The chaotic unraveling of the Paramount-Skydance merger

Blair Effron, a partner at Centerview Partners, the bank advising Paramount’s side, ended the call declaring, “We have a deal," people familiar with the conversation said.

The biggest remaining hurdle was for Paramount’s controlling shareholder – National Amusements boss Shari Redstone – to sign off. Despite grueling talks over the preceding 72 hours, there was optimism in Skydance’s camp and within Paramount’s boardroom.

But Redstone had a big surprise in store.

As a special committee of Paramount directors convened in the afternoon to review the deal,  a lawyer for National Amusements notified the board members that it wouldn’t go ahead with the Skydance deal, people familiar with the situation said.

The stunning U-turn by Redstone, who had previously been a booster of the Skydance deal, capped a chaotic stretch as the parties negotiated the fate of Paramount, the iconic Hollywood company behind movie classics like the “The Godfather" and “Titanic," the CBS broadcast network and cable channels like MTV and Comedy Central. It followed months of haggling over a complex deal that would have ended her family’s four-decade run atop the media empire.

Paramount’s business challenges are immense. Cable TV is in structural decline, moviegoing is in the doldrums and streaming has proven as costly as it is critical to the entertainment giant’s future. Moody’s Ratings warned prior to the deal’s collapse that unless Paramount, which has a heavy debt load, does a strategic transaction that comes with cost-cutting opportunities, its credit rating might be dinged.

As feverish negotiations unfolded in recent days, Redstone grew more concerned. She feared potential shareholder litigation over a deal that her critics said would disadvantage ordinary investors in Paramount and legal fees that might eat into her family’s fortune, said people familiar with the situation.

She also told people close to her that she lost some trust in Skydance CEO David Ellison after extensive back and forth with him that resulted in her family getting less cash from the deal than in earlier proposals.

Some Paramount executives grew increasingly concerned about the potential deal on Sunday night. Members of a Paramount special board committee tasked with reviewing the deal joined a video conference with top Paramount executives to go over a number of requests from Skydance for how to manage the company during the months between the announcement of a merger and the closing of the deal, according to people familiar with the call.

Skydance wanted to control Paramount’s content spending, requiring signoff on any movie with a budget of over $75 million and to cap TV series at $100 million each, according to people familiar with the situation.

Skydance also wanted limits on how much cash Paramount could borrow in the short-term, people familiar with Skydance’s requests said. Paramount’s three co-CEOs, who were on the call, expressed concerns that such restrictions could hurt the company.

Path to a deal

Redstone first discussed a deal with Ellison, the son of billionaire Oracle co-founder Larry Ellison, late last year at her home in a tony Connecticut suburb, and brought the idea to her board. She was impressed with his vision for the company and shared his values on the importance of family legacy.

The heiress had passed on other opportunities to sell parts of the company, but Ellison’s approach felt different. He represented a chance to keep the empire she’d fought to build largely intact, where other buyers were eager to break it up.

They sketched out a two-part deal in which Skydance would first buy National Amusements, which owns about 77% of the voting shares of Paramount. In a second step, Paramount would acquire Skydance.

Under Skydance’s most recent proposal, the production company would have bought National Amusements for around $1.7 billion in cash and provided $4.5 billion to buy out a certain number of Paramount’s nonvoting shares and non-Redstone voting shares. Skydance also would have injected $1.5 billion onto Paramount’s balance sheet, which it could use to pay down debt.

As the parties negotiated, Paramount’s former CEO Bob Bakish, who had voiced concerns about the deal, parted ways with the company and the board decided not to renominate four directors.

New bidders circled, including private-equity firm Apollo Global Management and Sony Pictures. Other parties, including media executive Edgar Bronfman Jr., backed by private-equity firm Bain Capital, and an investor consortium led by Hollywood producer Steven Paul, expressed interest in National Amusements.

Redstone’s advisers and Ellison’s team pressed on with negotiations, with National Amusements talks on one track and the Paramount merger on another. Neither could move forward without Redstone’s blessing.

Turbulence

The Paramount special committee indicated to advisers in recent days that it was prepared to support the publicly-traded company’s merger with Skydance, according to people close to the situation, a critical hurdle to clear.

Redstone, who had talked to Paramount committee members periodically throughout the deal negotiations, had a different understanding of where talks stood. Redstone was told that the special committee had agreed on economic terms but that the two parties were still far apart on other matters, a person close to her said. Those outstanding issues included making the Paramount-Skydance merger subject to approval by a majority of non-Redstone shareholders.

Redstone had other growing doubts. Over the weekend, her camp haggled with Skydance over how to handle shareholder litigation that might stem from the deal. She was wary of fighting costly legal battles and wanted as much liability protection as possible.

Charles Phillips, head of the Paramount committee, who had at times voiced concerns about the deal, and at least one other director, spoke to Redstone Tuesday morning. Redstone indicated that she didn’t think National Amusements was going to reach a deal with Skydance.

Phillips called an emergency meeting of its directors to relay the news to the committee.

Paramount’s advisers encouraged the directors to keep going and planned to meet at 2:30 p.m. ET to go over the final points of the deal, hoping the National Amusements negotiations would turn a corner. They aimed to see the deal terms and proceed with a vote shortly thereafter.

On Skydance’s side, executives prepared press releases and discussed an investor presentation to shareholders.

Minutes before Paramount’s committee sat down for the planned meeting, National Amusements’ lawyer notified the group’s attorneys via email that it was official: Redstone’s company would not pursue a deal with Skydance.

Without agreement between National Amusements with Skydance, there was no reason to vote. The Skydance deal was dead.

Redstone now plans to explore a sale of just National Amusements, while Paramount can entertain other offers. For now, the fate of Paramount remains in Redstone’s hands.

Lauren Thomas contributed to this article.