Paramount Takeover? 3 Bidders Left After Skydance Deal Falls Through (NASDAQ:PARA)

Melrose Gate entrance to Paramount Pictures in Los Angeles, CA – Will the studios be sold in the end? gregobagelMore billionaires and private equity funds have shown interest to buy Paramount Global (NASDAQ:PARA) (NASDAQ:PARAA) or buy the control of Paramount Global via a purchase of National Amusements (NAI), the family vehicle of the Redstone family. Since my previous article on the possible Paramount Global takeover, focused on the Sony-Apollo deal, quite a number of things have changed. Sony-Apollo have now signed an NDA and they are looking at a different way to structure a potential bid. Skydance came back last week with another offer that was leaked in bits and pieces and managed to get partial approval from the Paramount side in the leading to headlines like: “Paramount and Skydance agree to terms of a merger deal”. It looked like a deal was completed there, but it was actually the special committee agreeing to put the proposal to the final decision maker, Shari Redstone. This attempt appears to have ended now, though, with the Skydance offer being turned down this week by Redstone. Two new bidders emerged that are interested to buy NAI from Redstone to gain control over Paramount Global: a group around director Steven Paul with rich investors and another team with Edgar Bronfman Jr backed by Baines Capital. Because of the way the company is structured with the voting control in the hands of one person, the potential takeover seems to play out as a corporate drama similar to Billions or Succession. We now have a situation where the rich and famous are entering the scene, leading to a lot of twists and turns in this takeover saga. In this article, I will try to look at the current situation, the involved parties and their goals and what I estimate for their impact on the deal and, following that, the stock price of PARA. Notice that anything is possible in the next few days in terms of Redstone and other parties reaching an agreement, triggering the next phase in the process. Depending on who signs the first contract, the next phase may involve litigation against many parties and/or a higher bid by a competing bidder. I will try to show who these parties are, what they want and, very importantly, what does all of this mean for investors in PARA or PARAA shares? NAI and Shari Redstone Let’s start with the decision maker in this process, Shari Redstone. Via the 77% of the voting shares in Paramount Global (PARAA) which are held in NAI, Shari is the only one that can decide to approve or veto any merger or sale-related activity for NAI and for Paramount Global. Any suitor must deal with her somehow. Redstone has debts in NAI that need to be paid back and selling NAI and/or Paramount can be a way to get her enough cash to do this. If Redstone decides not to sell NAI or Paramount Global in a big transaction, she probably needs to sell PARA and PARAA shares in the market, which means she needs a higher share price. In the recent shareholder meeting, the three CEOs discussed what Paramount Global would do if they will stay alone. The Skydance/KKR/Redbird consortium David Ellison, billionaire and CEO of media company Skydance is the face of this group that has been negotiating with Redstone for a long time. So far their first attempt seemed to get cancelled by strong shareholder resistance and the first offer made by Sony-Apollo. The deal that fell apart today seemed another complex one with many parts: buying NAI from Redstone, merging Skydance with Paramount Global and paying back debt for Paramount Global with a cash infusion of $1.5B. They were also offering PARAA voting stockholders $23 and offering $15 in a tender for 50 percent of the PARA holders. I stopped reading the leaked stuff at some point and was waiting for the full picture after it was signed, which was signaled to happen at the Paramount shareholder meeting on June 4, but this did not happen. After the shareholder meeting, a few reasons were mentioned in the press about the non-signing, one being Shari Redstone being unhappy with a last-minute change to NAI part of the offer, lowering her take in the deal. Another reason mentioned was the outstanding discussion about who would pay for the cost of any following lawsuits. The WSJ article about the most recent Skydance deal failure specifically mentions disagreement about the right for the other shareholders to vote. When Skydance left their last offer, they implied they would not come back, but suddenly, they were back with a sweetened deal. It might be very possible that there will be a next offer from this consortium, without trying dilution or merger at unfavorable terms, but they probably need some time to let their current loss sink in. NAI actually released a statement to recognize the future relationship in business partnerships, saying “NAI is grateful to Skydance for their months of work in pursuing this potential transaction and looks forward to the ongoing, successful production collaboration between Paramount and Skydance.” The Steven Paul and John Paul DeJoria investor group This group of unknown investors emerged at some point in the process as a potential bidder for NAI. Steven Paul is a director with a lot of movies on imbd. After Steven’s bid became public, it became known that he is a friend of Shari Redstone and has an office on the Paramount lot. When Steven Paul was named as part of a group that were interested to buy NAI at a price higher than Skydance but below $3 billion, I was skeptical at first, but when I found out he was linked to a number of wealthy individuals, including Patron Tequila billionaire John Paul DeJoria, the deal made more sense to me. Based on all the candidates so far, the perfect team seems to involve at least a media specialist (CEO, director or producer), one or more billionaires, a private equity fund or a nice mix of those. Edgar Bronfman Jr. and Bain Capital On Monday, 10 June, this new contestant was added to the list of bidders