Is Paramount Global’s Debt Getting the Way of a Sale?

Entertainer-turned-entrepreneur Byron Allen sent an offer to buy 100% of the outstanding Class A and Class B shares of Paramount Global (PARA) (PARAA) on Tuesday by text message and email to the media company’s senior management and board. 

Allen Media Group has offered to pay $28.58 for each Class A (voting) share and $21.53 for each Class B ( non-voting). Including $15.6 billion in debt, its enterprise value is just under $30 billion. 

“This $30 billion offer, which includes debt and equity, is the best solution for all of the Paramount Global shareholders, and the bid should be taken seriously and pursued,” Bloomberg reported comments from Allen Media Group’s statement.

At some point, investors must start taking offers from Allen and others seriously. 

Shari Redstone, Paramount Global’s chair and, more importantly, the president of National Amusements, the family-holding company that controls 77% of Paramount’s voting shares, is more than ready to sell.

So, what’s holding back a deal? It’s hard to imagine that Paramount Global’s debt is in the way of its sale. 

Let’s consider the possibilities.

Debt Is a Big Concern

As of Sept. 30, Paramount Global had $16.97 billion in total debt and cash and short-term investments of $1.80 billion, for $15.17 billion in net debt. According to S&P Global Market Intelligence, that’s 28% of its total assets and 166% of its market cap. By comparison, Walt Disney’s (DIS) net debt of $36.49 billion is 18% of its total assets and 21% of its market cap. 

As you can see, the difference in net debt to assets percentage isn’t too significant. However, the eight-fold net debt to market cap difference is a big deal. Disney’s total debt to EBITDA is 3.2x while Paramount’s is 7.0x, a little more than double. 

Paramount’s more significant issue isn’t debt; it’s cash flow and profitability. Based on the trailing 12 months ended Sept. 30, its EBITDA margin was 7.8%. Disney’s was 16.5%, again, more than double. 

Cash Flow and Profitability Is the Real Threat

By almost every financial metric, Disney is the finer business. That’s not in dispute. What is in dispute is whether Paramount has enough cash flow potential to merit a large enough offer to make Redstone et al. say yes to the proposal.

Let’s think about Allen’s $30 billion offer. It’s a 57% premium to yesterday’s close on the Class B shares and 49% to the Class A. Yet, the Class B sits 30% below Allen’s price, and 20% below the Class A offer per share.

The market is effectively saying that Byeon Allen doesn’t have the firepower to get this deal to the finish line.  

“Byron Allen’s $14 billion bid for Paramount, as reported by Bloomberg News, adds more fuel to M&A speculation with Skydance Media, Apollo Global and Warner Bros. Discovery also expressing interest. We are skeptical of a deal happening soon given Paramount’s $15.6 billion of debt. A further complication is parent National Amusements owns 77% of its voting stock,” Bloomberg Intelligence said about the deal.

Allen has said he has the banking and other investors to make this happen.

Let’s assume that Allen’s group contributes 40% equity to the buyout and borrows the remaining 60%. That adds $8.6 billion in debt to the combined company. 

The interest rates vary between 4.5% and 6.375% of the debt issues maturing further out. Assuming Allen’s group gets an interest rate of around 5.4% (halfway between the two) for its $8.6 billion in debt. That’s an additional $464 million in annual interest expense. 

That would increase its annual interest expense by 50% to $1.39 billion, about $40 million more than its operating income for the trailing 12 months through Sept. 30.

Allen says that he will sell Paramount’s studios, its real estate -- approximately $1.23 billion on the books as of Dec. 31, 2022, for land and buildings -- and some intellectual property.

In December, IndieWire reported that Wells Fargo estimated the studios could fetch $19 billion if sold in an auction process. That should reduce any concern that Allen won’t be able to make the math work properly post-acquisition.  

The Bottom Line

While Paramount has a lot of debt, it also has several excellent assets, most notably Paramount Pictures, and some that Allen would dearly like to have, such as CBS, Paramount+, Pluto TV, plus the BET and VHF channels, which his firm bid $3.5 billion for in December.    

Some might say that debt is getting in the way of a deal getting done. I don’t buy it. Allen’s plans make sense, and he’s proven to be able to purchase and integrate assets into his media business. 

The real issue is Shari Redstone.

As Bloomberg’s Lucas Shaw reported on Jan. 28, she wants out. 

“The state of Paramount has only deteriorated in recent years, both in terms of its earnings and its share price. And it’s not clear how it’s going to get better soon. The cable networks are losing viewers, advertising sales are going down and the streaming services lose money. Redstone has made her preference clear to anyone who will listen; she wants out,” Shaw wrote. 

There are buyers ready, willing, and able to step into the breach and take over. However, with voting control, it’s up to her whether the Redstone family exits its long-time moneymaker. 

I say she does. 

Paramount Global is an excellent M&A arbitrage play.

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