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With growing speculation that Skydance Media, RedBird Capital and KKR will take a significant minority or slight majority stake in Paramount Global, three questions loom over the deal.
The most obvious question is what controlling shareholder Shari Redstone wants to achieve out of any sale. The Redstone family’s National Amusements (NAI) currently directly or indirectly owns 77% of the Class A voting stock of Paramount Global and 5.2% of the Class B common stock. In total, that reflects 10% of the overall equity of the company but still gives NAI significant control over the corporation's operations and policies.
The second question—reflected in multiple angry shareholder letters this week, so far (like the one I highlighted on Monday) —is whether the Skydance deal will be an outcome that will serve NAI’s fiduciary duty to act in the best interests of minority shareholders. This question looms larger after Redstone reportedly turned down a $26 billion offer—$12 billion for Paramount’s equity and $14 billion in net debt—from private equity firm Apollo Global Management to continue negotiations with Skydance. The Skydance deal terms, as they stand now, will reward Redstone with $2 billion in cash and Skydance would be acquired in an all-stock deal requiring new shares to be issued, thereby diluting minority shareholders.
The decision seems to have had one unfortunate consequence for Redstone: Yesterday, four directors serving on the special committee of the board of directors—generally appointed to protect minority shareholder interests when there is an appearance of conflict with controlling shareholders or management or affiliated entities—announced they will step down from the board. This is an unusual and rare step for special committee members to take during an ongoing deal process, especially en masse. Their resignations imply their conclusions that the proposed Skydance deal will not serve the best interests of Paramount's minority shareholders and will face litigation from angry shareholders to prevent any deal with Skydance from closing.
The third and arguably most important question is whether the proposed Skydance deal will return Paramount on the path back to growth. According to The Medium’s “Three Guidelines To Understand This "Weird" Market Moment In Media”, this path would meet three conditions:
“Great software people” would be in the top rungs of Paramount;
The management team of Paramount will be up to the task of adapting
Post-merger Paramount will be able to survive a failed pivot with the existing customer base and existing brand.
These conditions seem to be less important to Redstone and Ellison than they should be.
Key Takeaway
A $2 billion cash-out seems to matter most to Shari Redstone.This may be because she has realized audiences simply are increasingly unsentimental for Paramount's library or IP.
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Total time reading: 7 minutes
1. Are “great software people” in charge?
The Wall Street Journal reported that with the backing of his father, Oracle co-founder Larry Ellison, Skydance CEO David Ellison “has laid out a plan to grow Paramount by investing in technology, moving aspects of the business to the cloud and putting more resources behind its studio.” It is not yet clear what that will mean in practice. Generally speaking, Paramount has struggled with two software-related problems that I described in “Three Guidelines”:
“First, paywalls are a messy mishmash of third-party software solutions—payment processing (e.g., Stripe), customer relationship management tools, cloud-based hosting— built on top of websites, which are themselves an amalgam of computer code and different software solutions (e.g., video players). Second, website advertising is a messy mishmash of third-party data solutions ranging across data warehouses, demand-side ad-serving platforms, supply-side platforms and real-time bidding.”
I also wrote in “Three Guidelines”:
“At a micro level, solving these two problems individually and collectively is the purview of ‘software people’ beneath the C-suite. At a macro level, the pivot of a business towards a retail-first, consumer-first fundamentally requires those two solutions to align with management’s roadmap for growth. If management has no background in computer science and therefore does not understand the solutions, growth will not be possible.”
David Ellison is a studio executive with proven digital media experience with his streaming deals and gaming division Skydance Interactive. But he is not a software executive. The rumored partnership with Oracle’s cloud and artificial intelligence businesses will mean little unless the partnership also replaces existing Paramount management with the right people. In this light, if the deal with Skydance does not replace the current C-suite of Paramount with some “software people”, then at a macro level nothing will change Paramount's current trajectory.
2. Are the management team of an incumbent up to the task of adapting?
I wrote in “Three Guidelines”:
“A management team is ‘up to the task of adapting’ if it understands the media that it creates has the quality of scarcity. Meaning, that after day two and beyond, its subscribers would not be able to find its offering anywhere else. A team that is not ‘up to the task of adapting’ naively or dishonestly believes that its content is not a commodity, despite all evidence to the contrary.”
Effectively, media companies have a fiduciary duty to shareholders—if not an existential need—to understand the value of their content on the internet. Paramount seems adrift on this point: It offers both paywalled Paramount+ and free-ad-supported-TV (FAST) service Pluto TV, and it also licenses content to other FASTs and Netflix.
Ellison and his team value Paramount Pictures’ library of content, which includes “Mission Impossible”, “Star Trek,” “The Godfather” and “Indiana Jones”. Some reports suggest he also values the CBS deal with the NFL. What I wrote about Disney in “Three Guidelines” also applies to Paramount:
“streaming has proven that there is a disconnect between how Disney perceives the value of its scarcity—a library of valuable intellectual property across Disney, Marvel, Pixar, Star Wars and Fox assets—and how audiences value its intellectual property.”