for NAI: Former media executive Edgar Bronfman Jr backed by Bain Capital. According to WSJ, this team want to start due diligence and might make a bid for NAI above $2 billion. With an interest in media since he was young, experience at Warner Music and involved with the takeover of PolyGram to make the biggest music company in the world, Bronfman Jr. seems to have the right set of skills for this at first glance. The buyer of Polygram was Seagram, founded by the billionaire Bronfman family. Seagram was a Canadian conglomerate with strong ties to alcohol production and the owner of Universal at the time. Edgar Jr was the CEO of Seagram at the time of the PolyGram deal. Sources from within the Bronfman family have said that the media investments led to the end of Seagram and its sale to Vivendi a few years later. PolyGram was one of the first shares I held during its takeover, and I notice quite some similarities with the current situation around Paramount. The key item to buy was the PolyGram music catalog. The other assets were partly sold off after the deal. It is a long time ago, but I remember how the deal went down because it was an experience to learn from for future investments. The leaked news then seemed aimed at keeping the stock price down, and investors feared a low bid based on leaked pricing and deal terms. This probably all sounds familiar for PARA holders. In the case of PolyGram though, the actual terms were much better in the final bid compared to the leaked news and there was hardly opposition when the deal closed for a very acceptable price. Sony-Apollo The interest from Sony and Apollo started with a non-binding $26 billion all-cash offer for the company. In my first article about Paramount, I focused on this start point and discussed this deal in detail. Just after that, about 3 weeks ago, on Friday, 17 May, we heard that Sony-Apollo had signed the NDA to start looking at Paramount’s books. This was a big step forward in a potential sales process involving Sony-Apollo. On the market open the following Monday, this seemed to do nothing positive with the price of the stock, however. PARA prices around May 20 (Seeking Alpha screenshot)After that, everything went silent for a while, but on 30 May that changed. Not long after the news about a sweetened Skydance deal came out, Sony Pictures CEO Tony Vinciquerra stepped into spotlight at the Bad Boys: Ride or Die premiere. When asked about Paramount by Deadline he referred to the signed NDA and the deal status and said: “It’s still progressing, and we will see where we all go.” Sony-Apollo appears to have changed their interest from wanting to buy the full company in an all-cash offer to wanting to do something else. They have not been clear on what their new plan is. What matters to me is that Sony has long-standing interest in buying media content. Tony Vinciquerra was part of a group with Comcast trying to buy media assets from of 21st Century Fox in 2017. Tony already has expressed interest in buying Paramount Studios before there were talks about a sale of the entire company. In the recent Sony Q4 results meeting, the management specifically mentioned buying IP and M&A “We will continue to work toward mid, long-term growth of our business through such means as acquisition of IP and M&A, but we intend to emphasize investment efficiency and be more selective in the strategic arena.” Sony is actively buying IPs. At the moment, they are currently engaged in a music deal involving the Queen songs for about $1 billion. For Sony Pictures and for other uses, for instance in game creation, the Paramount catalog could be a very valuable addition to their IP. A Sony-Apollo deal for Paramount could be a partial buy of the assets or a partial payment in shares, or both or neither. Nobody really knows and there have not been any leaks, so we have to wait if they announce an offer and following that if the special committee will recommend their offer to Redstone. Redstone appears to have privately suggested in early May that if they want to split the company, it would not be a dealbreaker, but it depends on the terms. Regulatory issues might be more difficult to overcome for Sony-Apollo due to current media ownership by Apollo and rules for foreign owners but Warner Bros. Discovery (WBD) just recently showed interest again in CBS, where most of the regulatory issues would exist. Maybe these three parties can work something out together. In an interesting move, on 12 June, Sony announced that they are buying the Alamo Drafthouse movie theaters and are creating a new Sony Pictures Experiences Division. Movie studios were not allowed to own cinemas for a long time. This is one of the reasons NAI is structured as a large cinema business owning a studio, rather than the other way round. If Sony would acquire NAI in a Paramount deal, they would immediately own an additional 1,500 cinema theaters that could be used by their new Division. Various unknown short parties Paramount is one of the heaviest shorted stocks in the S&P 500 Index (SP500). The shorts have managed to bring their position down from about 73 million to 63 million in the last month. Because the traded volume in PARA has gone down recently, well below the 20 million traded stocks per day on average, it is getting more difficult for them to quickly get out. Example volume Monday 10 June 8,860,669 Avg. Volume 20,271,925 Click to enlarge The shorters seem to try to use any new bad news to generate volume and trigger stop losses set by retail investors, for instance when the news came out that Sony-Apollo was “Rethinking the deal”. The Skydance deal would have been good for them because dilution would offer them an easy way out, and the $15 price cap for PARA shares in a tender limited their potential losses. After the Skydance deal fell through, 32 million shares were traded, well above the 20 million daily average, so maybe some shorts used this opportunity to get out. Current Paramount investors and legal action Some of the large shareholders of PARA and PARAA