Barron's Streetwise - Paramount, Skydance Agree to Merge. Cornhole Turns Pro.

Episode Date: July 12, 2024

Barron’s Associate Editor Andrew Bary discusses why a new Paramount deal might irk common shareholders. Jackson interrupts Jack’s vacation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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You saw it was me. You're upset that I called you on vacation and you decided to punish my ears. I'm workshopping a new greeting. I'm just testing it on you and we're going to see what works. I'm going to try out a few of them in a day in the days ahead. Yeah. Can I opt out of that? Have you heard of the American Cornhole League?

I could have gone pro myself if it wasn't for my Achilles. No, I haven't heard of it. You sure? You haven't seen it on ESPN? Is it on ESPN? Yeah, it is now. The championships will be on ESPN 1. There's over 80 hours of Cornhole content on ESPN 2 and 3.

And Cornhole, by the way, for those unfamiliar, is the game with the beanbags and the boards with the holes in them. And you want to get the beanbags in the hole. I just played cornhole the first time, I want to say three weeks ago. It was in Pennsylvania and there was a cooler. There were some beers involved. On ESPN, I want to know if the technique is the same. They hold the beer in their left hand and throw it with their right, or how does it work? I think the prize money has gotten too big to warrant having a beer in one hand. You got a full concentration required. Over $8 million in prize money now. And I have a theory here. I'm sorry. We must have a bad connection. I could have sworn

you said there was $8 million in prize money for a cornhole tournament. Yeah, over. It's not undisclosed. And there's an undisclosed deal with ESPN. So we don't know quite how much money is involved here. Is this leading to, is what you're telling me that you're going to do a podcast episode on why cornhole is a bargain. Buyer's marketing cornhole rights. Maybe that's a future episode, but it's just a theory I have that sports is becoming increasingly necessary for companies to stop people from cutting their cable packages. And that's made sports rights more and more expensive. And so media companies are looking for solutions. And that's how you get a multimillion dollar cornhole league.

And that segues well into a conversation I just had with our colleague Andrew Barry about the pressures that led Paramount to agree to a new deal with Skydance that was announced this week. I saw that it looks like they're going to do that deal after all. They must have sweetened it for shareholders. The deal initially looked like a stinkeroo for the ordinary investor. Yeah. I talked to Andrew about those class B shares. And some of those investors might still be unhappy, but at least now Sherry Redstone has the necessary support to push this deal through whether or not the B shareholders like it. Well, you got me interested. I might even listen to this podcast.

Normally, I wouldn't recommend a thing like that. But if Andrew Barry's doing the talking, you've got my attention. And you too, of course. You're a fun way too. All right, well, thanks for handling the podcast while I'm gone. And while I have you, how about me-a-lo-dy-do-dy?

You can't say that. Is it better or worse? Definitely not better. I gotta go. I'll see you later. Thank you. Andrew, it's so great to have you on the Streetwise podcast again. You've been on here so many times. I think we're past commemorative tote bag level. I like one of those mugs that are so popular now. I mean, those like, what do they call those things? The Stanley cups? They're stainless steel and they're 40 ounces. It's a lot of beverage. I don't know why people love them so much, but anyhow. So we'll jump right into this. You wrote about Paramount and Skydance's agreement to merge.

We're going to dive into the details there. But first, can you briefly talk about the media landscape that led to this deal? Let's start with what Paramount is. Paramount's one of the leading media companies in the country. It owns CBS and one of the obviously leading broadcast network. Paramount Movie Studio, one of the leading studios in Hollywood, also has a number of cable networks, which are kind of led by MTV. And it's been under pressure, not just in the last couple of years, but I mean just in the last year or so,

from cord cutting, which has hurt the cable TV business by, you know, tougher times in the advertising business, as well as the increased cost to basically get sports rights, such as the NBA and the NFL. So those have been headwinds for Paramount and others in the industry, which include Disney and Warner Brothers Discovery and others. So the whole industry has been under pressure. Paramount stock has been a disaster, essentially, in the last couple of years, in the last 10 years. Stock's trading a little bit below $12 a share. It's down about 25% this year. The stock's down about 75% in the last five years.

So it's been a very difficult backdrop for traditional media. And it's against that backdrop that, you know, Sherry Redstone of National Amusements essentially said, we want out of the business at this point. And so that's the reason that this deal happened. I don't think Paramount's management was essentially eager to do this deal. Some Wall Street analysts didn't think there was a lot of reason to do a transaction. Their view was that Paramount could go it alone, sell assets, and kind of run the business better. There was a view that there's a lot of low-hanging fruit to cut costs and shed assets, which could benefit all Paramount shareholders. The Redstone family, particularly Sherry Redstone, seemed to be eager to do a deal. And that's why we have this transaction that was just

announced recently. Yeah, let's talk about that transaction. Where does it leave the Redstone family and where does it leave shareholders? The Redstone family will get $2.4 billion for national amusements in cash from Skydance, which is the buyer. So they get cashed out at what we think could be as much as $30 a share for their Paramount stock, while the public shareholders in the non-voting B shares are going to get $15 for half their stock. And given where the stock is trading now at $12, that's a big gap right there. It's kind of unequal treatment for the different classes of shareholders, which itself is a governance issue,

which could lead to potential problems and legal challenges to this deal in Delaware, where Paramount is based. My sense is that Paramount management wasn't particularly eager for a transaction. They felt that they could run this company better, cut costs, sell access, and do things that could benefit all shareholders. But assuming this deal happens, I mean, the benefits would essentially redound largely to Skydance, which is going to end up owning about 70% of the company, and they'd have full voting control, 100% voting control. So you have to understand that Paramount has two classes of stock. One, the voting shares, which is a very small amount of stock, about 40 million shares, and then over about 600 million of non-voting shares. And National Amusements, the Redstone vehicle, owns most of the voting shares.

