A Sony bid for Paramount would be a win-win

With a backer like Sony, which had $6.3 billion of cash on its balance sheet as of December, excluding its financial-services segment, the bid should be harder for Paramount to brush aside. (File Photo: Reuters)
With a backer like Sony, which had $6.3 billion of cash on its balance sheet as of December, excluding its financial-services segment, the bid should be harder for Paramount to brush aside. (File Photo: Reuters)

Summary

Any deal involving a takeover by the Japanese giant still faces thorny obstacles, antitrust regulators and boardroom drama among them.

A Japanese giant is lining up to buy an American corporate icon again—and not in the steel business this time. Sony is in talks with private equity firm Apollo to bid for Paramount Global, which owns broadcaster CBS and the Hollywood studio behind classics such as “The Godfather".

The news sent Paramount shares up 13% Friday.

The politics of a Japanese entertainment giant bidding for a U.S. movie studio are likely far less toxic than Nippon Steel’s bid for Pittsburgh-based U.S. Steel, which has run afoul of presidential politics. And a deal could make good sense for both sides. But there would still be some potentially thorny obstacles: antitrust regulators and boardroom drama among them.

Apollo has already tried to bid $26 billion for the company, including its $14 billion of debt. But Paramount’s board this month chose to enter a 30-day exclusive period with Skydance Media, the production company behind “Top Gun: Maverick". Uncertainty over Apollo’s financing options may have been one reason.

With a backer like Sony, which had $6.3 billion of cash on its balance sheet as of December, excluding its financial-services segment, the bid should be harder for Paramount to brush aside. The two firms haven’t formally submitted a bid as Paramount’s exclusive period with Skydance will only end next month.

The trouble is Paramount’s corporate structure. The Redstone family controls 77% of Paramount’s voting rights even though it owns less than 10% of the firm. Paramount’s board has set up a special committee to try to ensure that any deal is in the best interest of all shareholders. But any potential sale would still have to contend with the differing interests of the Redstone family and the rest of Paramount’s shareholders. The company’s shares have lost 26% since December, when the news of a potential Skydance deal first surfaced, reflecting precisely such worries.

Under the proposed merger, Skydance’s owners would pay more than $2 billion in cash to gain control of the 77% voting stake in Paramount from the Redstone family, and then Paramount would acquire Skydance in a $5 billion, all-stock deal. That would dilute Paramount’s existing shareholders, making it less attractive than the all-cash acquisition that Apollo proposed.

Sony’s potential entry into the fight should therefore give Paramount shareholders some hope. There are clear synergies between Sony, which owns a major Hollywood studio after its 1989 acquisition of Columbia Pictures, and Paramount. There could be cost savings in production, distribution and marketing. Bernstein also notes that Paramount’s studio real estate—which is not far from Sony’s—in Los Angeles could be worth $2 billion to $3 billion. Those potential synergies could allow Sony and Apollo to make a higher bid.

Unlike other studios, Sony has not jumped into the streaming wars. Instead it has played the role of an arms dealer, supplying content to other streaming platforms. That has proved to be a successful strategy as most other companies, including Paramount, racked up losses trying to battle Netflix for subscribers. Tying up with Paramount would further enrich Sony’s content library.

Antitrust scrutiny is one potential worry, although Disney’s $71.3 billion acquisition of 21st Century Fox’s movie and television assets in 2019 was a bigger deal. Another question is how Sony would deal with Paramount’s streaming and cable businesses. But as Bernstein’s analysts pointed out, having Apollo onboard to run the classic private-equity play—i.e. carve up the business and sell off its parts—could prove to be a strength in this partnership.

Sony’s move may seem opportunistic—but it might still end up leaving everyone with a better deal.

Write to Jacky Wong at jacky.wong@wsj.com

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