Paramount Global/Skydance merger - Hollywood Reporter; Paramount’s Future: Is Skydance Deal “Path of Least Resistance” or Will It Get Derailed?

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Will Paramount Global end up looking for a new dance partner, or will David Ellison’s Skydance Media get to clinch a deal and celebrate with a victory dance? Hollywood and Wall Street insiders alike are wondering about questions like these as the future of Shari Redstone’s media and entertainment empire hangs in the balance.

After all, Skydance remains in an exclusive period until early May to possibly finalize a two-step deal to acquire Paramount Global and its controlling shareholder National Amusements (NAI), led by Paramount non-executive chair Shari Redstone. According to a CNBC report, citing sources, Skydance will meet with Paramount management and start its due diligence process next week.

The structure of the proposed transaction has caused concern among some investors, though; they worry that a deal would benefit Redstone but dilute non-voting shareholders of Paramount. The company’s stock closed at $11.97 last Friday but has fallen around 10 percent since then.

And reportedly four Paramount directors are expected to step down from the company’s board in the coming weeks. One of them is Redstone attorney Rob Klieger, the other three are members of the eight-person committee of independent board members assessing the potential Skydance deal, with at least one of the departing people having expressed concern about it, according to a report in The Wall Street Journal.

Before this report emerged, Guggenheim analyst Michael Morris described the key decision for investors this way in a report: “Bottom line for Paramount non-voting shareholders: is it worth acquiring Skydance to remove Shari Redstone and attempt to re-orient the business for sustained growth?” he wrote. In his report, he maintained his “buy” rating with a $19 stock price target. Morris then shared his take on the decision process about the deal, noting that a Skydance agreement may be likelier. “We expect Paramount chair and NAI owner Ms. Redstone to maintain full support for the Skydance combination as it values NAI at a material premium to the market value of the company’s Paramount shareholdings,” the analyst argued. “The aim would be to find a defensible rationale for the merger being ‘good for all shareholders,’ which in itself does not preclude the material premium for Ms. Redstone’s holdings.”

What if a competing offer emerges, such as a reported $26 billion cash bid from private equity titan Apollo Global Management? “It’s not clear that the board would need to choose that offer over the Skydance offer given that there will likely be adequate uncertainty and potential that the Skydance merger could create future shareholder value in excess of any offer,” Morris said.

With all this in mind, the Guggenheim analyst concluded: “We expect that the path of least resistance will be to complete the NAI sale and Skydance merger. While meaningfully inferior to a $26 billion all-cash offer on paper, it’s not clear how that offer would ultimately play out. We believe that the ownership and management refresh likely to take place with the Skydance combination is unlikely to harm the business relative to its current trajectory and could potentially spur operating and creativity improvement.”

LightShed Partners analysts Richard Greenfield, Brandon Ross and Mark Kelley are less bullish on the Skydance deal being completed. “Will Chaos and Dysfunction at Paramount Imperil the Skydance Merger?” they wondered in a Thursday report.

“We have yet to talk to a single investor that wants a Paramount/Skydance merger, as they will be massively diluted even if there is the potential for long-term value creation,” the team shared. “Investors believe that a shift in Paramount strategy/management could achieve the benefits of a merger without dilution. Why not improve Paramount’s strategic position now, gain a better understanding of the regulatory landscape in 2025, and then look to strategic alternatives?”

The LightShed analysts believe that NAI “is not interested in a sale of Paramount to private equity,” making its focus a possible Skydance transaction. “While there are clearly board members in favor of a Skydance deal, the market reaction is creating a real challenge,” Greenfield & Co. highlighted, though. “Given how public shareholders are puking the stock, they realize that a Skydance transaction is increasingly less likely. … But if Paramount shares remain in freefall, it does feel harder and harder to issue $7 billion-$8 billion of equity for Skydance’s assets and cash infusion.”

The LightShed team outlined an alternative scenario: “If the Skydance deal falls through, we continue to believe NAI will bring in new management to run Paramount and sell a sizable portion (if not all) of NAI to a third party.”