And you said some of those Class B shareholders might be unhappy here. Why might that be? Well, I mean, there's a reason for the class B or the non-voting shareholders to be unhappy about this. There's unequal treatment of the A shares and the B shares. It's a big disparity there. And essentially, there's no vote for the B shareholders on this deal. this deal. Sherry Redstone and National Amusements, which controls the company, agreed to sell it, but they didn't insist on or they didn't allow a vote by essentially the majority of the shareholders on this deal. And I think that's because Skydance was concerned that the Paramount B shareholders might not approve this deal. So they were eager to do a deal without needing the approval of the B shareholders. That could be problematic

for this deal. There are likely to be lawsuits challenging this deal in Delaware where Paramount is incorporated. And generally, the Delaware courts look favorably on a transaction like this. We have a control shareholders. If the non-control shareholders get a vote or a say in the transaction, if they don't, it can make it easier to challenge this deal, which I think it will be. And I think there's a reasonable chance that if there are lawsuits, which I think there probably will be, that they could be successful down in Delaware. Is that sort of discrepancy between the A and the B shares? Is that normal? That seems like a big gap, $13 versus $23. That seems like a big gap, $13 versus $23.

It's a very big gap. And in other cases, you've seen A and B shareholders get paid the same amount. When Fox sold the bulk of its assets to Disney, the Fox non-voting and voting shares got treated equally. When John Malone has done a couple deals, the chairman of Liberty Media in recent years. He's not gotten a premium for his super voting stock in those deals. So this is kind of an outlier. And it generally is not considered to be good corporate governance to not allow a vote on essentially what amounts to a takeover of the company. Let's say this deal goes through, even with some objections from Class B shareholders. What's Skydance's plan for Paramount? What's their pitch to shareholders? Skydance's view is that, you know, with their technology smarts and their, you know, what they view is their understanding of how the

media business is evolving, that they can run this business better than Paramount's executives have been able to do. And that's an open question. They think there's some synergies between Skydance and Paramount, even though there's a huge difference in size between the two companies. And they're also going to be embarking on a big cost-cutting program. They're looking to cut about $2 billion of costs annually, mostly from some of the legacy TV and other businesses at Paramount. So while they're talking about growing and synergies, there are also going to be a lot of cost cuts that are going to occur, and that's going to help them meet their financial projections for the combined company. So the deal was announced this past Sunday. Can you give us a timeline for

when this could close? They're looking to close this deal in about a year in the third quarter of 2025. That gives them time to get whatever necessary approvals they need. As I mentioned earlier, the Redstone family, which is a controlling shareholder through the super voting shares, agreed to the deal. There's no vote needed by the public shareholders of the B shares who control about 90% of the company. So you don't have that happening. But there could be legal challenges to this deal in Delaware where the company is based on a couple of factors, including the disparity in what the different classes of shareholders are getting paid, the lack of a vote by the non-voting shareholders.

And also there could be some issue raised about how much Paramount is paying Skydance for its business. It looks on the highest side. And so that could be another issue that shareholders who were challenging this deal may bring up. And what about the other media companies? Do you foresee any other mergers happening anytime soon? There are probably not going to be a lot of media mergers. I mean, I think the antitrust environment in Washington is not conducive toward major media mergers. This deal is getting, I think, stands a chance of getting done because Skydance is so small relative to Paramount. Let's say if Warner Brothers wanted to buy Paramount, there would

almost certainly be major antitrust objections. I mean, there probably won't be any antitrust objections of any note to this deal, just given the fact that Skydance is so small. But the backdrop for media is difficult. You have continued cord cutting, which is putting pressure on cable networks like MTV. You've got a tougher advertising environment for network TV. But one bullish development for Paramount is that, especially in sports, is that the sports leagues want to reach a large audience for their broadcasts, and that's tending to favor the networks CBS, NBC, and Fox. So when sports rights are getting sold now, you're seeing leagues particularly interested now in doing deals with the major networks, which still have considerable reach in

tens of millions of households, rather than on cable networks, which are kind of rapidly losing subscribers. So that's a bullish development for Paramount and may be a mitigating factor for, I mean, some of the negative trends. I mean, the problem, though, for Paramount is that sports rights have gotten to be very expensive. The recent NBA package was at a multiple of two to three times what the old package was. You've got not only traditional media players bidding, but you've got Apple, Amazon, and others who want sports as well. So that's a tough backup. Sports has become the biggest draw for network TV, and it's increasingly expensive for companies like Paramount to basically maintain their position in holding sports rights and therefore in broadcasting the NFL, which is the major sport which Paramount broadcasts. They have the games on CBS, mostly the AFC games.

Andrew, that was very insightful. Thank you so much for coming on. We're going to have to get you a 64 ounce Stanley tumbler. Hope to have you on again soon. Happy to be here. Subscribe to the podcast on Apple podcast, Spotify, or wherever you listen and send us your questions. Record on your phone, use the voice memo app and email them to jack.howe at barons.com.

That's H-O-U-G-H. Alexis Moore helped produce this episode. We'll be back next week.