2024-01-15 07:56:11 ET
Summary
- Prospects for a deal for Paramount have risen, with other interested parties potentially appearing.
- The proposed deal by Skydance and its partners involves an all-cash deal to take out Shari and acquire PARA.
- A break-up strategy involving asset sales and spinoffs could potentially produce a higher return for Shari and shareholders.
Above: Deal should be Queen Shari takes pawn, not the other way around.
The question is, at what price will Shari Redstone sell her controlling stake of Paramount (PARA) ? Someone, sooner rather than later, will cut the check and come to the rescue for all.
Follow up : On December 19th I posted a Seeking Alpha article on PARA. That day the stock traded at $14.00, reflecting growing rumors that Skydance and its moneybag partners had moved deeper into talks with Shari regarding a deal. It was off around $1.63 from the first Skydance talk high. PARA had been dead pooled around $11, before the chatter began.
My conclusion last month: HOLD-on the theory that whether the Skydancers were serious or not, the prospect that a deal for PARA was a slow simmering pot on a stove. Eventually, PARA would get hot. Hence holders were well advised to sit tight given the fact that any deal would have to value the shares higher than where they now sit. The subsequent chat between PARA and WBD further reinforced my sense that we had a deal here one way or another.
Above: It's time, it really is TIME for the right deal, not panic.
The downside risk I saw while awaiting a deal was modest even though the short interest on PARA had risen to 14.36. There are still many non-believers in a Shari rescue anytime soon. Yet the company is continuing to grind out revenue and despite its burdensome debt profile is well financed enough to comfortably sit it out until the prince charming arrives.
What's changed: Prospects for a deal have risen. WBD kicked the tires. We are moving guidance from hold to overweight in the belief that a deal is closer than Mr. Market may think because other interested parties may well appear. No other troubled media giant we see now is closer to a transaction.
The prospective bid for PARA's controlling parent National Amusements by Skydance and its money bags partners appears to simply involve an all cash deal taking Shari out as stage one and as a result get one's hands on PARA. Stage two would clearly involve a sale of PARA assets to generate enough cash to offset the outlay for NA. Skydance says it only wants the studio and presumably would dump the rest of PARA. This strategy does not seem to be a best case scenario for PARA shareholders-at least at this point IMHO.
So on a net net basis we assume the coven of financial warlocks in the deal like Redbird, KKR and (gasp!) Chicom based online giant Tencent see a steaming cauldron of follow up asset sales necessary to reduce the net buy in cost.
It bears some strategic similarity to Caesars' 2021 buy of the UK based William Hill sports betting business. CZR wanted the US footprint only and paid $4b. It then quickly turned around and sold off the UK and global business to 888 for ~US$2b thus getting the American sports book for net $2b.
Pretty nice work if you can get it. But, for PARA shareholders, we see some risk in such a deal design because would-be buyers for the balance of assets would be bargain hunting given what they know about PARA's need to unload the assets.
KKR would seem to be the key captain of this ship though multi-billionaire Ellison will have much skin in the game here. Some of this strategy triggers memories of the ancient KKR battle to gain control of RJR Nabisco in 1985 through an LBO. We all know how that ended, don't we?
Anyone old enough to remember will recall everyday investors and employees paid for huge bye bye packages to managements. The bankers made out big time by later reselling the company to Philip Morris. Though the RJR war eventually bid the shares up to $109 to take the prize, tons had been bought during the battle at much higher valuations from the get go resulting in no great bonanza for many of the latecomers. The deep pocketed activists who did come in later like Carl Icahn had big enough positions to cash out a ton anyway, In time the great Oreo cookie we all love and its massive array of family edibles ultimately found its home in the European giant Mondelez.
Could we see a replay of that old game here on PARA if KKR and partners advance on the chessboard to capture Queen Shari? Our outlook here attempts to take an investor point of view. In the end, would a Skydance deal be a plus or minus to the long-time suffering, mostly out of the money investors?
We're not saying a Skydance deal is RJR Nabisco 2.0 with the financial coven wolfing down the billions leaving crumbs for the little guys holding the common. It could well be structured to benefit shareholders-but our contention here is that the Skydance group is essentially proposing a transactional strategy to put the Paramount Studio asset in its hands and whatever they get for everything else figures little in its goals of scaling up as strictly a content providing company.
