Shari Redstone, president of National Amusements and controlling shareholder of Paramount Global, walks to a morning session on 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 Global‘s controlling shareholder is open to a merger or selling the corporate at the fitting price, in keeping with people accustomed to her pondering. And she or he has been open to it for several years, said the people, who asked not to talk publicly since the discussions have been private.
Spokespeople for Redstone and Paramount Global declined to comment.
The issue has been finding the fitting deal for shareholders. Market conditions have made a transformative transaction difficult at best and highly unlikely at worst.
“The market is crying out for reshaping media company portfolios and consolidation,” said Jon Miller, chief executive at Integrated Media and a senior advisor at enterprise firm Advancit Capital, which Redstone co-founded. “However the deck is stacked against large-scale transactions now due to each immediate concerns by way of ad sales, subscription video numbers and the associated fee of debt. Nobody desires to transact at the present market valuations that these firms are given.”
Paramount Global is an archetype for the media industry’s consolidation conundrum. The corporate consists of Paramount Pictures, the CBS broadcast network, 28 owned-and-operated local CBS stations, the streaming service Paramount+, free advertising-supported Pluto TV, “Star Trek,” “SpongeBob SquarePants,” MTV, Nickelodeon, Comedy Central, BET and Showtime. It also owns the physical Paramount studio lot in Los Angeles, California.
From a sum-of-the-parts perspective, the corporate holds a powerful hand. A lot of Paramount Global’s assets would fit nicely inside larger media firms.
“Paramount has an amazing amount of assets in its content library and so they own some pretty powerful sports rights in the shape 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. “They should pull these items together, right-size the content, super charge that topline through pricing and penetration, after which we are able to see investors get enthusiastic about this concept again.”
Declining revenue from the acceleration of pay-TV cord-cutting, continued streaming losses and rising rates of interest have put Redstone in a bind. The corporate’s market capitalization has slumped to $7.7 billion, nearly the corporate’s lowest valuation since Redstone merged CBS and Viacom in 2019. On the time, that transaction gave the combined company a market valuation of about $30 billion.
It’s unclear whether staying the course will help turn investor sentiment. Warren Buffett, CEO of Berkshire Hathaway, one in every of Paramount Global’s biggest shareholders, told CNBC in April that streaming “will not be really a excellent business.” He also noted that shareholders in entertainment firms “really have not done that great over time.”
Paramount Global’s direct-to-consumer businesses lost $424 million within the second quarter and $511 million in the primary quarter. The corporate reports third-quarter earnings Nov. 2.
CEO Bob Bakish said 2023 will likely be the height loss 12 months for streaming. Paramount Global cut its dividend to five cents per share from 24 cents per share to “further enhance 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 12 months that Bakish should shut down the corporate’s streaming business entirely, despite the proven fact that Paramount+ has accrued greater than 60 million subscribers.
“We consider Paramount Global is price so much more either as a content arms dealer or as a break-up on the market story,” Cahall wrote in a note to clients in May. “Great content, misguided strategy.”
Big Tech lifeline
Bob Bakish, CEO of Paramount, speaks with CNBC’s David Faber on Sept. 6, 2023.
CNBC
Executives at Paramount Global proceed to carry out hope that a big technology company, corresponding to Apple, Amazon or Alphabet, will view the gathering of assets as a technique to bolster their content aspirations, in keeping with people accustomed to the matter.
Paramount+’s 61 million subscribers could help supersize an existing streaming service corresponding to Apple TV+ or Amazon’s Prime Video, or give Alphabet’s YouTube a much bigger foothold into subscription streaming beyond the National Football League’s Sunday Ticket and YouTube TV.
While Federal Trade Commission Chairman Lina Khan has been particularly focused on limiting the facility of Big Tech firms, Apple, Amazon and Alphabet may very well be higher buyers than legacy media firms from a regulatory standpoint. They do not own a broadcast TV network, unlike Comcast (NBC), Fox or Disney (ABC). It’s highly unlikely U.S. regulators would allow one company to own two broadcast networks. Divesting CBS is feasible, but it surely’s so intertwined with Paramount+ that separating the network from the streaming service could be messy.
