Description

Yesterday’s sharp sell-off in Paramount Global, presumably the result of a double-whammy of reporting by both the Wall Street Journal and CNBC’s Charlie Gasparino, has created an attractive entry point in the shares. The value of Paramount’s TV Media segment alone more than covers the entire enterprise value of the company at today’s prices, and controlling shareholder Shari Redstone has indicated a willingness to sell the company. This is an “asset play” in the style of Peter Lynch, and downside is protected by Paramount’s assets for patient investors. Upside is anywhere between +100-500%, depending on how well the assets are monetized.

Paramount Global (PARA) is a global media company with four distinct groups of assets: 1) TV Media which comprises domestic and international broadcast networks and owned television stations, including CBS, the #1 broadcast network in the U.S., 2) The direct-to-consumer subscription video on demand & advertising-based video on demand (Paramount+) and free, ad-supported streaming TV (PlutoTV) services, 3) Paramount Studios, a valuable content library and its associated 62-acre lot in Hollywood, and 4) Simon & Schuster, a leading publishing division.

TV Media alone more than covers the enterprise value of this company, meaning you get the rest of the assets for free. The valuation of the remaining assets is less certain and can be thought of as a free option with high potential upside. The entire thesis rests upon controlling shareholder, Shari Redstone, being a willing seller, which I think she is. 

First, I will cover what happened on Friday that caused a sharp sell-off in the shares.

Friday, July 14, 2023

Two reports came out on Friday, July 14, 2023, one at 3:30PM (Charlie Gasparino’s CNBC segment) and one just minutes before the closing bell (WSJ’s article on National Amusements). Both are non-events, which I will go on to explain below.

Charlie Gasparino said he had breaking news when he asserted Paramount is facing “existential problems” based on his discussions with investment bankers. The only justification he gave was that free cash flow is negative. This isn’t news, CEO Bob Bakish has said this year will be the peak investment year and free cash flow will improve going forward. Gasparino’s clip didn’t make much sense to me until I saw his follow-up tweet, where he said this: My scoop here proven accurate by $PARA announcement tonight — Paramount is facing real financial problems.

Charlie is referring to the Wall Street Journal article titled Paramount’s Parent Company in Talks With Creditors After Disclosing Financial Risks. Paramount’s Parent Company is National Amusements. So it is National Amusements (“NAI”) that is facing financial difficulty, not Paramount. Further, the subsidiary within NAI that is facing difficulty is the movie theater business which has nothing to do with Paramount and has been facing trouble since COVID. A sober reading of the WSJ article indicates that this is a technical issue, likely related to a covenant, and will be solved in a matter of weeks.

In summary, I don’t think either of the news stories had anything to do with Paramount, but both had the effect of pushing the shares lower, especially into the closing bell and after-hours on Friday. Including after-hours trading, the shares lost 7% in one day.

Shari, Control, and Willingness to Sell

I think controlling shareholder Shari Redstone is a willing seller of the company. This was revealed in the court documents pertaining to the CBS shareholder lawsuit against Shari Redstone. I have seen various market commentators make the point that since Shari went to great lengths to merge CBS with Viacom it follows that she won’t want to relinquish control of the company. Basically, the argument is that Shari wanted to build an empire for herself to control. I think this is exactly backwards. The judge in the CBS shareholder lawsuit agrees. Here’s what he had to say:

[The plaintiff’s claims] allow a reasonable inference that CBS's acquisition of Viacom was motivated not only by Ms. Redstone's concerns about Viacom's viability as a going concern, but also her desire to shop NAI following their consolidation.

I believe the correct interpretation of Shari’s actions — the reason why she merged Viacom and CBS — was so that she could sell the combined companies for a higher price than she would have been able to had they remained standalone companies (recall that prior to the merger, both were controlled by NAI). Here’s more from the legal case:

Evercore advised that “a sale of [NAI]” was preferable to a sale of either or both of CBS and Viacom, and concluded that “[t]he ideal scenario for [NAI] may be a combination of [CBS] and [Viacom] as a first step, followed by a sale of [NAI].” According to NAI's advisors, if Viacom and CBS were to combine, then NAI could expect a sale premium as high as 50%.

With the merger consummated and all of the shareholder litigation behind her, I think Shari is finally in a position to monetize NAI’s holdings.

Valuation 

An asset play is any company that’s sitting on something valuable that you know about, but that the Wall Street crowd has overlooked … [with an asset play] you can sit back and wait for the value of the real estate or oil reserves or TV stations to be recognized by others. - Peter Lynch, One Up on Wall Street

TV Media

What is TV Media worth? The analyst from JPM — who has a $16 price target and underweight recommendation on the stock, that is, he is hardly a bull — thinks the division can do $4.82bn in EBITDA in 2024, down from $4.96bn in 2023. I accept his forecast despite CBS having both the Super Bowl and presidential election coverage next year. It’s not hard to justify a range of 7.0x-8.0x for TV Media, especially if you believe CBS is a gem. Peer Fox Corp trades at 7.6x NTM EV/EBITDA vs. its five-year median of 8.6x. Publicly-traded broadcasters (SSP, GTN, SBGI, NXST, TGNA) trade between 7.0x-9.0x NTM EV/EBITDA. Using 7.0x-8.0x gives us a range of $52-59/sh for TV Media. The entire company, not just the TV Media segment, carries $23/sh in net debt. Net, that’s $29-$36/sh for the TV Media business or +82%-129% versus Friday’s after-hours price (which continued sliding on account of the news reports). Knock however much off the price you want for merger dis-synergies; the point is that PARA’s share price today is well-covered by the TV Media business. The obvious question is how will TV Media be monetized? Will it eventually be spun as a separate entity that PARA retains a large stake in, allowing them to continue to benefit from TV Media’s free cash flow? Or will the division be sold in conjunction with a plan to sell the non-TV media assets to an acquirer like a big tech firm? The future is uncertain, but the value of the assets is not.

The Rest of the Businesses

The direct-to-consumer (D2C) business is harder to value given the losses it generates. Bulls argue that Paramount+ is valuable given that it’s the fastest growing streamer, and PlutoTV (alongside Fox’s Tubi) is dominating the new niche of FAST streaming services. It’s less clear to me what D2C would be worth in a sale. Assume it’s worth anywhere between zero (it will never turn a profit) and 4x sales (a fair multiple for a rapidly-growing technology company). That gives you a range up to $38/share. 

What about the film studio? It was rumored to be worth $8bn when Dalian Wanda was a suitor in 2016. Despite an inflation-driven loss in purchasing power for the US dollar, let’s assume the value of the studio has not changed since 2016. If a buyer would pay $8bn, less than what Amazon paid for MGM studios, then that’s $12/share.

Finally we have the publishing division, Simon and Schuster, a non-core asset that was sold to Penguin for $2.2bn and then blocked by U.S. Regulators due to anti-trust concerns. PARA says a deal is in the works for Simon and Schuster and could close this year. Let’s assume $2bn or $3/share.

Adding up all of the divisions gets you a sum of the parts of $87-$94/sh, or >450% upside. The high end of the range would obviously require everything to go right, and is provided to show the asymmetry in the shares in the event all of the assets of the company are monetized.

Risks

- Shari does not cut a deal and the business does not improve

Catalyst

- An announcement to sell all, or some, of the company at attractive prices

- Asset value is recognized by other investors