Paramount (PARA) Soars on Acquisition Interest: What's in Store for Investors?

Last week, the leading stock in the S&P 500 was Paramount Global (PARA), as its shares soared amid mounting speculation of a potential acquisition. Content production entity Skydance Media and private equity firm RedBird Capital Partners have shown interest in acquiring PARA's assets.

Although the acquisition process is still in its early stages, non-disclosure agreements have been signed, and a small team is currently evaluating the financial figures, there is no official process or dealbook yet.

The potential acquisition could manifest in several ways; one may involve Skydance and RedBird Capital purchasing a majority stake in PARA’s parent company, National Amusements (NAI). The Norwood, Massachusetts-based company controls 77% of Class A shares of PARA's stock.

If RedBird and Skydance acquire shares in NAI, it could pave the way to steer the company without entirely purchasing it. This would enable the group to strategically detach underperforming assets or cultivate a partnership with a strategic ally.

RedBird and Skydance could avoid managing PARA's KCBS-TV channel or cable networks. There could be efforts to execute a phased divestiture, dispensing CBS and TV stations and packaging some cable channels. Hence, a plausible scenario might involve targeting PARA's intellectual property and Paramount Pictures for acquisition.

Despite Shari Redstone, President of NAI and PARA’s non-executive chair, historically asserting that her company – rooted in a drive-in cinema business originally founded by her grandfather – was not up for sale, recent activities indicate a possible change in stance.

Last month, PARA's board of directors endorsed "golden parachute" compensation arrangements for its Chief Executive, Bob Bakish, along with other top-level executives. These moves ignited speculation around Redstone’s receptiveness to incoming offers.

As a majority stakeholder in NAI, Ms. Redstone holds the domain over the majority of the voting rights in PARA. Consequently, her ownership gives her an authoritative influence on final decision-making. However, for another party to negotiate acquiring those NAI shares from Ms. Redstone would significantly ease the path for a potential buyout of PARA.

The acquisition rumors propelled PARA's shares to their highest level since May, placing them in positive territory for the first time this year. The stock increased by 14% late Friday trading, hiking PARA's market capitalization to roughly $11.13 billion. This comes after the company concluded its latest quarter with nearly $15.62 billion being long-term.

The corporation recently pledged to shed its non-core assets to reduce debts and enhance its financial standing. The announcement of the sale of Simon & Schuster to investment institution KKR followed the publishing colossus's failed acquisition by Penguin Random House in the preceding year. This $1.62 billion cash transaction was completed in October 2023. Recent speculation also suggests potential sales of additional assets like Showtime and BET Media Group.

PARA is grappling with various headwinds, specifically in its quest to establish a presence in the streaming arena. Its conventional sectors, encompassing broadcast and cable TV, are witnessing a decline, with advertising revenues from the TV Media division registering a 13.7% decrease year-over-year in the third quarter.

The buyout rumors gain credibility because PARA stock, barring fleeting moments of triumph, has substantially fallen short of stakeholders' hopes. Its shares have marginally surged year-to-date, inclusive of the Friday pop. Over the last five years, a devastating slump of over 67% has been witnessed for PARA stock, a trend that long-term investors might anticipate reversing with the rumored acquisition.

Warren Buffet’s Involvement

Operating in a unique arsenal of the vast entertainment domain, Skydance, a prosperous enterprise, enjoys immunity from possible regulatory impediments. Established in 2010 by David Ellison, heir to billionaire Oracle co-founder Larry Ellison, Skydance's existing partnerships with PARA have given rise to massive successes like Tom Cruise’s megahit projects Mission Impossible series and film and television adaptations of Jack Reacher, adding significant value to the speculated acquisition deal.

The Ellison family, the majority shareholder of Skydance, possesses significant financial clout for conducting a major transaction. In October 2022, the company's market assessment surged to $4 billion following a cash infusion of $400 million. This round was led by RedBird, who endeavored co-jointly with the Ellisons, KKR, and Tencent.

Skydance’s restructuring of PARA could convert the company into an arms dealer following substantial asset liquidations. Paramount Studios' high value could be instrumental in settling outstanding debts, signaling a revival of overall corporate growth and profitability, should Skydance merge into PARA. Such a shift will likely favor PARA's shareholders, including Warren Buffett.

The question arises if this solution was conceptualized by Byron Trott, Buffett's esteemed banker, after recognizing the severe financial difficulties faced by both NAI and PARA.

Earlier this year, Ms. Redstone accepted a $125 million strategic investment from merchant bank BDT & MSD Partners to alleviate some debt, reaffirming her confidence in PARA's value proposition. Buffett's trusted banking advisor is Byron Trott, Chairman and Co-CEO at BDT & MSD Partners.

The association continues beyond this point. Berkshire Hathaway, under the stewardship of Warren Buffett, is the largest institutional investor in PARA, holding a 19.6% stake secured initially in early 2022. This investment is noteworthy, particularly as it sits impressively above the current market value. The stake is now approximately $1.58 billion, post PARA's recent divestments.

The interplay of power and influence here between Trott, NAI, and Berkshire Hathaway leads to an intriguing scenario. It sheds light on the indirect control Trott may exert over NAI proceedings and NAI's influence over Buffett’s significant ownership in PARA.

The inclusion of Buffett and his financial advisor adds complexity and intrigue to the situation, making it significantly more compelling than previously perceived.

Bottom Line

PARA has historically been susceptible to instability due to its size and heavy reliance on youth-centric cable networks. Furthermore, it spent most of the preceding decade grappling with the effects of Sumner Redstone's deterioration, unguided favoritism ensues by Viacom C.E.O. Philippe Dauman and alleged repeat offenders like Les Moonves.

Additionally, there seemed to be an overemphasis on short-term numerical targets to the detriment of long-term planning. Although PARA handled the distribution of popular franchises such as Marvel movies and Lucasfilm’s Indiana Jones, Disney ultimately had the strategic acumen and scalability to acquire these companies.

Given its relatively small size compared to its competitors, PARA has often been regarded as a potential candidate for acquisition. PARA shares are trading relatively flat for the year, noticeably lagging the approximately 17% surge for the S&P 500 index following acquisition rumors.

From an investor perspective, the hope is for a significant premium to emerge within the coming months. Investment from market giant Warren Buffett may incentivize investor uptake of PARA shares, potentially increasing stock prices.

NAI's situation looks increasingly dire. They cut their dividend by a striking 80% earlier in the year due to decreasing TV advertisement revenues and losses incurred from streaming. They were significantly impacted even further before their $125 million issuance in May, after which they were expected to simply break even for the year and predict a loss of about $35 million in 2024, according to S&P Global. The possibility of a downward spiral seems plausible.

LightShed analyst Rich Greenfield wrote, “With over 5x leverage, Paramount is in a precarious situation. In fact, we suspect its stock price would be dramatically lower if not for investors believing that its dire situation requires a sale in the coming 12-18 months.”

Shari Redstone could accept and make a dignified departure from her father's company if a fair proposal materializes. Transitioning voting power from NAI to another corporation won't notably benefit common stock shareholders but would significantly favor Ms. Shari and the senior executive.

If this trajectory ensues, one could predict that long-term investors would be disadvantaged, with the bulk of benefits allotted to voters with substantial voting power. Therefore, it could be wise to watch the stock for now.