Despite 3 offers for Paramount Holdings, the stock has been languishing. This is one of the holdings of Buffett’s Berkshire Hathaway.

We have touched on Paramount in our previous write-up, where we think that it is worth being on your shortlist due to its valuation. Truth be told, there are now 3 offers tabled for Paramount after our article. We would like to think that is where great minds think alike.

In this article, we will try to look through the 3 offers and why despite 3 offers, the price is languishing.

3 Offers for Paramount Holdings

First and foremost, at the current price of 11 dollars, it has a market capitalisation of 7 billion dollars.

It has total debt of close to 15 billion dollars with 2.5 billion dollars in cash.

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Skydance Offer

Skydance is led by David Ellison who is the son of Larry Ellison.

Their initial involvement was by trying to acquire National Amusement which owns 77% voting class stock.

This latest offer seems to be taken most seriously as they are currently in an exclusive discussion. Based on the grapevine, it could very well be a merger with an eventual cash infusion by Skydance to bolster the financials to deal with the debt situation ( Paramount debt was recently downgraded to junk status by S&P) based on a Reuters newsflow.

The deal seems more complex with Paramount raising funds to the tune of 3 billion dollars to facilitate this whole transaction. This sounds more like equity fundraising which could lead to a dilution of existing shareholders. Paramount would be the party to initiate the first move by taking over Skydance.

For this deal, the stock is to be continually listed and things would be back to normal with the majority of their assets intact.

There would likely not be a windfall for shareholders through a buyout offer with this deal.

Skydance will try to nurse Paramount’s business back to its glory days. They could be the right partner as they have been collaborating with Paramount from 2009 to 2021.

We can see why this is the preferred deal as Paramount assets are currently depressed. To sell off the assets in such a situation would be less optimal.

Moreover, their debt woes would also affect their negotiation chips.

Apollo Management Offer

Another offer that was on the table would be by Apollo Management of 26 billion dollars for the whole of Paramount Holdings.

This included 14 billion dollars for the debt and 12 billion dollars for the stock. With this offer, stockholders could see a takeover price of 18 dollars from the current 11 dollars.

Initially, Apollo was just looking to buy Paramount Studios for 11 billion dollars and not the whole piece. The initial offer was an opportunistic lowballing as a Wells Fargo analyst has a valuation of Paramount Studios pegged at 19 billion dollars.

A deal with Apollo could likely see Paramount Holdings being broken up which the Redstone family might not be agreeable to, they are trying to keep intact the legacy.

Allen Media Offer

This was the first offer which is now taken as the less probable. Bryon Allen of Allen Media has an offer of 30 billion dollars for Paramount Holdings.

Excluding the debt, the takeover offer would be $21.50 for the shares. This is much higher than Apollo Management’s offer.

It should have been given huge weight but our take is that the credibility of the financing of this deal is being doubted.

That explains why the initial surge to close to $17 after this offer was not able to hold. The price even fell below the $13.5 level before the offer was in.

Paramount Debt Woes

Currently, the main weakness for Paramount is their debt which is at 14 billion dollars net of cash holdings.

Fitch and S&P have both downgraded their debt to junk bond status.

Poring through their financials for the end of 2023, the debt-to-equity ratio stands at 0.63 which is not exactly in a dire situation.

However, as they are not profitable, this could change, and the servicing of the debt interest of 930 million annually becomes an issue.

They still have 2.5 billion dollars in cash to tide things through. They have also registered positive operating cashflow of 475 million dollars in 2023 which is a positive despite losses in 2023.

With a likely deal with Skydance, there would be a substantial cash infusion which should see an upgrade in their bond ratings.

Warren Buffett Involvement

One of the selling points for Paramount’s stock was Berkshire Hathaway having a stake.

Berkshire has sold off one-third of its stake at a loss for the 4th quarter of 2023.

Nonetheless, with Buffett in the game, we are sure he will be siding with the deal that makes the most sense for the stockholder as his interest is aligned with the minority shareholders.

So we hope he will work some magic to have his voice heard. If there is a deal, the best will be chosen.

Summing Up

Despite 3 offers on the table, we were baffled by the lacklustre share price of Paramount.

The offer we feel that would likely be taken seriously by the controlling shareholder (Redstone Family) would be by Skydance. This deal would likely keep the legacy intact with minimal break up of the businesses.

However, this deal would have to take a long shot before we could see results in the investment of Paramount. It is not an outright takeover offer which would provide existing shareholders with an exit at a premium from the current price.

Therefore, our view is that the lacklustre performance of Paramount despite 3 offers, is because the deal that is given huge weight would be a work in progress if accepted. Hence, it would not provide an outright premium to the existing price, adding on, it could even lead to equity financing from existing shareholders.

Also, this deal would favour the Redstone family the most as compared to the rest of the shareholders.

In our earlier article, we have highlighted the merits of an investment in Paramount given their battered valuation. So an outright sale at such a depressed valuation would not be a good strategic move.

However, given that their debt has been downgraded to junk status, there is urgency to bolster their financials.

Looking at their financials, if they could turn the tide soon and be profitable. This would be a potentially attractive investment given they are trading at just 0.32X book value with solid intellectual assets backing it.

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