Mike Reynolds: Hi, I'm Mike Reynolds, a senior reporter covering the media industry with the S&P Global Market Intelligence tech, media and telecom news team. Welcome to MediaTalk, a podcast hosted by S&P Global, where the news and research staff explore issues in the evolving media landscape. Today I'm joined by S&P Global Market Intelligence Kagan analysts Justin Nielsen, Seth Shafer and Scott Robson. They're going to weigh in on a story that has been generating headlines since last October: the potential sale of Paramount Global.

Shari Redstone and her family own National Amusements. In turn, National Amusements has 80% voting control over Paramount Global. Redstone was going to sell the NAI stake to Skydance and its CEO David Ellison, the son of Oracle Corp.'s Larry Ellison. Skydance has worked with Paramount's theatrical business on Mission Impossible and the Transformers franchises and "Top Gun: Maverick." Then, the companies were going to merge, but now Redstone has backed away from the deal.

How are we doing guys?

Justin Nielson: Doing well, thanks Mike.

Seth Shafer: Doing good. Thank you.

Scott Robson: I'm doing well, Mike. It looks like we have a lot to pick apart here.

Reynolds: I gotcha. I gotcha. All right. So in light of Redstone's turnabout, where does that leave Paramount Global — which recently dropped longtime leader Bob Bakish in favor of an in-house CEO triumvirate — in today's media world? Is Shari Redstone eventually going to sell her NAI shares and exit the business? Does Paramount Global need to be sold? And are there other suitors ready to jump in? What do we think, guys?

Justin, you want to go first? What happened here? Why did Shari back out?

Nielson: It's an interesting question that you raise, Mike, because I think there are multiple responses and answers to that question. What happened here? The deal collapsed basically because there were a few sticking points between the offer agreement and the merger agreement and then also the NAI stake and share that Shari Redstone owns a majority stake in. So from that perspective, Shari wanted the best price for her stake. The shareholders also wanted their piece and, ultimately it collapsed around the terms and then also the shareholder vote. From rumors and reporting, the Ellison group with Skydance did not want a shareholder vote — basically wanted to go forward and get controlling interest in National Amusements, as well as Paramount through the deal with Shari.

Reynolds: So as we said, it's a complex situation. Seth, you were saying that the company's debt level is high, but it doesn't necessitate a fire sale auction. Does it make more sense for Paramount Global to just step back and let the CEO trio enact the plan that they've been talking about?

Shafer: Yeah, I think big picture, the situation at Paramount is shared by Warner Bros. Discovery Inc. and, to a lesser extent, Walt Disney Co., as far as shareholder pressure increasing over the last year, year and a half just to be as profitable as these companies once were and how each is reacting to that. Paramount's spot is less about the metrics of the company looking terrible and more about this new world we're in and how these big media companies navigate that. So from the point of view, the recent kind of presentation by the new co-CEOs, I think the intent there was to show they're not dependent upon a sale. They have a plan. And there's A plan, B plan, C plan — however many plans you want to ascribe to them to navigate this. To your point, I think it's really difficult to say, is it better just to focus on core business? It won't relieve the shareholder pressure all these companies face. So I think that's definitely a path. I don't know that saying all talks are off will really resolve the core issues they're facing.

Reynolds: I guess in the sense that the plan talks about $500 million in cost cutting, some asset sales, more JV streaming partnerships and investments in some of their top franchises — can you let that take shape? What kind of pressure are they under to make things happen quickly.

Shafer: Yeah, it's a good point. And Scott can talk about the traditional side of their business. It's a weird time in that we focus on streaming and gloss over the fact that profits for a lot of these companies are still coming from the core traditional TV assets, the linear assets. The free cash flow is coming from that side of the business as they invest in streaming. As much as the plan we're discussing here — as much as that focuses on the streaming side of a joint venture possibility for Paramount+ and just being leaner and meaner and doubling down on their core IP — it doesn't necessarily solve the underlying transformation going on in the video marketplace or what companies do there. So definitely, to finally answer your question, I think it would make a lot of sense to double down on their strengths as outlined in that plan. But there's just pressure — investors want to magically get in a time machine and go back five years, 10 years ago …

Reynolds: Immediacy is the word.

Shafer: I think immediacy and a little bit of irrationality that you can replicate those profits.

Reynolds: All right, Scott, Seth just teed us up to talk about their traditional business. CBS (US), the broadcast network, has just won primetime for a 16th consecutive season. Does that even matter anymore?

Robson: Yeah, sure. I think it matters, but it's less important than it was a decade ago as audiences have migrated to streaming services. So CBS prime-time delivery was down 12% in 2023 and has fallen 36% in the past five years. Now, that's holding up better than the basic cable networks, but it still illustrates an industry in decline. That being said, CBS has valuable sports rights to things like the NFL, PGA and college sports that still make it an attractive asset.