spoke up during one of the earlier Skydance offers. Ariel Investments, Aspen Sky Trust, Matrix Investments and others talked about treatment of the PARA holders. The process of merging Skydance with Paramount could potentially be stopped by filing an injunction at the court with a relevant legal argument – for instance, breach of fiduciary duty, which then would lead to proceedings and perhaps a block of a merger until these were concluded. The Employees’ Retirement System of Rhode Island, took a different approach. The pension fund asked for access to the Paramount books, including documentation regarding the sale, to see if the process used was fair to all Paramount owners and not just for the sake of the majority shareholder, Shari Redstone. Paramount denied access to this documentation request and a follow-up legal procedure to ask a judge to give access to the requested information is currently ongoing. The pre-trial brief states that “Plaintiff is concerned that the Paramount Board has failed to prevent Shari Redstone from diverting corporate opportunities or interfering with Paramount’s ability to seek the best deal for Paramount and its other stockholders.” As to the purpose why the pension fund wants to see the documents, they are clear: “Plaintiff has a credible basis to suspect potential breaches of fiduciary duty, wrongdoing and mismanagement by Shari Redstone, NAI, the Board, and Paramount management”. The role of the special committee, loyal insiders and the golden parachutes are also in the pre-trial brief. The lawyers of the pension fund have done a detailed job describing what happened in the past and where they think rules were broken and who was involved and/or would benefit. This may have helped push back on the Skydance proposals and with this the Rhode Island pension fund probably improved the chances to get fair treatment for all PARA shareholders. Importance of following the process to prevent legal issues Depending on what type of deal, Delaware law protects minority shareholders against majority shareholders in different ways. Skydance did not seem eager to have a majority of the minority shareholders vote over their merger plan. If this was done and the majority of the minority agreed on the offer, it would be more difficult to have legal procedures against the involved parties. Redstone would have a lot to gain by limiting her legal risk. In the latest plan a go-shop for a limited time was discussed between Skydance and the special committee. This would be a possible alternative for the minority vote, according to sources in a recent WSJ article. In a go-shop there would be an agreement to a deal, unless the seller (Paramount) finds a better deal in a set time period, for instance 30 or 45 days. If no new bidder stands up to buy, it helps to prove that there was no better buyer in the market. I have no idea how this would play out in court vs majority of the minority as a process requirement, but from a shareholder perspective I do not think it matters a lot. My guess is that a go-shop provision, which would partly protect Redstone and the board would have opened the door to Sony-Apollo to try outbid Skydance fairly and win. After what happened with the Skydance deal today, the situation just became a bit more blurry for Paramount holders again. This is because the new bidders are only trying to obtain NAI at this point. How to play it? Paramount stock just took a 7.8% hit from the Skydance deal ending, and it will take a few days for everyone to reposition themselves. Traders who thought that they could play arbitrage with the $15 cap from Skydance, may want to get out in the next few days. If you currently own PARA shares, I would wait it out. Just hold your shares until this is over, or consider to average down if you have a higher cost average. PARA is still trading quite close to the low points, the downside seems limited, and the results this year are improving. New investors considering to buy PARA shares From what I see, only a Sony-Apollo deal would lead to a decent short-term increase in the PARA stock price. I have been betting on a Sony-Apollo deal because Sony is a strategic buyer for media content. I treat the PARA stock as a coin flip bet with a real edge, and it currently looks like heads I win with a Sony-Apollo bid, tails I don’t lose much, due to the depressed stock price aided by the shorters. My idea is that Sony will aim to outbid the smaller competitors to win this deal. Their price indication was above $20 per share in their earlier non-binding offer that started the negotiations. With Skydance gone for now, Sony-Apollo is the only public party with interest in buying the whole company. I hope to see them make an offer that is fair to all shareholders. Difficulties to close this deal will be more on Paramount’s side, mostly due to the hard-to-understand position of Shari Redstone and NAI. Any deals for NAI only with either Steven Paul/John Paul DeJoria or the combo of Bronfman with Baines Capital would get us a new controlling owner to replace Redstone. It is not easy to say what this would mean for the share price. It would probably depend on the details of their plans and the perceived quality of their management. It is hard to believe though that they would pay a decent price for control over Paramount without trying to earn something back, possibly at the expense of the PARA shareholders. I have a slight preference for a self-made billionaire like DeJoria over one that came from a rich family, like Bronfman, but there will be no voting over this if they just buy NAI, so it does not really matter! Conclusion If a Paramount deal happens, Sony-Apollo is currently the only team we know of that may want to buy the whole company. For the other NAI buyers, we may hear what they really want in the coming weeks. It is also still possible that no deal happens. Shari Redstone holds the key, and she will decide what happens next. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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