Above: Repeat - it's time.
The rest of PARA could wind up being sold off at prices that do not necessarily reflect the best interests of holders in terms of fetching big premiums. I'm not implying fire sales, but I do see how the financial people in the transaction can walk away with a ton for doing nothing but putting up the cash while the holders wind up holding for sure-the bag.
A better way for Shari: Get real about a hard look at all assets and put together a strategy to sell off some, spin off others, and wind up with a total valuation that benefits all.
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Above: There is little question that a spinoff of its streaming business would fetch a far fatter return than a sale. Shareholders would see real value here.
Nobody asked me, BUT :
Here's a plan for PARA designed to bring best value overall.
Let's agree that the business model of today's media giants is broken, tired, and non-starting for the future and that a new design for a sunny future lies in rationalizing assets. The hard reality here is that the markets and circumstances that created these media behemoths in the 1970s and 1980s no longer exists. They are munching grass in Jurassic Park truth be told.
I advanced this thought in my post on Disney (Jan. 5th), and while my thought is not a perfect analogy for many reasons, it's close enough to resonate as a good alternative to Skydance, or for that matter WBD as well.
Our answers are simple and we understand the possibility that readers of this space may believe they are oversimple, not taking into account all the investment banking/tax guru mumbo jumbo that ultimately informs most analysis of such possible deals.
From our perspective, we bring the POV of a c-suite veteran who has faced similar deals before during that tenure. You maximize deal returns best by validating the time proven adage that parts are almost always worth more than the whole in deals like this. And the Skydance deal has its merits but is something of a head fake too: It's a cheap leap frog deal for Shari with too many question marks about assuring that the disposal of the assets maximizes shareholder stake in the deal.
A plan for Shari and PARA holders that seem to make better sense than a total buyout of NA and the subsequent task of a massive sell down of non-studio assets-including wrestling with the grizzly bear of PARAs streaming business.
- Asset group - Sale - Spin off:
- Studio - Goes to Skydance - The studio is salable
- CBS network's - N/A - buyers are few
- Media Networks - BET, NICKELDEON - All others
- Paramount+ - Yes, to Apple, etc. - Yes, strong IP
- Consumer products and experiences - Mattel could be a serious buyer - N/A
- International Networks - N/A - Packaged right can work
Theory: There is every reason to believe that a break up of PARA using a strategy of both asset sales and spinoffs could produce an overall total return to Shari and shareholders considerably above the stock's current trading range and clearly above any Skydance deal.
All Shari needs to do is to call in the best belt and suspenders groups from Goldman, or Morgan, set the table and have them go at it. Instead of the holding action that a Skydance deal could produce on unwanted assets, you could have a stronger offer to would be buyers. PARA shareholders would end up with positions in key PARA units free of corporate costs, manageable debt and a fresh eyed approach to a narrower but deeper growth arc.
A WBD deal would benefit some PARA verticals but be highly redundant in others. Whether CEO Zaslav wants to own a linear TV network is questionable. Our guess if he was the one writing the ultimate check, he'd be inclined to sell off CBS or spin it off as noted. The streaming business could add some solid IP to the WBD business. BET is best served by selling it to owners who are willing to undertake a revival in the face of the massive African American theme and casting leaps in the mainstream media. To me, $3.5b seems like a good deal for all potential players here.
We'll save you the trip down the inevitable rabbit hole of sussing out total value potential between various deals and possibilities. We've done some napkin scribbling and present it not as the imprimatur gospel of a major bank. But our DCF estimates with five year terminal value comes out to near $29.75 a share assuming nothing big time changes.
However, assuming something similar to the rough plan involving both sales and spinoffs, I get the ultimate return to shareholders well above $38.25 a share.
If you buy into the idea that a well thought out break up of PARA not limited by tired quick fix ideas or a simple offer to take out Shari, you could well find a reason at $14 a share to buy in now and sit tight.
For further details see:
Paramount: Skydance Move Could Lead To A Mess, But Timing Is Good