2023-12-19 18:40:33 ET
Summary
- Skydance wants to acquire Paramount Studios, but the future of movie studios is uncertain due to declining theatrical movie attendance and the rise of streaming.
- The value of Paramount Global's library and the ability to produce successful movies are questionable, making the acquisition risky.
- Other Paramount verticals, such as CBS, Showtime, and BET may be attractive to potential buyers, but unloading these properties will take time and strategic fit.
- Skydance just wants to buy the Paramount Global (PARA), (PARAA) studio. Paramount controlling shareholder Shari Redstone may need to sell it all.
- The parts add up to $38b--but that may not be the real world given the current state of media properties expectations ahead.
- Will the biggies like Amazon.com, Inc. (AMZN), Apple Inc. (AAPL), and Netflix, Inc. (NFLX) kick the tires?
Premise: The Skydance/Redbird Capital move raises questions as to why anyone would want to own a movie studio as the industry faces massive long-range growth issues. Others may see kicking the tires now and put the stock in play under the assumption that most units are highly salable. That's a real question. Movie studios are not what they were. Para has a huge legacy library plus a production and distribution system, but its IP is aging. All Hollywood studios still face the time-proven financial dice roll the business is till this day: Make ten movies, pray one blockbuster will pay for five flops and four so-sos. Shari may be motivated, but she can't dismiss other suitors that may pop into the picture after the Skydance/Redbird rumbles became public and goosed the stock by $5 on the get-go.
The Paramount Studio is the family jewel in more ways than one. Father Sumner dismissed any deals for it. Shari may want to honor her father's memory. Despite their tempestuous relationships over the decades, Redstone's blood may remain thicker than even tall stacks of Benjamins to Shari.
If the studio is the true target, what questions does that raise about a Skydance endgame making it past the finish line?
The business of theatrical movies has been and continues to be in decline. This, of course, is partly an aftermath of covid, but far more damaging to its future is the streaming business. In brief, what the entertainment giants have created amounts to a circular firing squad they can't control. They went deep into the red on streaming dreams, but at the same time, watched theatrical movie attendance sink as production costs skyrocketed and kept content spend soaring.
A few basic facts:
We looked at the 20-year performance of theatrical movie attendance and revenues as a general guide:
Year Tickets sold Box office total Av. Tix price
2003 1.5b $9.1b $6.03.
2023E 868m 9.1b 10.53.
So, over ten years there has been, in effect, no advance in attendance and the box office takes flat only due to ticket price inflation. The covid factor is at play, of course, since 2020/21, but the 2023 estimates tell us that even in a year essentially covid-free, total attendance has not yet recovered. And probably won't.
Clearly, the blockbuster unicorns like Barbie and Oppenheimer played a key role in 2023's stretch run to y/y flat box office. But they represent what we noted above as the Hollywood reality going back deep in industry history-the blockbuster cleaning up the mess of mostly flops enabling the same executive minions to keep their jobs-hiring one another. In Hollywood, it's called failing up.
So, if you are a seeker of PARA as is Skydance, what evidence do you have if you pulled off the deal, as to the real-world value of the library? And also calculate the odds of producing at least one box office biggie a year. For example, it has become evident that the superhero genre is in early death rattle stage. Sequels that bust seriously reduce the theoretical forward value of superhero IP. The overall value of the PARA library is estimated with recency bias. Who is to know how excited audiences in 2035 will be over Top Gun ? That's why I raise a bit of a skeptical eye at some bulge analysts I've read who have valued PARA IP at $38b.
A new PARA owner would need to consider moving much production to limited theatrical runs, then to a streaming distribution mode. If so, you then fall victim to the pricing curse as it now is: struggling to keep production costs low inclusive of the new union contracts as well as constant promotional deals to contain churn in the expensive pursuit of retaining new subscribers.
Above: PARA isn't hiding from investors, retail, pr, corporate; it's ripe.
Total wide theatrical studio releases
2003: 106.
2023: 67 from majors.
PARA studios grosses ranked fourth in the industry at $26b ( Top Gun Maverick was the 2022 blockbuster).
Disposing of PARA verticals may prove harder than it looks
CBS and all its branch businesses have been valued by some financial institutions at $19b alone. This is in the light of falling ad revenue trends and sinking audiences. Were Skydance to succeed, we pose this question: Who is the logical buyer for CBS? Who, in 2024, would be rushing to cut the check for a business that appears to be aging fast? In looking at the entire CBS display case, we see only one true jewel, which is the NFL rights and other sports deals that still have tread time ahead.
CBS scripted TV programming and the news division have no real appointment-TV appeal one could not find elsewhere. Does that mean CBS could wind up in the bargain bin if put on sale? Perhaps not, nor could we see it fetching a premium. Our point being: It's not a quick layup.
Other PARA verticals may be attractive only because of a possible comfortable strategic fit with a buyer. Paramount+ is easily blended into one of the content-hungry streamers with pockets deeper than the molten rock at the center of the earth like Apple. Price would be less a consideration than fit here. An Apple/PARA streaming vertical makes immediate sense. Acquiring the studio and streaming businesses both would bring Apple right up among the sector leaders.
