Update: Skydance Media Acquisition of Paramount Diminished After Disjointed Annual Meeting

Updated: Paramount-Skydance Merger Collapses

In a significant development for the film industry, Paramount Global’s shares surged by 7.5% on Monday following news that a long-anticipated merger with Skydance Media is nearing completion upon the finalization of merger terms.

However, at their annual meeting on Tuesday, Paramount Global executives unveiled a plan to reduce costs and seek a partner for their streaming service. As a result, shares dropped nearly 5% on Tuesday as prospects for a merger with Skydance Media diminished.

This proposed merger, driven by various factors, including Paramount’s declining stock, historic creative failures, and strategic repositioning towards streaming, marks a pivotal moment for the studio and the broader media market.

Paramount and Skydance Finalize Merger Terms, Await Redstone’s Green Light

Paramount Global’s stock has substantially declined in recent years, plummeting to about one-third of its pre-lockdown value in 2019 when CBS and Viacom reunited. Despite the downward trend, the past three months have brought a nearly 30% rise in shares, fueled by various merger and acquisition rumors, including a less likely deal involving Sony Pictures Entertainment and Apollo Global Management.

The current offer in question, supported by RedBird Capital, KKR, and Paramount’s independent special committee, would provide Redstone $2 billion for National Amusements, which owns 77% of Paramount’s Class A voting stock and 5.2% of its Class B common stock. The second step involves Skydance merging with Paramount to create a combined company.

The deal, which does not require a shareholder vote, would also see Skydance and RedBird contribute $1.5 billion in cash to help reduce Paramount’s debt. Skydance would buy nearly 50% of Paramount’s Class B shares at $15 each. Upon closing, Skydance and RedBird would own two-thirds of Paramount, with Class B shareholders owning the remaining third. All in, both Class A and B shares would cost Skydance and its partners $7.9 billion.

Previously, Sony Pictures Entertainment and Apollo Global Management submitted a joint $26 billion all-cash offer for the company. This plan proposed that Sony take a majority stake and operational control while Apollo would take a minority stake. This bid followed Apollo’s rejected offer to acquire Paramount Pictures solely. Despite signing NDAs to begin discussions with Paramount, Sony and Apollo have since backed away from the original offer.

Paramount Executives Silent on Skydance Deal as Focus Shifts to Streaming

Investing in streaming has been a disaster for major studios, with Paramount Global incurring a $490 million loss in Q4 2023 alone despite subscribers reaching 67.5 million. Notably, Tuesday’s presentation didn’t mention the Skydance Media merger. Instead, executives outlined a streaming strategy that includes exploring strategic partnerships or joint ventures to accelerate Paramount+’s profitability. This shift of focus suggests how the company aims to survive if Skydance implodes.

As reported in December, Apple and Paramount were on the verge of forging a bundling partnership that will include Apple TV+ and Paramount+, marking the next chapter in the streaming story.

Bundling streaming services marks a significant departure from the traditional model, especially as many studios have spent years re-acquiring films and shows from third-party distributors. The rumored bundle of Apple TV+ and Paramount+ exemplifies a growing trend in a profit-starved segment.

Aspen Sky Trust Raises Concerns Over Merger Agreement

Skydance Media, led by the son of multi-billionaire Oracle founder Larry Ellison, has been in discussions with Shari Redstone’s National Amusements Inc., which controls 77% of Paramount’s voting shares but only 10% of its equity. Initially criticized as a sweetheart deal for Redstone, Skydance’s revised bid has satisfied some skeptics.

However, on Monday, Paramount shareholder Aspen Sky Trust criticized reports of a Skydance agreement to acquire the media conglomerate, calling it an “undervalued bid” that primarily benefits non-executive chair Shari Redstone to the detriment of most other shareholders. The firm, which owns approximately 6.57 million shares in Paramount, expressed its opposition in a third letter.

While the Skydance offer may be accepted, the more pressing issue is the future strategy to stabilize and grow the combined entity. Despite potential cost-cutting opportunities, effective management is needed to navigate the company’s turnaround after a decade of mismanagement.

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Regulatory and Governance Challenges

Due to CBS and its owned stations being part of the deal, the merger would face superficial regulatory scrutiny, particularly from the FCC. Nonetheless, the US government has never mounted a meaningful challenge to media mergers beyond the most tepid requests.

Uncertainty about Shari Redstone’s final decision and the potential for corporate governance and fiduciary issues also exist. Paramount’s interim leadership will present these concerns to shareholders at the company’s annual meeting and a town hall meeting for employees. However, the town hall for Paramount Global employees, initially scheduled for Wednesday, is now delayed until June 25.

Updated Timeline and Strategic Implications

Reports confirmed that Paramount Global and Skydance have agreed to merger terms, with Redstone reviewing the final details. This accelerated timeline adds urgency to the upcoming shareholder meeting, where executives will outline strategic plans. The Skydance offer, while attractive, faces competition from other potential acquirers, including an overture from producer Steven Paul, who has secured $3 billion to finance a potential takeover of National Amusements.

Leadership and Future Directions

The self-inflicted leadership confusion at Paramount, with three executives sharing CEO duties, including the CEOs of CBS Networks, Showtime/MTV, and Paramount Pictures, has introduced new challenges. These executives, more experienced in entertainment than financial operations, must now manage the company’s public profile and strategic vision amid ongoing speculation about Paramount’s future.

The company’s stock has fallen 17% this year, reflecting investor concerns about its ability to profit from streaming while linear television declines at an accelerated pace.

Executives have stressed that streaming is crucial as audiences shift from linear. The company aims to transform streaming to move closer to profitability by reducing non-content costs, targeting around $500 million in annual savings. Paramount is discussing divesting some of our assets to unlock value, including negotiations to sell BET Networks.

FilmTake Away: Paramount Cues Start of Hollywood Consolidation

The Paramount-Skydance merger represents a critical juncture for the iconic studio. While it offers a potential path to financial stabilization and strategic realignment, significant challenges remain. Regulatory hurdles, corporate governance and fiduciary issues, and the need for effective leadership will shape the merger’s success.