Paramount Global stock: an outright bargain with a 35% upside

Paramount Global (PARA) stock price has been in the spotlight this year as traders focused on the ongoing sale process by Shari Redstone. It has continued to underperform the market as it crashed by over 23.40% while the Dow Jones and the S&P 500 indices have soared to their all-time highs.

Edgar Bronfman drops Paramount bid

Paramount Global is a leading media company that owns some of the best-known brands in the United States. It owns CBS, the most watched cable television, MTV, Pluto TV, Paramount Pictures, and Paramount+.

The company was formed through the merger of Viacom and CBS, a deal that was forced by Shari Redstone. Merging the two entities had a negative impact since Viacom owned cable brands that were losing their relevance.

The main news this year has been the company’s sale process, which has attracted several suitors like Sony and Apollo Global Management. 

In July, Paramount agreed to merge with Skydance, a company owned by David Ellison, the son of Oracle founder, Larry Elisson. His deal valued the company at $28 billion and had a go-shop period. 

Just recently, the company has attracted the attention of Edgar Bronfman, another billionaire heir to the Seagram fortune. He made a $6 billion deal for the company in a deal backed by Mubadala, Abu Dhabi’s main investment arm. 

However, in a statement on Monday evening, Bronfman ended the deal, meaning that Paramount will likely be acquired by Skydance. 

Skydance’s deal is relatively complicated in that the company will first buy National Amusement for $2.4 billion, which holds about 80% of Paramount. After becoming the majority shareholder, Skydance will then spend $8 billion to merge with Paramount. 

Common Paramount investors will receive $15 a share while those with Class A shares will receive $23. Ordinary shares go for $11, meaning that shareholders will get a 37% premium. 

Still, a lot can happen in the coming weeks. For one, a better deal can still come up since Paramount owns some well-known brands that can be highly valuable if sold individually. 

Read more: PARA stock price is struggling: Was Shari Redstone wrong?

The downfall of Paramount Global

PARA stock chart | Source: TradingView

The ongoing sale of Paramount Global marks a big fall for an empire that Sumner Redstone spent decades building. 

CBS and Viacom had a long relationship. In 1971, CBS was forced to spin Viacom off into a separate company by the FCC. The two companies then reunited in 1999 when Sumner Redstone made a hostile takeover for the company. 

They then split again in 2005 and then re-merged in 2019 to form ViacomCBS, a deal that the ailing Sumner Redstone rejected. The deal was strongly advocated by Shari Redstone, who believed that a bigger company was required to compete with the likes of Netflix and Disney.

However, the combination had a big negative impact on the company. While the CBS brand was highly valuable, it was diluted by other companies in the Viacom side like MTV, Comedy Central, and Smithsonian Chanel.

All these were highly valuable brands in the past as they were the biggest sources of entertainment content. Today, most people get their content in streaming platforms like YouTube and Netflix. Social media platforms like TikTok have also become highly popular.

Skydance will likely break and sell Paramount’s TV business

Paramount’s problems are similar to those being experienced by Warner Bros. Media, which we wrote about on Monday.

The most likely strategy for Skydance will be to sell different parts of the company and use these funds to pay some of the debt. The resulting brand will own popular brands in the ecosystem like Showtime, CBS, Paramount+, Paramount Network, and Paramount Pictures. 

I believe that these brands are more valuable than the entire business. For example, the direct-to-consumer revenue rose by 13% in the last quarter as the average revenue per user (ARPU) rose by 26%.

Paramount+ had over 68 million members, a drop of 2.8 million from the previous quarter. That decline was because it exited a bundle deal in South Korea. Therefore, this business has room to grow if it had more investments. 

Exiting the TV business will be a good strategy as the revenue has continued falling. In the last quarter, revenue fell by 17% to $4.3 billion as advertising fell by 11%. Affiliate and subscriptions revenue fell by 5% as cord cutting increased.

The filmed entertainment segment’s revenue fell by 18% to $679 million. Again, like the DTC segment, with enough resources, Paramount’s studio business can bounce back.

Altogether, there are signs that Paramount Global stock is a bargain for now since the merger agreement with Skydance is expected to go on. This means that buyers of the ordinary shares will get a 35% premium, which is a good deal.

The biggest losers in all this are long-term investors who have seen the value of their holdings evaporate. Paramount stock peaked at $92.95 in 2021 and the company will be sold for less than $20.