Why Shari Redstone Needs the Right Treatment

Paramount Global Non-executive chairwoman and majority shareholder Shari Redstone has been talking to potential buyers interested in acquiring her media company (or parts of it) for years, but the seriousness of those discussions has increased in recent months.

There are sector-related reasons why an agreement seems increasingly urgent. The media world is changing rapidly. During the Covid-19 pandemic, legacy media companies seemingly had a path to growth by launching their own streaming services. But Wall Street collectively turned its back on that narrative after Netflix growth stalled in 2022, leaving companies like Paramount Global in the wind.

Paramount Global's flagship streaming service, Paramount+, has successfully amassed 63 million subscribers and continues to grow. But it also continues to lose money, although not as much as before. Streaming operating losses in the third quarter were $238 million. A year ago, it was $343 million.

Without a clear growth narrative, Paramount Global has struggled as a publicly traded company. The stock is down 56% in the last two years. This has sparked interest from some private equity firms and other potential buyers, including David Ellison of Skydance Media and media mogul Byron Allen.

If Paramount Global, which owns Paramount Pictures, CBS, cable networks like Nickelodeon and Comedy Central, and intellectual property like “Star Wars” and “SpongeBob SquarePants,” is withering away as a publicly traded company, perhaps by taking it private or selling it some of the assets for parts makes more sense.

Redstone also has personal reasons to consider selling now. He has long had an active interest in Jewish causes, including serving on the board of directors of Combined Jewish Philanthropies.

Redstone's focus on fighting anti-Semitism has increased since the Hamas terrorist attack on Israel on October 7, which killed about 1,200 people, according to people familiar with Redstone's thinking.

“Look, to be honest, I'm not doing well,” Redstone told The Hollywood Reporter in October. “I don't think there are words to describe what happened, and all I do every day is try to do something that makes a difference and helps people.”

Then there is an important financial consideration related to National Amusements Inc., or NAI, the holding company that owns the majority of Paramount Global's voting shares.

When Redstone's father, Sumner Redstone, founder of National Amusements, died in 2020, Shari Redstone inherited his shares. National Amusements owns directly or indirectly through subsidiaries 77% of Paramount Global's Class A voting shares and 5.2% of its Class B common shares, constituting approximately 10% of the company's total capital. company.

Under tax law, Shari Redstone must pay taxes on the shares linked to their value at the time of her father's death. That amounts to more than $200 million, according to a person familiar with the matter.

Redstone has deferred the tax bill for 10 years, until 2034, and only owes about $7 million this year, said the person, who asked not to be identified because the details are private. Still, the looming tax payment, along with an additional $37 million debt payment to Wells Fargo in March, could be a compelling motivation to sell National Amusements for cash, rather than a stock swap with a strategic partner. .

National Amusements will make its March payment on time, according to a Redstone spokesperson.

“National Amusements has significant assets, including our well-located movie theaters in the US, UK and Latin America, owned real estate holdings and interest in Paramount Global. We continue to take steps to improve our financial position, including by reducing of the debt with a significant payment in March,” the spokesperson said.

Redstone's varied motivations for selling mean he's looking for the right kind of deal, at the right price, and so far he's had options.

Warner Bros. Discovery has held preliminary talks to acquire Paramount Global. While Warner Bros. Discovery board member John Malone suggested in an interview with CNBC in November that Paramount Global could be a distressed asset in the future, that fate can be avoided if CEO Bob Bakish can make that Paramount+ is profitable.

There could be structural problems with a deal with Warner Bros. Discovery, in terms of a cash and stock split, including the amount of debt a combined company would want to carry. It's also possible that Warner Bros. Discovery will choose to wait to see if Comcast is willing to part ways with NBCUniversal.

In early talks with buyers, Redstone has pushed for a high premium for both National Amusements and Paramount Global, according to people familiar with the matter. Paramount Global has a market capitalization of nearly $10 billion and about $13 billion of net debt.

Redstone also has fiduciary duties as non-executive chairman of Paramount Global. If he agrees to sell National Amusements or all of Paramount Global, he will need other investors to participate.

Banker Byron Trott, who is helping Redstone navigate the sale talks, has long been an adviser to Warren Buffett, whose Berkshire Hathaway is the largest Class B shareholder of Paramount Global.

No deal is imminent, people familiar with the process said. As CNBC reported last month, Skydance is interested in acquiring NAI as part of a two-step transaction that would involve merging Skydance with Paramount Pictures.

Talks with Redstone regarding NAI are more advanced than with Paramount Global, two of the people said. Still, Skydance is only interested in acquiring NAI if it can reach a deal with Paramount Global, CNBC reported in January.

Spokespeople for Skydance, National Amusements and Paramount Global declined to comment.

There is also the question of LetterThe looming transportation deal with Paramount Global, which is set to expire in April, according to people familiar with the matter. This may not be driving Redstone's urgency for a sale, as a deal is likely to be struck long before an acquisition closes, but it certainly looms over the company's future prospects.

While Comcast, the largest U.S. cable provider, and Paramount Global renewed their deal with little fanfare in December, Charter is a different animal. The second largest cable operator in the US reached an agreement with disney Last year that paved the way for Charter to begin eliminating little-watched cable networks while directly selling subscription streaming services to its millions of broadband customers.

Paramount Global charges $5.99 per month for ad-supported Paramount+. Most of what airs on CBS and Paramount Global's cable networks is available on Paramount+. That gives Charter two advantages in a renewal deal.

First, Charter will likely argue that Paramount Global has priced all of its cable and CBS networks at $5.99. Charter can point to that as the maximum price of what it's willing to pay for Paramount Global's linear channels.

Second, Charter now has some blocking influence with consumers because it can point them to Paramount+ as a relatively inexpensive way to access Paramount content. Charter will make the same argument it made with Disney: the existence of the same content on both the streaming service and linear channels effectively charges the consumer twice as much.

Paramount Global probably can't afford to lose carriage of most of its networks to Charter, as Paramount+ continues to lose money. Paramount Global still relies on its linear business, which made $15 billion of its $22 billion in revenue in the first nine months of 2023 from traditional television. More than $6 billion of that amount came from cable affiliate fees.

Bakish has always successfully struck renewal deals with major pay-TV distributors since taking over as CEO in 2019 and even dating back to when he ran Viacom, starting in 2016. Still, given Bakish's lack of influence, You may have to settle for lower affiliates. fees or a deal that devalues ​​Paramount+.

Disclosure: Comcast owns NBCUniversal, the parent company of CNBC.

WATCH: CNBC's Jim Cramer on Paramount Global

Don't miss these CNBC PRO stories: