Consider this scenario: A family-owned global media conglomerate worth billions of dollars is caught in a bitter struggle. The question at hand is whether to preserve the family’s legacy or to sell and walk away with billions in their pockets. This is not a plot from a popular TV show, it’s the real-life drama surrounding Paramount Global (PARA).
Paramount’s structure is unique compared to many publicly held companies. Its dual-class structure allows Shari Redstone, daughter of the late media mogul Sumner Redstone, to effectively control 77% of all voting stock. Regrettably for shareholders, her control of the company has often hindered their best interest.
Investors should have been ecstatic when private equity group Apollo Global Management Inc. (APO) proposed to purchase Paramount for $26 billion last week. This offer would have provided shareholders with roughly $17 per share in cash. Any typical CEO would have welcomed this deal, especially considering the company’s $11 share price.
However, Shari Redstone declined the offer.
Despite this ongoing saga, Paramount remains significantly undervalued. But, is it a wise investment at this moment?
Typically, a company like Paramount would be valued at least at $17, the net cash value per share of Apollo’s $26 billion bid. A deal with Apollo wouldn’t raise any potential antitrust issues, and the nature of the offer would have guaranteed shareholders a payout.
On the higher end, Paramount’s stock could be valued as much as $25 today. Analysts predict the company to produce $1.03 cash flow per share this year, and $1.79 per share by 2026 as streaming costs decrease in relation to revenue.
Paramount’s cable enterprise – which includes MTV, Nickelodeon, and Showtime – is experiencing a decline, but a well-managed one that continues to generate strong cash flow. A three-stage discounted cash-flow model values this combined future payment stream at $25, a 220% upside from current levels.
Over the past weekend, a concerning report surfaced:
“Common shareholders could get a different deal than the Redstone family in a merger.”
After rejecting Apollo’s bid last week, Paramount’s executives started exclusive negotiations with Skydance Media, a production company managed by David Ellison, the son of Oracle Corp. (ORCL) founder Larry Ellison.
During these recent discussions, Skydance is proposing to purchase Paramount’s parent company, National Amusements, and merge with Paramount for $2 billion.
The outcome – needing approval from a special committee of Paramount’s board – will potentially provide the Redstone family with cash, while distributing nonvoting shares and possibly diluted stock in the new firm to others. The dilution amount will depend on the ratio of Paramount shares to Skydance ones.
Paramount’s increasing corporate governance issues now cast doubt on whether this cash flow will benefit common shareholders.
Paramount’s directors were reportedly “unconvinced” about the $26 billion Apollo deal due to uncertainty about how Apollo would finance its bid. An odd concern considering Apollo’s reputation as a $300 billion buyout empire.
This latest round of negotiations with Skydance indicates that the Redstone family is more focused on preserving its patriarch’s legacy than rewarding shareholders with returns. The most probable offer now has Paramount absorbing Skydance’s smaller movie studio, which will not significantly impact the company’s value.
Therefore, despite Paramount shares having as much as a 220% upside, I wouldn’t advise investing in this company at the moment, especially with the ongoing merger discussions with Skydance Media.
However, if you’re interested in knowing which companies I do recommend investing in, check out my Investment Report. Here, I analyze the global macro environment and share the best strategies to capitalize on it, including selecting the right stocks at optimal prices.
Let us know what you think, please share your thoughts in the comments below.
