The takeover battle that could reshape Hollywood (2024)

Tom Nunan, executive producer of the Oscar-winning film Crash and a lecturer at the UCLA School of Theatre, Film and Television, says there is a pall over Hollywood. “There’s a re-examination of what business we’re in. What everyone can agree on is that the business seems to be broken.”

The source of this malaise is Netflix and the streaming revolution it unleashed, which lured customers away from the cable TV channels that were studios’ cash cows for decades. They responded by spending billions of dollars building their own streaming services, but these have yet to compensate for the decline in cable – a situation bankers have likened to a “melting ice cube”.

The two bidders have different strategies for fixing Paramount, but Hollywood appears to be rooting for Ellison, a movie fanatic who has produced blockbusters in partnership with Paramount, including Top Gun: Maverick. He has also been endorsed by figures such as Titanic director and producer James Cameron, who tells the Financial Times: “I love the Ellison idea.”

Some investors prefer the Apollo offer, saying it is less complex and better for common shareholders. “I think the combination of Sony and Apollo is perfect,” says John Rogers, chairman and co-chief executive of Ariel Investments. “Apollo has so much money and expertise in putting together deals and closing transactions.”

This tension boils down to what a veteran of Paramount describes as “Wall Street money guys versus Hollywood, where they’re fiercely protective of the creative process”.

The choice between the two bidders will ultimately be made by a four-member board committee and Shari Redstone, the daughter of Sumner, who died in 2020 at the age of 97.

Shari controls a majority of the voting shares in Paramount and is believed to oppose any transaction that would break up the company her father built. She may be considering a third option: not to sell to either group.

Paramount’s predicament has been a decade in the making.

After the entertainment industry consolidated through a series of megamergers – Comcast and Universal in 2011, Disney and Fox in 2019, Warner and Discovery in 2022 – Paramount emerged a smaller player in this new landscape.

Viewed as too small to compete on its own, the company has been the subject of feverish takeover speculation among bankers and Hollywood deal makers for years.

Redstone has long resisted such talk. She had spent years fighting off rival executives and her elderly father’s girlfriends to finally take hold of her family’s media empire in 2019. Selling was not part of the plan. “It was her family’s legacy, so she wanted to make a run at it,” says a former Paramount executive.

Even during 2022’s “Great Correction” in Netflix shares, which dragged down the valuations of Paramount and its peers, the company pushed forward with an ambitious leap into the streaming wars.

This all began to change a year ago when Redstone started to feel the pinch on a personal level. In May 2023, Bob Bakish, then-CEO of Paramount, slashed its quarterly dividend from 25¢ a share to 5¢ a share. The move rattled investors and sent the stock tumbling.

It also had an impact on Redstone’s own finances. National Amusem*nts (NAI), the Redstone holding company and cinema chain founded by her grandfather in 1936, emerged from the pandemic heavily in debt. NAI relied on the cash from Paramount’s dividends to help pay loans. “The dividend cut had an impact on the family business,” says one person familiar with the matter.

Redstone was also profoundly affected by the October 7 Hamas attack on Israel, and has been spending more of her time on efforts to combat antisemitism, says a person close to her. Another person, involved in one of the bids, says she has “been in this for a long time ... I think she’s ready to move on”.

She sought out the help of Byron Trott, a former Goldman Sachs banker known as a discreet adviser to some of America’s wealthiest individuals, including Warren Buffett and Michael Dell.

His BDT & MSD merchant bank was brought in to manage NAI’s debt – as well as a potential sale process at Paramount Global. He arranged a loan to NAI of about $US125 million last year to help repay part of $US500 million in borrowings from Wells Fargo.

Trott advised Redstone that she had two choices: find a way to restructure internally; or sell part or all of Paramount. “For Shari, there was a certain emotional component to this,” says a seasoned media executive. “She was estranged from her dad for a long time, but they reconciled towards the end of his life. She became the steward of his legacy.”

“When she finally achieved that, selling was not something she was comfortable doing because it was her family’s legacy.”

Then last summer, Redstone was approached by Ellison. It was the beginning of a conversation that has carried on for nearly a year, kick-starting a chaotic bidding war over some of Hollywood’s most storied assets.

Like Redstone, Ellison had spent much of his life in the shadow of a hard-charging billionaire father. With funding from father Larry, Ellison founded his own Hollywood studio in 2010 when he was 27, naming it Skydance after his love of stunt flying. His sister, Megan, also pushed into Hollywood with her own studio, Annapurna Pictures, which has made films such as American Hustle.