Reynolds: Sure. You mentioned cable. Some of the bigger networks under the Paramount Global portfolio — Nickelodeon/Nick At Nite (US), Comedy Central (US), BET (US). Scott, what's the forecast there? Do these brands still matter in 2024?

Robson: Yeah. So Paramount has one of the biggest stables of basic cable networks with about 29. A lot of those networks did not attract large audiences. You have a lot of music video networks still on there. When Bob Bakish first took over back in 2017, he emphasized a strategy around six core brands, which were BET, Comedy Central, MTV, Nickelodeon, Nick Jr. and Paramount Network. That strategy never seemed to take hold. And what we saw instead was Paramount focused more on things like PlutoTV and Paramount+. And in the years that followed there was a pullback in original programming on the cable networks.

You look at Comedy Central, it's down to "South Park" and "The Daily Show." MTV (US) has "Ridiculousness" and then a group of reality shows. Paramount Network (US) had a hit with "Yellowstone" and then the spinoffs went to Paramount+. So on a more positive note, Paramount renewed a key carriage deal with Charter Communications Inc. last month. Paramount+ is included in the more expensive tier, but none of the cable networks were dropped, which was a different outcome than Disney's renewal with Charter, where eight niche cable networks, including Freeform, got dropped. So this might have been the result of Paramount agreeing to lower rates for its underperforming networks. But overall, long story short, the cable network business is a difficult one right now.

Reynolds: Justin, let's talk about the TV stations. I think CBS — and correct me if I'm wrong — I think they have 28. And they're in many of the top markets, including New York, Chicago, L.A. How do you value Paramount Global's business? The CBS-owned stations still hold value, right?

Nielson: Oh, absolutely. And, looking at it from the basis of the revenue component and cash flow, the TV station business has been a very good cash-flowing business. Granted, the advertising marketplace has been more challenged as well as retransmission consent fees. But you look at the CBS owned-and-operated station portfolio — so as you mentioned, 28 stations — and from the perspective of where they are in the major markets, they're attractive. But in terms of valuations, the CBS owned-and-operated TV station group, based on our estimates, generates about $2.5 billion. If you were to approximate about a 30% cash flow margin, that gets you to about $715 million. Looking at that, maybe at an 8x to 9x or possibly 10x multiple, you're looking at anywhere from about $6 billion to $7.5 billion in terms of potential value.

Reynolds: Wow. Okay. Nexstar Media Group Inc., the largest TV station owner in the US, might they be interested in CBS stations? And obviously, the FCC's cap might come into play if something were to happen that way. Or do you foresee, Justin, some private equity players maybe want to get in on this if in fact the CBS stations became available for sale?

Nielson: Sure. There's definitely interested parties. There have been in the past with [Nexstar CEO] Perry Sook saying, yeah, they'll look at the CBS assets if they came up for sale. Same with Byron Allen and others. So yes, there'll be a lot of strategic bidders for those assets if they were to come up for sale. But you had pointed to the restriction in terms of Nexstar being up against the 39% FCC ownership cap. Could there be opportunities for them to divest certain markets to get under that cap? Yes. Although with the FCC being a little bit more stringent in terms of the duopoly rules and all of the JSA and SSA agreements, it may be a little complicated to get a deal like that done.

Reynolds: All right, Seth, let's switch over to Paramount+, Paramount Global's aggregate streaming service. It's been growing subscribers on a advertising basis, but I'm not sure when it becomes profitable. Your take on that particular property, Seth?

Shafer: Yeah, so the bottom ones have been improving for Paramount+, like you mentioned strong growth in subscribers, revenue. That said, last quarter they were close to a $300 million loss for the streaming division overall, which Paramount+ is a big part of. So still probably another year or two to go as far as breakeven profitability there. I think the joint venture is a possibility — maybe less of a tie-up with another service, not necessarily another owner — but maybe more of kind of a joint venture where a partner comes in and is able to inject some money into that business. I think the real pressure there is just the drag on overall profitability, not so much the prospects for the service. Because there is really strong underlying IP as far as the content that Paramount brings to the table. And we haven't talked about that angle much, but whenever it's looked with all the different suitors, almost every potential suitor has mentioned how great that the content or the IP is. The difficulty is everything else that comes with it. Really the drag there is more so the push towards profitability and still needing to invest billions of dollars in content every year into the programming underneath it. So solving for that could help in some ways if they were able to set up a joint venture there.

Reynolds: As Shari's father, the late Sumner Redstone once said, and others have followed suit, content is king. And again, with Paramount Pictures and their TV business, they've been producing top content for 100 years or more. Anyway Scott, let's switch over a little bit to a possibility. When news of this first broke last fall, one of the companies that came to the fore, at least in terms of different people's thought processes, was Warner Bros. Discovery. Your sensibility for that? Is that something that could make sense?

