Shari Redstone Wins, Shareholders Lose in Paramount-Skydance Deal
Paramount Global’s merger with Skydance Media is proof that you can lose for winning, at least when it comes to big Wall Street deals. Still, shareholders might have no choice but to accept what looks like a bad deal.
With Paramount stock down 20% in 2024 and 75% over the past five years, some investors had been hoping for a deal to cash them out. The terms of the Skydance merger are unlikely to make them happy. National Amusements, led by Paramount Chair Shari Redstone, is getting a far better deal than the bulk of public shareholders, who hold nonvoting Class B shares. Holders of A shares, which have voting rights, are also getting more favorable terms than B holders. And Paramount is paying a stiff price to purchase assets of Skydance, which is leading the deal.
Shareholders won’t even get a chance to OK the merger. The Redstone family’s National Amusements, which controls the company through supervoting Class A stock, accepted a deal that doesn’t allow a vote by holders of B shares, who control about 90% of the struggling media company, even though National Amusements’ economic interest in Paramount is just under 10%. Skydance, which is headed by David Ellison, the son of Oracle founder Larry Ellison, apparently didn’t want such a vote, which is considered to be good corporate governance but might not have led to shareholder approval, given the terms of the transaction.
The deal doesn’t seem all that complicated at first. The holders of the nonvoting Class B shares (ticker: PARA) can elect to receive $15 a share for what will likely be about half their stock. They will keep the rest of their shares. Public holders of voting Class A shares will get $23 a share in cash or 1.53 Class B shares. The cash option is more valuable for both share classes, with the A shares rising 5% to $21.43 so far this week and B shares falling 0.8% to $11.73.
Here’s where it gets complicated. To gain control of Paramount, the Skydance group isn’t buying all the Paramount stock. It’s purchasing National Amusements for $2.4 billion including assumed debt. National Amusements holds 77% of the 41 million Class A shares outstanding, which have voting rights, and 5% of the 626 million nonvoting B shares. When the deal is done, Skydance Media and its partners, including the Ellison family, will end up owning 70% of Paramount stock and 100% of the voting control of the company.
National Amusements owns more than its stake in Paramount, its most valuable asset. It also operates some 759 movie screens in theaters in the U.S. and abroad. The company didn’t break down the price it got for the Paramount stake versus the theaters. And it doesn’t provide financials on the theaters, making it difficult to value them. But if the theaters are worth about $500 million, in line with the valuation of the public Cineplex , the Redstone family got about $30 a share for its Paramount stake, according to Barron’s estimates, or $7 more than other class A shareholders.
Mario Gabelli, whose firm is the largest public holder of Paramount voting shares, wants to know that breakdown, tweeting on X that investors need to know what Skydance paid for National Amusements’ A and B shares. He called this “operation fish bowl.”
Class B shareholders have more to worry about, though. At a recent $11.73, the stock was trading closer to the 52-week low of $9.50 than the high of $17.50, although the stock is above where it stood in early July when reports of a deal surfaced. Financing isn’t an issue given Larry Ellison’s deep pockets, and regulatory problems aren’t expected due to the small size of Skydance. Paramount would buy Skydance for its stock, now worth about $3.7 billion, or over 10 times estimated 2025 earnings before interest, taxes, depreciation, and amortization, or Ebitda.
Investors, though, fear that the B shares will fall to around $8.50 when the deal closes. This is calculated by assuming that investors get $15 a share for half their stock and then solving for what price on the remaining half yields the current stock price of $11.73 ($15 plus $8.50 divided by two is about $11.73). The company will still owe more than $10 billion of net debt, and have limited projected free cash flow in 2025, while continuing to struggle with tough industry trends that should pressure the revenue and profits Paramount generates from its legacy media businesses. Citigroup analyst Jason Bazinet called that implied Paramount price of about $8 a “relatively muted multiple” in a client note but did concede that, at that price, the stock would trade at about six times projected 2025 Ebitda, in line with some media peers. The public float in Paramount will fall by about 50% after the deal, which could benefit investors.
The big issue is why the deal was even needed. National Amusements gets cashed out at a nice price, but the deal for public holders of the nonvoting stock is much less generous and most of any upside will go to Skydance. Analyst Richard Greenfield of Lightshed Partners has argued that Paramount should have stayed independent, cut costs, and sold noncore businesses—BET is reportedly for sale. He called them “easy lifts” that don’t require a sale of the company soon. Once done, the company could have considered a sale in a better condition, he wrote in June.
Shareholders may file suit challenging the deal in Delaware, where Paramount is incorporated. In evaluating the fairness of deals, Delaware courts prefer to see votes by noncontrolling shareholders. Paramount states in its 10-K that in general the class A and B shares “have the same economic rights.” This implies equal treatment in a merger, which isn’t the case here.
There is a so-called go-shop clause on the deal that allows Paramount’s special board committee to consider other offers in the next 45 days, but go-shops rarely result in a winning alternative proposal.
Paramount has been a graveyard for investors in recent years—a classic value trap in which a seemingly cheap stock gets cheaper due to weakening fundamentals. It just might stay that way.