David Ellison has built a strong reputation among Hollywood’s creative class and has co-produced a series of films with Paramount, including recent iterations of Mission: Impossible and Terminator.

His interest was “innovative and different” from other approaches Redstone had received, says a person close to Redstone, adding that she saw in him as another owner-operator who could provide safe hands for Paramount.

But Redstone’s discussions with Ellison drove a wedge between herself and Bakish, previously a loyal ally. He began searching for alternative deals in a bid to save his job, enlisting the informal help of LionTree banker Aryeh Bourkoff, according to people familiar with the matter.

Bakish’s efforts were successful in flushing out another bidder: Apollo, first on its own, then with Sony Pictures. But his manoeuvring also agitated the rest of the board, and he was pushed out late last month.

He has been replaced by a trio of long-time company executives – a scenario that has left the group in a state of limbo as its thousands of staff wait to find out if a deal will be made, and if so, with whom.

Some saw Bakish’s exit as a sign of dysfunction at Paramount. “It’s just extraordinarily odd and unprecedented to let go of the CEO in the middle of a transaction,” says Rogers, of Ariel. “It was just totally illogical.”

Both of the bids for Paramount face significant hurdles.

Skydance, which has made its final pitch to a Paramount board committee evaluating the proposals, has financially savvy backers that include Larry Ellison and RedBird founder and former Goldman Sachs banker Gerry Cardinale.

Ellison plans to revive Paramount by restructuring the film and television businesses while making its own streaming service, Paramount+, more competitive by improving its technology.

But his challenge is persuading Paramount’s outside investors to accept the structure of its proposal. Skydance’s two-step offer envisages first acquiring NAI, which holds 77 per cent of Paramount’s voting A-shares. That would give Redstone an immediate $US2 billion cash payday and Skydance voting control of Paramount, albeit with only about a tenth of the economic rights.

People briefed on the proposed transaction say Skydance and Paramount would then merge in an all-stock deal that, based on Skydance’s $US5 billion private valuation, implies a premium of about 30 per cent for Paramount’s other shareholders. In total, they say Ellison’s group would be investing about $US10 billion into Paramount, including a $US3 billion capital injection into the business.

But independent Paramount shareholders, most of whom own the non-voting B-shares, have rebelled. They say the deal disproportionately favours Redstone over other investors. In an effort to win them over, the Ellison consortium sweetened its bid recently, throwing in an extra $US1 billion of cash to Paramount’s minority shareholders.

By contrast, the Apollo-Sony approach gives all Paramount’s shareholders, including Redstone, the same cash premium for their shares. The two companies plan to restructure Paramount by cutting costs, creating new synergies with Sony, and potentially spinning off assets. Sony, which chose to sell its shows to streamers instead of compete with them, is unlikely to want to keep the Paramount+ service.

Their proposal comes with more regulatory risk, however. Given its Japanese ownership, Sony Pictures could be barred from owning Paramount’s CBS news network, while Apollo, which already owns TV broadcasters, could run into ownership caps.

Apollo and Sony say they can structure the deal in a way that avoids upsetting the authorities. “From a regulatory perspective, we feel very comfortable with a deal getting through,” says a person involved in the joint bid.

But Washington has been tough on media deals. In 2022, it blocked Paramount’s proposed $US2.2 billion sale of book publisher Simon & Schuster to rival Penguin Random House. To his frustration, Bakish ended up selling S&S to private equity group KKR a year later for $US600 million less.

The Biden administration’s regulatory stance has worried some bankers and Hollywood executives, who believe that consolidation is the only way to bring the industry back to life.

One possible combination that is frequently discussed is a merger between NBCUniversal, owned by cable giant Comcast, and Warner Bros Discovery. “The best thing for the business is an NBC-Warner tie-up,” says one banker, expressing a common sentiment in Hollywood.

The alternative, some say, is that tech companies will ultimately end up controlling the movie and TV business. “There’s no question there needs to be consolidation in Hollywood,” says a person involved in the Paramount talks.

The question now, both on Wall Street and in Hollywood, is whether Redstone is ready to make a deal. Some warn that she needs to act sooner rather than later.

“If there isn’t a deal, what happens? I don’t think that the prognosis is good,” says the seasoned media veteran.

“Some of these [potential acquirers] may just sit around and wait for it to run into more difficulty … and revisit it in six months or a year.”

Financial Times