Paramount

     Paramount has been a part of the fabric of American entertainment since 1912. It remains the largest operating and only remaining major studio in Hollywood, serving as the production site for thousands of notable movies and television programs. Paramount’s influence has been profound. The cultural impact from their films and television shows have entertained generations of people across the world, shaping societal trends, and influencing popular culture. From classics, like “The Godfather” and “Titanic, to fan favorites like “Star Trek” to “Indiana Jones” and the “Mission Impossible Movies,” Paramount has showcased some of the most famous movies seen all around the world. 

     Paramount has changed ownership hands over its history, but one of the most impactful owners, Sumner Redstone, bought Paramount for about $10 billion in 1994. Redstone transformed Paramount into a media monolithic empire by combining Paramount Pictures, CBS, Viacom and National Amusements. Paramount at its zenith was an unsinkable, Titanic-like powerhouse once valued at over $80 billion before Sumner’s daughter, Sheri Redstone, took over the company in 2016. Unfortunately, like the ship from one of Paramount’s highest grossing films, Titanic, the once unsinkable empire has hit a massive performance iceberg and has been sinking over the years. After strategic business model shifts and attempts to further expand failed, the boat finally sank. On July 8, 2024, Sheri Redstone agreed to sell the once mighty Paramount for $8 billion to entertainment company Skydance and private equity firm RedBird Capital Partners.

Changing Entertainment Industry

     The entertainment industry has always been evolving over the years. New technology has seen the industry change drastically as silent and black/white films, gave way to sound and color films. Television grew exponentially and peaked. Home viewing has transformed from VCRs to DVDs and now to streaming services. Content, as well as technology to deliver, has become critical especially as media competition has evolved. Film studio giants of old, have been replaced by new production houses. Disney/PIXAR, Netflix, Amazon, Apple TV, and other smaller social media platforms have taken away from the standard means of television and show entertainment. With the introduction of social media platforms in the early 2000s the traditional entertainment industry was drastically impacted. With platforms like YouTube, Instagram and TikTok, how and what people watched changed making traditional network television less captivating for many consumers. Streaming platforms have become a standard in the entertainment industry following the Covid-19 pandemic with media companies, like Paramount, chasing the leader Netflix in both content as well as viewership. 

Where did it all go wrong?

     Paramount had been growing under the direction of Sumner Redstone. He retired from the company in 2017 and gave leadership to his daughter Shari. Upon Sumner’s passing away in 2020, as part of his estate planning, his daughter, Shari Redstone, inherited most of his shares and the controlling interest in Paramount. The market cap and valuation of Paramount has greatly depreciated since her father’s death. Paramount’s strategy to stay with traditional network (CBS) and premium television (Showcase) has been met with rising costs and declining viewership. Attempts to build a streaming platform (Paramount+) came late to a saturated streaming market. That business lost $1.66 billion for all of 2023 as Paramount never quite figured out how to capitalize on their content and gain enough paying subscribers versus the cost of running the operations. At the end of 2023, the company’s long-term debt was $14.6 billion, leading to its debt rating to be slashed by the credit rating agency S&P Global in March of 2024. Since Shari Redstone took over the reins of her father’s helm the valuation of the company has crumbled as the share price has lumbered in the teens despite all attempts to turn the company around. 

Complex Policy Issues / What could go wrong with the merger?

• FTC, Department of Justice and FCC approval is needed

     The merger of Paramount and Skydance is subject to formal review by the Federal Trade Commission (FTC) and the Department of Justice. U.S. antitrust laws have been designed to prevent anticompetitive mergers or acquisitions. “Under the Hart-Scott-Rodino Act, the FTC and the Department of Justice review most of the proposed transactions that affect commerce in the United States and are over a certain size, and either agency can take legal action to block deals that it believes would ‘substantially lessen competition.’” Further, given Paramount is a media company which owns television stations, their merger with Skydance must also be reviewed and approved by the Federal Communications Commission (FCC). 

     Although the FTC has been focused over the last few years on limited the power of Big Tech and Media companies, the deal with Skydance doesn’t present the same issues as if Comcast (NBC), Fox or Disney (ABC) bought the company as Skydance doesn’t own a broadcast network. With this suitor, it’s possible the FTC or FCC requires Paramount to divest CBS or affiliated stations before the merger is completed, but it is not likely. 

