The fight for Paramount

0:05Pushkin. It's high noon in Hollywood. Two financial gunfighters are eyeing each other warily. The prize, one of the oldest and most revered studios in Hollywood. Today on the show, the fight for Paramount. This is Unhedged, the markets and finance podcast from the FT in Pushkin. Joining me in our New York studio is James Fontanella Khan, the FT's deals editor. Welcome, James. Thanks for having me, Rob. So you're going to have to fill me in. I haven't been following the story very carefully. Who's fighting for Paramount and why? So the way we look at it, it's a fight between Hollywood and Wall Street, and it's for the soul of Hollywood, right?

0:59And so you've got on one hand Skydance, which is a studio really kind of founded by David Ellison. He's the son of the founder and billionaire behind Oracle, Larry Ellison. We can assume they're fairly well funded. Yeah, he's doing okay. And to top that, behind Skydance and David Ellison, you've got KKR, the well-known private equity firm. and you've got Redbird, which is another private equity firm that has been in the news a lot. Recently, the founder is Jerry Cardinal, who was at Goldman Sachs, and now he's the owner of AC Milan. He tried to buy the Daily Telegraph, didn't work out. So it's a huge amount of financial firepower and a lot of deal-making skill there.

1:43Absolutely. So on the one hand, and Skydance makes Mission Impossible. It's done a ton of movies with Paramount, so they've got a relationship there. On the other hand, you have Apollo, which brought in Sony. So, Sony is a very well-known company, but that's a more financial transaction. And then the complexity is you have Shari Redstone. So, the Redstone family are the family behind Paramount. It was created by Shari Redstone's father, who's Sumner Redstone. And so, they weirdly only own about 10 % of the company through this other vehicle. The Redstones. Only own 10%. But they control 80 % of the company.

2:27So they'll decide between the two bids. Well, shareholders might dispute that. Okay. In a court. Before we get to the legal niceties here, why is Paramount for sale at all? That's a very good question. So if we step back, all these studios, these kind of Hollywood companies that were thriving in the 50s, 60s, 70s, they're all kind of doing pretty bad right now. And that's streaming. We were talking about the streaming wars. We were talking about something else. We were talking about the streaming wars. We were talking about tech companies destroying. They've destroyed our industry, the news industry.

3:09And that was not enough. No, no. Now they're going after Hollywood. But that's the thing. It's like, you know, we all have a ton of streaming kind of offerings. Let's just go through it. Netflix, Amazon Prime, HBO, Hulu, Paramount. Yeah. You want to watch sports? It's ESPN. And it's like, you can go on and on and on. And it's like... And my impression is that although Netflix makes money, there's a lot. And there's Apple TV. I forgot to mention that one. But with all these competitors, the economics of streaming can't replace the old world of theaters, movie rentals. Absolutely. Network TV, all of that stuff.

3:53The economics just isn't working in some sense or not working as well as the old economics. A hundred percent. And it's, again, Warner Brothers, it changed hands so many times. And now it's like, it's not a penny stock, but it's like kind of, it's in constant decline. Yes. All of these companies are having trouble. So at some point, you either bundle them through deals or you actually combine them through M &A. When I meant deals is that you could have a bundle where you could have HBO, Hulu, Disney, which seems to be happening. Yeah, it was announced this morning. So that's an option. But still, it doesn't really fix the problem.

4:25But would this deal represent consolidation? Very good question. So on the one hand, the Skydance deal isn't really consolidation because Skydance is still fairly small. And so their pitch, to explain it to our listeners, it's like, so Skydance says, it's a really complex deal. So one step at a time. First part, they want to pay Shari Redstone about$2 billion for her stake in the company. Yes. That gives them control of Paramount. So next step, they want to merge Paramount with Skydance. They can do that because now they effectively have control. Yes. And they value Skydance at$5 billion. So we got two plus five, we're at seven.

5:05Hold on. Next, there's a further investment, which is a$3 billion investment. We call it a pipe, but it's essentially injecting more capital in the company. So two plus five plus three, we're at 10, roughly speaking, for the equity of the company. Then there's a big debt load, and part of the$3 billion will go to reducing the debt load. I think it's around$40 to$15 billion. $40 to$50 or$14 to$15? 14 to 15. Sorry, 1415. Yeah, yeah, got it. On the other hand, you've got Apollo and Sony offering 26 billion. Everybody says 26 is much bigger. No, that's 26 including debt. I see, I see. So once you strip the debt, it now becomes a much more apples for apples deal.

5:48And Sony makes content too, right? So there is a consolidation element on that side. Yes. And that takes us to the regulatory issue. Ah. And this is actually something that philosophically we need to start thinking about because regulators haven't said this publicly, but behind closed doors is like we won't allow Sony and Paramount to get together because that is kind of reducing the number of players in the market. In the movie making, TV making market. And that made sense in 1954 when all these streaming companies didn't exist. Yeah. Now, it's like, is it fair to kind of block a deal of this kind?