With Skydance Interactive, Ellison would be positioned to serve consumers across both streaming and gaming. That said, it is less clear whether he understands that Paramount+ and legacy media streaming models are built upon deeply flawed assumptions about the value of IP on the internet, and consumer nostalgia for that IP.
3. Can the company survive a failed pivot with the existing customer base and existing brand?
I wrote in “Three Guidelines”:
“A media company may survive the pivot to a retail-first, consumer-first model if it can figure out which of its offerings have the quality of scarcity or are not vulnerable to the commoditization of media. Or, a media company may survive if it is destined to fail in its pivot to retail but has other business models that enable it to survive.”
Skydance appears to map to these answers with a much narrower lens. It wants to produce movie, TV, streaming and gaming content with Paramount IP. It also appears to value CBS’s 11-year deal with the NFL at $2 billion per year.
So, a Paramount-Skydance combination could certainly survive in smaller form. But it would look much more like Sony Pictures Entertainment—which generated $10 billion in revenues and $880 million in operating income in 2022—than a media conglomerate. It would not look like a retail-first, consumer-first business.
But, Apollo?
The existing answers to the "Three Guidelines" are not solid answers for Paramount shareholders seeking growth. The business case for Oracle’s technology powering Paramount reads speculative, at best, and therefore a path to growth seems speculative, too. This raises the question of why the Apollo bid is not being considered by Redstone: If Paramount’s future is indeed as a retail-first, consumer-first media business, Apollo has a proof-of-concept for Redstone and minority shareholders in Yahoo.
In one sense, Yahoo is an apples-to-oranges comparison to Paramount. Yahoo generates roughly $8 billion in annual revenue with a significant profit margin or 26% of Paramount’s annual revenues. But, Yahoo started as an internet directory and much of its C-suite has long had computer science degrees because it is a technology company. Its foundation of technological sophistication was key to the ability of Apollo to pivot to a consumer-first, retail-first profitable model driven by subscriptions (I wrote about this last September in “A Hopeful Sign for Big Media?”). It has focused on building digital products and services aimed at its most engaged users.
Paramount is also a broad portfolio of wholesale and retail businesses, whereas Yahoo is purely retail. As I wrote in December, private equity ownership of Paramount’s cable networks business seems inevitable. But, because we do not know the details of Apollo’s bid—the special committee refused to consider it upon the recommendation of the group's advisors, Centerview Partners and the law firm Cravath, Swaine & Moore—we do not know whether Apollo’s offer favors the linear business over the retail and studios businesses, or vice versa (a future built upon the 67 million subscribers to Paramount+).
Shari Redstone & Moral Hazard
A read of the tea leaves of suddenly departing Paramount directors and incomplete deal terms suggests that Shari Redstone has made up her mind to do the deal with Skydance, whatever the consequences. This is an example of moral hazard, or an incentive to increase her exposure to risk—e.g., more shareholder lawsuits, declining stock price—because as controlling shareholder, she does not bear the full costs of that risk under Delaware law. We learned this in 2022 and 2023 when two class action lawsuits brought by Viacom and CBS stockholders in Delaware Chancery Court—both related to the 2019 merger of Viacom and CBS—were settled.
The lawsuit from Viacom had alleged that Redstone had ousted board members in a “tyrannical” effort to merge the two companies. It also alleged that CBS stock was overpriced in the merger and that Viacom was undervalued, causing harm to Viacom shareholders. Paramount Global settled the case in March 2023, paying $122 million to the plaintiffs.
The lawsuit from CBS shareholders was structured differently. It was brought on behalf of the former CBS Corporation against Redstone, National Amusements, CBS board members and Joseph Ianniello, the former CBS president and acting CEO. The lawsuit challenged the merger, alleging breaches of fiduciary duties in connection with the negotiation and approval of the merger agreement. It also argued Ianniello was given a $125 million severance to buy his support for the merger and Redstone stacked the Viacom board with allies to approve the deal against the best interests of CBS shareholders. Paramount Global received $167 million because it is now the parent company of CBS.
In both cases, the financial harm to Redstone was minimal. Paramount paid out the Viacom settlement. Directors & Officers insurance—which protects the people who serve as directors or officers of a company from personal losses if they are sued by the organization's employees, vendors, customers or other parties—likely paid out the second settlement.
In other words, we may not see a retail-first, consumer-first future for Paramount because Redstone and NAI are not incentivized to deliver it. Fiduciary duties to minority shareholders are ultimately a solvable nuisance for Redstone. A $2 billion cash-out seems to matter more. That may be because she has realized what I concluded in The Medium's 10 Predictions for 2024: Audiences simply may not value Paramount's library or IP as much as Redstone assumed they did, and Skydance and private equity assume that they will.