     Further, Paramount had been subject to antitrust issues prior to this pending merger. The Department of Justice first sued Paramount in 1938 under the Sherman Antitrust Act for “conspiring to create a monopoly in restraint of trade” when it attempted to buy and expand upon its theaters for exclusive distribution of its movies. In 1948, the Supreme Court ruled that Paramount and other studios cannot own theater chains for distribution of their product. In April 2020, a federal judge determined that major studios could again own the theaters where their films were shown. Paramount, through its national Amusements entity, owns more than 1,500 theaters and it is possible that the FTC could require the company to divest those as a condition to the closing of the merger. 

Fiduciary Duty/Shareholder class-action lawsuits

     Every corporation is made up on residual claimants who own the property rights to the free cash flows of a company. This gets incredibly complex with non-voting stock being released. Unlike common stock, non-voting stock entails exactly what it sounds like, no voting rights. Usually this stock has some type of premium taken off in order to incentivize people to purchase such stock. Paramount has issued both class A, common stock, and class B, non-voting stock over the years. For Paramount, Shari Redstone, the heir to her father Sumner’s empire, has the most to benefit from the deal. Redstone’s combined stake in the company’s Class A and B shares is around 10%, but she holds nearly 80% of the Class A shares. While the board had to approve the merger, Shari sits on the board as the non-executive chairwoman since her father’s death in 2020. Shari Redstone given her outsized ownership stake is driving the decision regarding who to sell the company to regardless of board oversight. She decides the fate of both the Class A and Class B stock and can thus hold almost absolute power over the terms of the contract. It blurs the line of fiduciary responsibility on who she is liable to beside herself and the other Class A voting stock members. Other Paramount shareholders “had ripped Redstone for seeking a premium for her stock over other that of other Paramount investors” and Mario Gabelli, a major investor, has threatened a $100 million-plus class action lawsuit in the past over this situation. For the latest version of the deal, there is still disparity between the value class A shareholders and Class b shareholders will be received. Class A investors will be able to sell at $23 per share. A tender offer was made from Skydance which would allow Class B to sell their shares directly to Skydance for $15 per share. “This will allow investors who feel shortchanged by the Skydance deal to get rid of the company’s stock at a premium to its current price of $11.81.” Given how recent this deal was announced, it is unclear whether the new terms will be deemed sufficient for all shareholders or if investor class action lawsuits will be raised.

So how does this movie end?

     It seems like the antitrust issues associated with the merger are not insurmountable and it’s likely the FTC, Department of Justice and the FCC will permit the merger to go through with few stipulations. But there are very good odds that a meaningful investor class action lawsuit will be filed and it’s important that the Paramount board is able to prove valuation and structure were reviewed and approved at arms-length from Shari Redstone. While I’m never one to spoil a good movie ending, and it may not be as predictable as I suspect, I will say that at the height of Sumner Redstone’s reign at Paramount it likely seemed that “God himself could not sink the ship.” Unfortunately, for many investors, they may want to seriously take the Skydance tender offer to seek drier land.

Further Readings:

1. Paramount Global Must Get Skydance Approval for Any Paramount+ Joint Venture or Bundling Deals With Biggest U.S. Streamers
2. Paramount Can Extend Skydance Merger’s Go-Shop Period if It Enters ‘Good Faith’ Talks With a Rival Bidder
3. Paramount Agrees To Skydance Merger, Seemingly Ending Saga
4. PARAMOUNT GLOBAL’S SPECIAL COMMITTEE UNANIMOUSLY APPROVES MERGER WITH SKYDANCE MEDIA
5. Paramount agrees to merge with Skydance, ending months long negotiations and Redstone era
6. Skydance Deal In Hand, Paramount Lays Out What Happens If A Rival Offer Emerges
7. Paramount’s Merger With Skydance to Test DOJ’s Tolerance for Big Media Consolidation
8. Could Skydance-Paramount Deal Trigger New NFL Talks With CBS? Roger Goodell Doesn’t Dismiss It
9. SEC Filling Form 8-K
10. The FTC still needs to bless the Paramount and Skydance merger