6:26I'm not saying this is a better deal. I mean, it feels like as a consumer of content, there's a huge amount of competition out there from different companies for my watching hours. It's crazy. Apple, Amazon, Netflix, all the old traditional studios, on and on it goes. And they're struggling. And they're struggling. Okay. Maybe this is a good time to take a step back and let's look at the bizarre and fascinating history of Paramount. Can you give us the kind of three-minute version? I know that's impossible, but the three-minute version of this. There's two great journalists from the New York Times who wrote Unscripted.

7:00So if you're ever interested, you should buy Unscripted. It's an amazing book about the Redstone family. And this is kind of a family from Boston. The father, Sumner Redstone, a kind of larger-than-life character. He built an empire, but he started with movie theaters. And that's NAI, the holding company that controls Paramount, which is the Redstone family holding, is kind of still like manages movie theaters, a declining business. Yes. And the way Redstone kind of step by step, he kind of bought a ton of assets and ultimately at some point he separated the two companies into Viacom and CBS. I remember I was an analyst at the time, and it was like there are these two things that are together.

7:45They don't go together. One's a kind of dowdy TV-ish company, network TV and CBS, and then Viacom was like MTV. It was the cool stuff. It was the cool stuff, which was on the other side. And everybody's like, this is a good idea. Now CBS will not be dragging Viacom down anymore. And as it always happens in the world of dealmaking, a few years later, they realize, oh, we messed this up. we should bring them back together. Yes. And that was the whole thing, just a scheme to keep investment bankers wealthy and happy. That's what you're saying. These are my great sources. They're very decent people.

8:24Just a side, they were two giants. Yeah. And CBS was literally, it was a network TV company. It had a publishing. Yeah, it was broadcast. It had a little publishing business. Yeah. And then Viacom was mostly cable TV. Nickelodeon. Am I getting this right? You are, you are. MTV and maybe some other properties mixed in there as well. Correct. Okay. And Shari and her father, some did not get along. Yeah. An understatement. And they kind of fought with each other. He refused to die was part of the problem. He refused to die. He had a crazy libido. Yeah. He had a lot of lovers. Yes. I mean, he was a raunchy.

9:04Powerful guy. Yeah. Yeah. There's no doubt about that. Yeah. So often when we think about succession, we think about the Murdoch family, but a lot of the elements in succession are actually linked to the Redstone family. And the drama and like the backstabbing is just like, ultimately, Shari wins the battle of bringing the two companies together. At the time, so you said earlier, they broke up. CBS was kind of the less performing company and Viacom was kind of the more attractive kind of growth company. Years later, Les Moonves, who led CBS, turned CBS into the much more successful company, whereas Viacom was struggling.

9:41And how did he do that? He invested a lot in the programming, the deals on sports. We got the NFL. He was early on football, soccer, depending on where you're based. But he was like this eminence grease in Hollywood, right? So Shari tries to convince him to be the head of the combined company. Yeah. I mean, I think everybody knew about Les Moon versus kind of Me Too problems. Yes. And I think it was used probably against him when he didn't agree to kind of bring the two companies together. Yeah, yeah. So they got rid of him, bought the two companies together, thinking that it would make a better, stronger company.

10:21The guy to lead that effort was Bob Backish. Yeah. And let's face it, it did not work. Okay, so what's wrong with the company right now? They got Yellowstone. Everybody likes Yellowstone. That's about it. I mean, Paramount's streaming business, it's kind of not a thing. Right. Remove Yellowstone. I mean, I have to admit, I'm a big consumer because I watch Serie A. I'm Italian, as you can hear, and I watch the Champions League, and it's incredibly cheap. They have those things. But we're in the US, and nobody cares about Serie A and the Champions League so-so. Yeah. So there's not much on the platform.

10:57They've got a great catalog. When I watch The Godfather 1, 2, and 3, you find it on Paramount. Yeah. But the truth is that you can also probably buy it on Amazon for three bucks. Yes. So you don't really need to have it. Netflix has become the, I have to have Netflix. Disney kind of competes in that space for kids. Yep. And then you're like, the rest is like - All this stuff is nice. Yeah, exactly. James, here's what's puzzling me. My understanding of private equity is that they like businesses that are very, very steady, that have very regular cash flows, that can be highly leveraged and so on and so forth.

11:30And Hollywood Studio strikes me as the opposite of this. It's a business that is feast and famine. You can have a big hit and make a zillion dollars and you can have years where things are terrible. What is private equity doing in Hollywood? Is this just New York finance people who want to have their pictures taken standing next to movie stars? So that's a good point. No. I mean, there's a lot of vanity, but these guys are nerds and it's all in a spreadsheet. Yeah. So take the broadcasting business. Private equity has been quite aggressive. Apollo in particular owns a ton of TV stations because that is a fairly regular cashflow and it's a declining business.