Showtime likewise could be a layup for WBD at such point when its debt load really lightens. Messrs. Zaslav and Malone must have their spyglasses trained on developments now seeing what we all see: SHO is a made in heaven in addition to MAX. Both units produce high quality programming, both units bring big value for subscribers, an opportunity to move the monthly price higher that feels consumer-friendly.
BET will have to become a loss leader at some point since offers to date have been inadequate according to PARA. Given the explosion of DEI casting and stories among mainstream film and TV producers, it would appear that African-American audiences no longer have to turn to BET for the kind of programming that is comfortably inclusive.
Nickelodeon, MTV and other PARA cable verticals can likely find homes in other streaming wannabee caboose dwellers in the sector. Overall, our point here is that it's no overnight process. Unloading that trove of media properties in dicey markets is a long-term pull. For that reason, we believe a deep-pocketed media biggie is probably the customer Shari is looking for. That doesn't rule out Skydance, of course, but we believe that buying the entire PARA business might be a bit too heavy a lift for Skydance and its partners.
So, If Shari clings to the Sumner legacy and says take it all or nothing, the Skydance deal could go nowhere. Their presumed strategy is a good one, namely buying out Shari's NA position for essentially chump change, selling off everything but the studio and getting that gem at a bargain price. But if the biggies sit quiet stroking chins, Shari could also run out of patience and take the Skydance offer. Her voting situation post-deal could keep her as a central decisionmaker as well.
In the end, who is Skydance?
A $400m financial package the company closed on last summer was a blended ante from Ellison family interests (Larry's son is CEO), KKR, Redbird, Capital Partners, and China-based digital giant Tencent Holdings Limited (TCEHY). The group is highly credible, but hardly has the pocket depth in our view to make a run at the entire PARA business with its current market cap of $30b.
Skydance shows revenues of $21m and productions with a nice cutting edge that clearly lend themselves to younger audiences. So, the next question is this: Are the big players prepared to watch from the sidelines as Skydance and their partners advance on the NA equity from Shari that could, in effect, get them control of the entire PARA Global business?
The $400m financing resulted in Skydance being valued at $4b, which flies in the paper airplane world of finance well past the planet Pluto. This is not to say the company isn't competent to run a big studio-but one still winds up asking: So what? What does Skydance bring to the party other than a nice little cash-out deal for its partners and current shareholders? Nothing much that PARA couldn't do better on its own.
But if the Skydance move has triggered a few salivary glands among the big guys, it has well served holders here. The back door Skydance strategy used is smart, but also obvious to other potential buyers. Even at $15 a share, adding a nice premium for Shari and holders, it could still be a sensible buy for a sector leader. Consolidation is the only ramp the entertainment business can look to that holds the promise of big-time returns, not a game of Chutes and Ladders that looms ahead for PARA going at it alone.
The biggies may be, or as I believe, are already in the process of having their eyeshade minions tapping away at the algos at this moment to determine at what premium could the entire PARA be bought? What return could bring a smile to Shari, with real-world estimates of what unwanted PARA orphaned businesses could fetch in a tough market.
PARA at a glance
Price at writing: $15 63.
Price pre-Skydance move: $11.
Revenue 2023: $30.1b. up 5..49% y/y EBITDA: $3.29b.
Operating income: $272m.
EPS: $1.61 P/E: 10.49.
MC: $11.37b.
Long-term debt:
At 9/23: $15b.
Maturities: Noteworthy now, PARA faces $555m in repayments in 2024. The company has refinanced its $3.5b revolver now extended to 2027. Its debt reached a high of $19b during covid, but the company has been aggressive in reduction. Its current ratio sits at 1.23. What all this means is that, without question, PARA's best strategy is to sell itself in its entirety, not merely the studio. Its $2b NFL rights obligations due in 2024 pose a cash squeeze problem, accelerating the Shari appetite for sale without question. But that contingency alone will neither send her to Skydance or anyone else with a beggar's bowl. The key is this: the timing is right but urgency is not propelling PARA yet.
NFL rights are the best kind of collateral one can have these days in media, so we believe that in a crunch situation PARA will come up with the cash. That puts a fire sale out of consideration, in our view.
Our takeaway here is that the buyer for Paramount Global here could be one of the biggies in the sector who can come up with the cash and sees a distinct strategic plus in the acquisition of the entire company.
I've calculated what I believe to be real-world scenarios for a possible sale of the entire company, valuing each vertical discounted for what I believe is aging IP "depreciation" new, exciting content, etc. My estimate of $23.50 a share is a solid starting point if the stock gets into play.
On that basis, PARA is a hold for at least the next 90 days based on possible rumblings from the biggies becoming far louder than they seem to be now. Credit Skydance for stirring the pot that needed a ladle.
For further details see:
Paramount: Possible Skydance Deal Poses More Questions Than Answers