Among the possible strategy changes they predict is a shift in streaming strategy toward an arms dealer approach, which would see the sale of key content to the highest bidders, as well as a scaling back or joint venture deal for Paramount+.

Bank of America analyst Jessica Reif Ehrlich also shared her latest take on all the recent moves on the Paramount dance floor in a Tuesday report. She maintained her “underperform” rating and $9 stock price target, emphasizing: “Long term, a deal should create value, but the heavy lifting required following a deal takes time.”

Assessing reports about the potential Skydance deal, she concluded that it would “not [be] a clear win for Paramount shareholders.” She worked under the assumption that Skydance would acquire NAI with financial partners RedBird Capital and KKR, with Paramount then buying Skydance via newly issued stock. “Under this scenario, Paramount shareholders do not get taken out (i.e. Paramount remains a public company),” the analyst emphasized.

Following the combination, “we anticipate the strategy would be similar to the Warner Bros. Discovery playbook with new Paramount management led by David Ellison and likely RedBird’s Jeff Shell,” the former CEO of Comcast NBCUniversal, whom Reif Ehrlich called “an outstanding media executive.” Strategic priorities are likely to include “eliminating duplicative costs, making rational decisions on Paramount+ (cut costs, merge with another streamer or shut down), sell certain assets, and restructure the business, in particular film,” she argued.

“However, we struggle to see how the prospect of issuing Paramount equity would be positive for shares in the near term, while the potential for creating value via asset sales down the road has additional execution and timing uncertainty,” she cautioned. “Furthermore, we suspect there are potential tax consequences from future asset sales that need to be considered.”

Reif Ehrlich also called “Skydance best positioned as other offers underwhelm,” explaining her view on a $26 billion reported expression of interest from private equity giant Apollo. “We are skeptical of the reported details of the Apollo bid, and given Paramount’s share reaction post the Apollo news story, the market appears to be as well,” the Bank of America analyst noted. “As a result, Skydance appears to be best positioned to move forward with a Paramount transaction.”

Tom Cane, head of private funds research at Mergermarket, also described Skydance as sitting in the catbird seat for now. “The wind is blowing in the direction of RedBird Capital-backed Skydance Media, but agreeing a deal that works for everyone will be no small feat. Paramount’s dual-class structure could pose a challenge to getting a deal done,” he tells The Hollywood Reporter. “If a deal can’t be agreed, it remains to be seen whether Apollo’s reported bid for Paramount Global could be a viable alternative.”

The fact that private equity powerhouses are key players in the battle for the Paramount crown comes as no surprise to Cane. “Apollo and TPG have been showing an interest in Hollywood and could be among the potential private equity bidders for assets as consolidation takes shape,” he explained.

The M&A expert also sees the potential for a Paramount sale sounding the starting gun for more media and entertainment deal activity, which observers also expect to include some of Paramount’s assets. Mergermarket data since 2018 shows that the number of deals in the U.S. communications, media, entertainment and telecommunications sectors has declined. After a record year in 2021 with 800 deals with a total value of $356.3 billion, 2023 marked a low point for activity with 334 deals with a total value of $75.6 billion. But Mergermarket expects activity to step up from here, with consolidation among media conglomerates driving an uptick in sector M&A.

“Corporate consolidation in Hollywood is being driven by mounting financial pressures from weak advertising and the shift away from cable television, not to mention the actors and writers strikes,” Cane tells THR. “Looking ahead we’re expecting more tie-ups between media companies as their financial pressures mount to establish larger streaming platforms to compete with Netflix.”

Besides scale- and streaming-driven deals, “another area likely to draw M&A activity in 2024 is live events, such as sports or concerts,” argued the Mergermarket expert. “Two notable examples include Amazon’s deal to invest in Diamond Sports Group, the bankrupt sports programming subsidiary of Sinclair Broadcast Group, in January and Endeavor’s acquisition of Worldwide Wrestling Entertainment a year ago. Private equity firms are also increasingly looking at sports rights.”

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