12:15It's not sexy and they can manage it downwards, right? Yes. Hollywood is a bit different, no doubt about it. But there's a belief that they, I mean, and Apollo is involved with Legendary, which they were familiar with this business. And they believe in kind of bringing greater efficiencies, streamlining it, kind of turning it into a more efficient business. You can see why the Hollywood people hate them. Absolutely. I mean, I think any private equity dude looks at Hollywood and sees a ton of fat and says, this is easy. You can just get rid of all the fat and then make the movie instead with 100 million, you can make it with 2 million.

12:51The rest is in their pockets. Yes. I'm simplifying this, but the reality, Rob, is private equity owns a lot of stuff these days. It's very different from what private equity was in the 80s. Indeed. We actually have a colleague who's going to write a book about this, Mark Vandervelde, about how essentially private equity is taking over Main Street in a way that is unthinkable. And so the same way they're running like hospitals, often not so well, I'd say, they're now thinking we can run movies, we can run sports clubs, we can, they're getting into areas and their philosophy is we're going to professionalize these businesses.

13:27Okay, so let's try to think about the future. Let's talk about possible outcomes. There's a fight. Does the deal help the economic problems at Paramount and the industry? And if it doesn't, like what's the next step for this industry? How does this industry solve its problems? Is it, can consolidation work? Will regulators let it happen? Is there more fundamental rearrangements that need to be done? These are all excellent questions. It's an existential question for Hollywood. And like, we spoke to a ton of people in LA, and the truth is nobody wants an Apollo deal. Why? Because they fear for their jobs.

14:04They fear that this consolidation is going to mean layoffs and just like fewer movies. Yes. So it's going to hurt the industry. On the flip side, they all recognize that status quo is not an option. Yes. So what Skydance is offering is bring a younger guy. He's got a ton of cash in David Ellison. He's very well respected. We spoke to James Cameron, Ari Emanuel, James Cameron of Titanic. Ari Emanuel is the most powerful agent. He's also David Ellison's agent. Yes. So he would obviously talk up his guy. But people don't think this is just some rich guy's kid. No, that's what most people thought.

14:42But like James Cameron said, I thought he was just a trust fund kid that knew nothing, just as a vanity project, wanted to make movies. And he said, no, actually he understands the craft and he works together. He's like invested. So people definitely like him. And that's another important aspect. shari redstone the heiress of some of redstone kind of sees in david somebody like her and she kind of loves idea of helping him and sees like he's a young guy he's curses that he's the kid of a rich guy that was my curse and so there's empathy there yeah they've connected yeah so she she does not want the apollo deal okay so advantage ellison and skydance exactly 100%.

15:27The problem, though, is if you're a share... There's a bunch of shareholders in Paramount and say, I don't care about your love affair for David Ellison. Yeah. Give me as much... Give me the higher bid. Absolutely. Yeah. And so they say, if those guys are offering$1 more, we're taking... We're taking$1 more as their right to do. But that's a big question. Nobody forced anybody to buy shares in a company that you knew was controlled by a minority holder, right? Okay, so prediction time. What's going to happen, James? I'm going to be controversial. Okay. Nothing. I love it. It's so crazy, and I should not make predictions because of deals reporter, but it feels like there's a special committee.

16:15They could have approved the Skydance deal. They were in exclusive talks for 30 days. I know as a matter of fact that like Skydance has made all the concessions that it could have made. Yes. So everything that was asked of them to do, they did. The 30 days ended on May 3rd. No deal was announced. Now they're talking to Apollo and Sony. And my feeling is like for that deal to go through, you do need Shari Redstone approval. And she does not want that deal to happen. So my prediction is nothing happens, which is crazy. Because it could lead to the slow death of a glorious kind of Hollywood company.

16:58Something has to happen because we need a Hollywood ending. I think the movie about all of this is going to be great. Thanks for all that, James. We'll be right back with Long Short.

17:12Welcome back. This is Long Short. that portion of the show where we go long things we like and short things we don't like. James, do you have a long or a short for us? I don't want to long or short any companies. That gets me in trouble. So I'm going to go long on Real Madrid, winning the Champions League, basically. I'm a diehard AC Milan fan, but their coach is Carletta Ancelotti, who's a historic player and coach for AC Milan, so I'm going with Real Madrid. I'm going to go long, too, And this, it makes me physically ill to say this long, but I'm going to stick with the sports theme. And I'm long the New York Knicks, who I hate.

17:53I'm a Boston Celtics fan. If both teams win their current series, playoff series, which looks like it's going to happen now, the two teams will face each other. The Boston Celtics will crush them like a handful of chicken bones. I'm quite confident. However, the Knicks are better than they've been in years, and the economic logic of New York City having a great basketball team is just overwhelming. It's important for the league. It's important for the city. They've been suffering under terrible ownership under the Dolans, something I'm sure you know about, James. But eventually, the Knicks just have to be good because the world needs a good Knicks team.

18:32I couldn't agree more. Go Knicks. Thanks for joining us, James. listeners, we'll be back in your feeds on Tuesday.

19:06dot com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.