“We consider Paramount Global is simply too small to win the streaming wars, but it surely is bite-size enough to be acquired by a bigger streaming competitor for its deep library of film and TV content, in addition to its sports rights and news assets,” Laura Martin, an analyst at Needham & Co., wrote in an Oct. 9 research note to clients.
Acquiring Paramount Global could be a relative drop within the bucket for a Big Tech company. Paramount Global’s market value was below $8 billion as of Friday. It also has about $16 billion in long-term debt.
Still, even with huge balance sheets and trillion-dollar valuations, there is not any evidence technology firms wish to own declining legacy media assets corresponding to cable and broadcast networks. Netflix has built its business specifically on the premise that these assets will ultimately die. Paramount’s lot and studio could also be appealing for content creation and library programming, but that will leave Redstone holding a less desirable basket of legacy media assets.
Breakup difficulties
It’s possible Redstone could break up the corporate and unload legacy media assets to a personal equity firm that might milk them for money. But Paramount Global’s diminished market valuation, relative to its debt, likely makes a leveraged buyout less appealing for a possible private equity firm.
Furthermore, rising rates of interest have generally slowed down take-private deals in all industries, as the associated fee of paying debt interest has soared. Globally, buyout fund deal volume in the primary half of 2023 is down 58% from the identical period a 12 months ago, in keeping with a Bain & Co. study.
If a full sale to Big Tech and a partial sale to personal equity won’t occur, another choice for Redstone is to merge or sell to a different legacy media company. Warner Bros. Discovery could merge with Paramount Global, though putting together Warner Bros. and Paramount Pictures may delay deal approval with U.S. regulators.
Beyond regulatory issues, recent history suggests big media mergers have not worked well for shareholders. Tens of billions of dollars in shareholder value have been lost in recent media mergers, including WarnerMedia and Discovery, Disney and nearly all of Fox, Comcast/NBCUniversal and Sky, Viacom and CBS, and Scripps and Discovery.
Merger partners corresponding to Warner Bros. Discovery also may prefer to sell or merge with a distinct company, corresponding to Comcast’s NBCUniversal, if regulators allow an enormous media combination.
Redstone has recently dabbled around the perimeters, shedding some assets, corresponding to book publisher Simon & Schuster, and interesting in talks to sell a majority stake in cable network BET.
But Paramount Global shelved the thought of selling a stake in BET in August after deciding sale offers were too low to outweigh the worth of keeping the network in its cable network portfolio. With the whole company’s market valuation below $8 billion, it’s difficult to persuade buyers to pay big prices for parts. A change in broader investment sentiment that pushes the corporate’s valuation higher may help Redstone and other Paramount Global executives get more comfortable with divesting assets.
Selling National Amusements
If Redstone cannot discover a deal to her liking, she could also sell National Amusements, the holding company founded by her father, Sumner Redstone, that owns the majority of the corporate’s voting shares. National Amusements owns 77.3% of Paramount Global’s Class A (voting) common stock and 5.2% of the Class B common stock, constituting about 10% of the general equity of the corporate.
Redstone took a $125 million strategic investment from merchant bank BDT & MSD Partners earlier this 12 months to pay down debt, reiterating her belief in Paramount Global’s inherent value.
“Paramount has the most effective assets within the media industry, with an incredible content library and IP spanning all genres and demographics, in addition to the No. 1 broadcast network, the leading free ad-supported streaming television service and the fastest-growing pay streaming platform within the U.S.,” Redstone said in a press release in May. “NAI has conviction in Paramount’s strategy and execution, and we remain committed to supporting Paramount because it takes the crucial steps to construct on its success and capitalize on the strategic opportunities in our industry.”
Selling National Amusements would not alter Paramount Global’s long-term future. But it surely is a way out for Redstone if she will be able to’t discover a deal helpful to shareholders.
Paramount Global is not actively working with an investment bank on a sale, in keeping with people accustomed to the matter. The corporate is content to attend for a shift in market conditions or regulatory officials before getting more aggressive on a transformational deal, said the people.
Still, Redstone’s predicament aptly sums up legacy media’s current problems. The industry is counting on a turn in market sentiment, while executives privately grumble that within the near term there’s little they’ll do about it.
WATCH: Mad Money host Jim Cramer weighs in on Paramount Global
Disclosure: Comcast’s NBCUniversal is the parent company of CNBC.