Unbundling Paramount is better for almost everyone

Tegna

25/03/2024 12:00

(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
    By Jennifer Saba
       NEW YORK, March 22 (Reuters Breakingviews) - Paramount
Global  PARA.O  would be better served by taking the hard road.
The media company behind cable network MTV and the
Mission: Impossible franchise has received an $11 billion bid
from buyout shop Apollo Global Management  APO.N  for its film
and television studios. Controlling shareholder Shari Redstone
is instead eyeing a deal for her stake. That’s a neat solution
for her; for other investors, though, a breakup offers more.
    Paramount is in trouble. Its traditional cable business has
been undermined by Netflix  NFLX.O , against which its
own streaming service Paramount+ is comparatively small
potatoes. Worse is its heap of debt, some $12 billion net of
cash, making an outright takeover risky for potential
media-industry buyers - like one-time suitor Warner Bros
Discovery  WBD.O , which has broken off its pursuit, CNBC
reported. 
    Those woes affect Redstone’s National Amusements, which
holds a 77% voting stake in Paramount and is itself groaning
under high leverage. Extricating her family empire from the
situation in one clean sweep holds obvious appeal.
Indeed, Redstone favors a proposal to sell a majority of her
privately held firm - and, with it, voting control of Paramount
- to David Ellison’s production company Skydance, according to
the Financial Times. What independent shareholders get from such
a deal, likely a prelude to merging Skydance and Paramount, is
unclear, whether in terms of diversifying a struggling business
or giving them cash. 
    Apollo’s bid, reported by the Wall Street Journal on
Wednesday, offers another path. Morgan Stanley estimates
Paramount’s TV and movie studios together will generate
approximately $650 million in EBITDA this year, implying Apollo
would be forking over a hefty 17-times multiple. Taxed at
the standard 21% rate, the offer would net Paramount nearly $9
billion of cash.
    Crucially, that gives the company options. If used to pay
down debt, the windfall would bring Paramount’s leverage down
considerably to 1.5 times EBITDA, Morgan Stanley reckons. That
might make remaining assets, like its CBS broadcast network or
Nickelodeon cable channel, easier to swallow for buyers such as
declared suitor Byron Allen or TV groups like Tegna  TGNA.N .
Alternatively, cash could be returned to shareholders.
    There are drawbacks. Paramount would likely have to license
back content to its networks. Taking as a guide Warner Bros
Discovery, whose internal sales are over 15% of total studio
revenue, implies roughly $1 billion in fees. But it sets the
floor for a valuation and stabilizes the remaining business. It
isn’t the easiest route for anyone - but it’s the best deal for
almost everyone.
         
    CONTEXT NEWS 
    Private equity firm Apollo Global Management has offered to
buy Paramount Global’s film and TV studios for $11 billion, the
Wall Street Journal reported on March 20, citing people familiar
with the offer.
    Paramount’s controlling shareholder Shari Redstone favors an
alternative deal with David Ellison’s production company
Skydance, which is considering acquiring a majority
of Redstone’s investment vehicle National Amusements, according
to a March 21 Financial Times report. NAI controls 77% of
Paramount’s voting shares.

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Graphic: Paramount's mountain of debt towers over peers
Paramount's mountain of debt towers over peers    https://reut.rs/3x7cpLU
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 (Editing by Jonathan Guilford and Sharon Lam)
 ((For previous columns by the author, Reuters customers can
click on  SABA/ 
jennifer.saba@thomsonreuters.com; Reuters Messaging:
jennifer.saba.thomsonreuters.com@reuters.net))