouTube TV.
While Federal Trade Commission Chair Lina Khan has been particularly focused on limiting the power of big tech companies, Apple, Amazon and Alphabet may actually be better buyers than legacy media companies from a regulatory perspective. Unlike Comcast (NBC), Fox or Disney (ABC), they do not own a television network. It is highly unlikely that US regulators would allow one company to own two broadcast networks. Divesting CBS is possible, but it is so intertwined with Paramount+ that separating the network from the streaming service would be messy.
“We believe Paramount Global is too small to win the streaming wars, but it is small enough to be acquired by a larger streaming competitor for its extensive library of film and television content, as well as its sports rights and news resources. Laura Martin, an analyst at Needham & Co., wrote in an Oct. 9 research note to clients.
Acquiring Paramount Global would be a relative drop in the bucket for a Big Tech company. Paramount Global’s market value was below $8 billion on Friday. In addition, the country has around $16 billion in long-term debt.
Still, despite huge balance sheets and trillion-dollar valuations, there is no evidence that tech companies want to snap up declining legacy media assets like cable and broadcast networks. Netflix has specifically built its business on the premise that these assets will eventually die. Paramount’s property and studio may be attractive for content creation and library programming, but that would leave Redstone with a less desirable basket of legacy media assets.
Separation difficulties
It’s possible Redstone could break up the company and sell the legacy media assets to a private equity firm that could exchange them for cash. But Paramount Global’s lower market valuation relative to its debt likely makes a leveraged buyout less attractive to a potential private equity firm.
Additionally, rising interest rates have generally slowed take-private deals across industries as the cost of paying interest on debt has skyrocketed. Worldwide buyout funds Deal volume fell 58% in the first half of 2023 compared to the same period last year, according to a study by Bain & Co.
If a full sale to Big Tech and a partial sale to private equity don’t materialize, another option for Redstone is to merge or sell to another legacy media company. Warner Bros. Discovery could merge with Paramount Global, although the combination of Warner Bros. and Paramount Pictures may await approval of the deal by U.S. regulators.
Beyond regulatory issues, recent history suggests that large media mergers have not worked out well for shareholders. Tens of billions of dollars in shareholder value have been lost in recent media mergers, including WarnerMedia and Discovery. Disney and the majority of them Fox, Comcast/NBCUniversal and Sky, Viacom and CBS as well as Scripps and Discovery.
Merger partners such as Warner Bros. Discovery may also favor selling or merging with another company, such as Comcast’s NBCUniversal, if regulators allow a large media merger.
Redstone has been playing around the edges lately, shedding some assets, such as book publisher Simon & Schuster, and entering into talks to sell a majority stake in cable network BET.
But Paramount Global I put the idea on hold to sell a stake in BET in August after decided offers to sell were too low to outweigh the value of the network remaining in its cable network portfolio. With the company’s total market value under $8 billion, it’s difficult to convince buyers to pay high prices for parts. A change in overall investing sentiment that is driving up the company’s valuation could help Redstone and other Paramount Global executives feel more comfortable about divesting assets.
Selling national amusements
If Redstone can’t find a deal she likes, she could also sell National Amusements, the holding company founded by her father, Sumner Redstone, that owns the majority of the company’s voting stock. National Amusements owns 77.3% of Paramount Global’s Class A common stock (voting) and 5.2% of its Class B common stock, representing approximately 10% of the Company’s total capital stock.
Redstone took in a $125 million strategic investment from merchant bank BDT & MSD Partners earlier this year to pay down debt, reaffirming her belief in the inherent value of Paramount Global.
“Paramount has the best assets in the media industry, with an incredible content library and IP spanning all genres and demographics, as well as the #1 broadcast network, the leading free ad-supported streaming TV service and the fastest-growing pay streaming platform in the U.S.,” Redstone said in a statement in May. “NAI is confident in Paramount’s strategy and execution, and we remain committed to helping Paramount take the necessary steps to build on its success and to take advantage of the strategic opportunities in our industry.”
The sale of National Amusements would not change the long-term future of Paramount Global. But it’s a way out for Redstone if she can’t find a deal that’s beneficial to shareholders.
Paramount Global is not actively working with an investment bank on a sale, according to people familiar with the matter. The company is content to wait for market conditions or regulators to change before moving more aggressively on a transformational deal, the people said.
Still, Redstone’s predicament aptly sums up legacy media’s current problems. The industry is anticipating a shift in market sentiment, while executives privately grumble that there is little they can do about it in the short term.
WATCH: Mad Money host Jim Cramer weighs in on Paramount Global
Disclosure: Comcast’s NBCUniversal is the parent company of CNBC.