Robson: Yes, there's not a lot of buyers for basic cable networks these days. Byron Allen teased a BET offer that never came to fruition. But aside from Allen, there aren't many potential bidders for niche cable nets. So Zaslav recently said, look there will be consolidation amongst the programmers. So I think he's definitely taking another look at Paramount. But I'm not sure if adding more networks is a good long-term play for Warner Bros. Discovery. Zaslav had success with the purchase of Scripps Networks. But the addition of the Warner Bros. networks has been a bit more rocky. CBS would be valuable for Warner Bros. Discovery given the sports rights you mentioned, especially with the loss of NBA potentially coming up on TNT. But I don't know if the group of Paramount cable networks would be a welcome addition, given viewership of those networks has declined nearly 50% in the last 5 years. That being said, we've seen consolidation like this in the magazine and newspaper industries in the past. So it wouldn't be surprising if Warner Bros. Discovery ended up with, you know, around 60 US cable networks. I'd imagine there'd be a lot of regulatory scrutiny around that, though.

Reynolds: That would just be such a gigantic number. It would be interesting to look at from many different perspectives, not only from the government intervention, but how you justify content outlays to one versus the other. How they would winnow that down, which I guess they would have to do? Be very interesting.

All right, so Shari Redstone elected not to part with her father, Sumner Redstone's, legacy at this point, but what's going to happen? Let's keep the M&A story whirring here. Apollo Global Management Inc. and Sony Pictures Entertainment Inc. submitted a $26 billion bid for all of Paramount Global. Justin, do they get back into the hunt?

Nielson: It's possible. Although the initial bid and offer wasn't good enough, you could see them coming back into play. As well as it actually made the most sense in my view, because Sony Pictures acquiring the Paramount Studios and then from Apollo's perspective, they also have the Cox Media Group LLC assets in their portfolio. So maybe merging that with the CBS network and stations. So it actually made sense on paper, but maybe the valuation just wasn't enough in terms of getting Shari's approval and the shareholder approval.

Reynolds: Seth, how about the tech companies? Amazon.com Inc. bought MGM a while back. Might it have interest in Paramount Pictures?

Shafer: I think when we as analysts made predictions at the beginning of each year for the last three years, one of mine has been a big tech company will buy an old school media company. And it just never happened. So I'm a little beaten down by being wrong consistently. I think that the issue there is does a tech company really have an appetite for running some of these traditional businesses we're talking about and/or do they simply wait a few years and buy them at a much reduced valuation and price? And it seems like most of the tech giants are willing to sit on the sidelines and wait out this process of the linear world eroding. So it could happen — I think Amazon's at the top of the list. Netflix Inc. and Apple Inc., I think, were both rumored in the last year or two to at least talk to Paramount folks about something or other. But I think there's a reason we haven't seen these deals happen, even though some of these tech companies are sitting on mountains of cash. Just a difficult mash of cultures and businesses with different trajectories, I think, have been the biggest roadblocks.

Reynolds: Scott, there's been some reported interest from Hollywood producer Steven Paul and a consortium of other investors; and more recently, Edgar Bronfman Jr. and private equity firm Bain Capital LP might be interested. Does that make dollars and sense for Paramount Global?

Robson: Yeah. So rumors are swirling about potential buyers. Looks like Steven Paul has a relationship with Paramount and is friends with Redstone. So it might be a good fit. I think anyone who acquires NAI is going to strip apart the Paramount assets and try and maximize value. I don't think there's going to be someone who comes in and looks to grow the traditional business and create value, keep the status quo at this time. So, looking forward, I think there's going to be changes at Paramount either way, no matter who eventually buys them.

Reynolds: Yeah, that makes sense. Guys, we come to the end of 2024, is Paramount Global still under NAI voting control and being run by the office of the three CEOs? Will Shari sell her stake? Will Paramount Global remain intact overall or will various pieces be sold off or something else that I haven't touched on here? Seth, you're up first.

Shafer: I'm going to steal Scott's response. I think it does get sold and probably to a buyer that is mainly interested in the Paramount IP and sells off the other pieces would be my guess. But like I said, I've been consistently wrong about this so far.

Reynolds: So Scott, Seth has stolen your thunder. Can you work something else around that?

Robson: Yeah, I think litigation is going to hold things up. I think in six months, we might have a deal pending. Shari clearly wants to sell. So I think it's inevitable. And yeah, like I said, I think the pieces will be eventually sold off.

Reynolds: Last word, Justin.

Nielson: Yeah, I think I'm going to agree with both Seth and Scott. I think a deal gets done, but it probably gets in regulatory waters into next year.

Reynolds: That brings us to the end of this episode of MediaTalk. No doubt this story has other chapters to be written. I wanted to thank Kagan analysts Justin Nielson, Seth Schafer and Scott Robson for weighing in. Do appreciate it guys. This is Mike Reynolds. Thanks to all of you for listening. We'll catch up soon on the next edition of MediaTalk.