Paramount Global (PARA) and Warner Bros. Discovery (WBD) CEOs Bob Bakish and David Zazlav met in New York on Tuesday to discuss a possible merger between the two media companies.
While the action was relatively muted for both stocks Wednesday after news about the meeting got out, Paramount’s options were unusually active, with 11 puts or calls with volume-to-open-interest (Vol/OI) ratios above 1.25. In contrast, WBD only had two yesterday that were unusually active.
This suggests investors feel PARA is a better bet than WBD in a possible media tie-up between the two.
Should you buy Paramount stock? I say yes. Here’s why.
PARA Has Always Been the Hunted
In every instance where Paramount has been the target of M&A speculation, it has always been the hunted, not the hunter. That's because it is the smallest of all the names that have cropped up in potential consolidation mergers.
But that's okay. If you own PARA, it's good to know that there's interest in your company. That's likely to push the acquisition price higher. How much higher? That's still to be determined.
The news about discussions between Bakish and Zaslav shouldn’t be surprising. Zaslav has a significant problem that needs solving: His Max streaming service might deliver an excellent product, but it needs more subscribers. Except for Netflix (NFLX), you could say that all the streaming services have too few customers, too much debt, and no immediate pathway to profitability.
In early December, The Wall Street Journal reported that Apple (AAPL) and Paramount discussed merging Apple TV+ with Paramount+ in a single streaming bundle.
Paramount+ had 63 million subscribers as of Q3 2023. Apple doesn’t release subscriber figures but is estimated to have 11% of the ad-free streaming market, according to market analysis firm Antenna. In addition, its subscriber numbers have tripled over the past two years. Its market share in the ad-free market is thought to be within striking distance of Disney+.
The next shoe to drop was news involving RedBird Capital and Skydance Media -- it produced Top Gun Maverick and the very popular Netflix hit Grace & Frankie -- they’re rumored to be interested in acquiring Shari Redstone’s control position in Paramount through her family-holding company, National Amusements.
While Paramount has accelerated the selloff of some of its non-core assets, RedBird and Skydance taking control would accelerate this process. That’s not necessarily a bad thing.
Citi analyst Jason Bazinet believes that a sum-of-the-parts valuation of Paramount suggests its shares are worth $38, considerably higher than $15 where they’re currently trading.
That brings us back to the discussions between Bakish and Zaslav. Redstone has been touring the various media conglomerates to understand what someone might pay for the company and its different assets.
Considering Nippon Steel (NPSCY) is willing to pay $55 a share for U.S. Steel (X), about 150% higher than where the U.S. steelmaker’s shares traded before the M&A process got going in August, it’s fair to say that an eventual buyout of Paramount could get to $38 or higher by the time the ink is dry on a sale agreement.
Too Much Debt Means WBD Shareholders Get Diluted in a Big Way
Yahoo Finance published an article Wednesday that suggested debt could be a significant stumbling block in a Paramount-Warner tie-up. That’s the understatement of the year.
Warner CEO David Zaslav’s legacy-building buyout of Warner Media from AT&T (T) burdened the company with $42.3 billion in net debt as of Sept. 30, according to S&P Global Market Intelligence. While that’s down from $49.0 billion at the end of 2022, it is still 1.6x its current market cap.
Paramount’s net debt is $15.2 billion. The merged entity would have nearly $60 billion in net debt. And that doesn’t include the debt taken on to pay for the equity. God help them if interest rates don’t drop in 2024. Paramount’s net debt isn’t much better at 1.5x its market cap. However, assuming a $38 share price, its net debt multiple is less than 1.0.
“It wouldn't be hard for, say, Apple (AAPL) to buy Paramount. It would be a chip shot. For Warner Bros. Discovery, with its $43 billion in debt, and Paramount's $15 billion in debt, and the overlap in terms of business lines, it's going to be difficult, strategically and regulatorily, to get this through,” Puck News founding partner William Cohan said in a Yahoo Finance interview Wednesday.
“But David Zaslav is nothing if not ambitious. He clearly doesn't think he's done yet in Hollywood. He wants more in Hollywood.”
The only way this deal gets done, never mind the regulatory issues, is through an all-stock transaction.
Paramount has approximately 651.4 million shares outstanding. Based on $26.50, the halfway point between its current price and $38, you get $17.3 billion to buy out the equity. WBD shares are trading around $11.15. Approximately 1.55 billion WBD shares would be issued, increasing Warner’s share count by 65%.
Looking at it from this angle, maybe paying with debt isn’t so bad. I’m being facetious.
The Bottom Line
I don't think there's any question that Paramount gets bought out by somebody. However, It's going to take a lot of work. As Cohan said, Apple is the preferred buyer, but Tim Cook hasn’t had the appetite for large deals, so this could carry on well into 2024.
So, of the 11 unusually active options for PARA on Wednesday, I’d say the March 15/2024 $22.50 call looks like the best bet. With a $0.45 ask price, it’s a down payment of 2%. The delta of 0.16786 means you can double your money on the call by selling the option when the shares increase by $2.68, or 17% higher.
In the best case, it gets an offer north of $26.50 before March, and you exercise your right to buy. The worst case is you’re out $45. The risk/reward is reasonable.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
