Last week, Paramount Global announced topsy-turvy fourth quarter earnings. The company added nearly 10 million subscribers to Paramount+, its fledgling streaming service, and Pluto, its free ad-supported streaming tier, remains a viable business unit as cord-cutting accelerates. But the growth in streaming wasn’t large enough to offset a frosty advertising market and the secular decline in the affiliate fees business. Overall revenue declined about seven percent from the previous year, to $5.9 billion.
The earnings report underscored what has become a stark reality in the financial markets: Paramount Global is a conundrum of a company. It’s got some irreplaceable assets, including the CBS television network, Showtime, Comedy Central, Nickelodeon and the Paramount movie studio, home to Top Gun: Maverick, which has grossed nearly $1.5 billion worldwide since its release. It’s also got some major challenges, starting with governance.
Under Sumner Redstone, CBS and Viacom were run by supplicant chief executives and pliant boards. The situation has only become exacerbated under the rule of his daughter, Shari, who can pretty much do whatever she wants at the now-combined entity, including replacing its C.E.O., its board and single-handedly deciding whether the company should be sold, if that’s even a possibility. From a corporate governance perspective, it’s never great to have so much power concentrated in the hands of one person, like Shari, who controls nearly 80 percent of the votes at Paramount Global but only owns around 10 percent of the company’s equity. The owners of the other 90 percent of Paramount’s stock have a 21st Century version of taxation without representation.
Paramount Global operates the smallest of the Big 4 streamers. Par+, with its 56 million subscribers, pales in comparison to fellow newcomer HBO Max and Discovery+ (95 million combined), and falls much further behind second-mover Disney+ (162 million) and the O.G., Netflix (231 million). And it just announced it would take an impairment charge of as much as $1.5 billion in order to integrate Showtime into Paramount +. I get why Bob Bakish, the Paramount Global C.E.O., decided to integrate Showtime into Par+—to stem losses, to cut costs, and to create one streaming point of entry for the company—but the attendant price change, to $11.99 per month, makes the reconstituted Par+ a moderately priced option in an increasingly saturated market. (Unless you previously paid for both Showtime and Par+ separately, in which case the bundle is now cheaper.)
The moves toward consolidation appear to be an ongoing effort to make Paramount a more attractive M&A partner. On the one hand, the company has become the proverbial minnow in the shark tank. Its market value is $15 billion, up 39 percent so far in 2023 but down 17 percent in the last year. Compared to all of the aforementioned—Disney (market value nearly $200 billion), Netflix ($154 billion) WBD ($37 billion)—and the unmentioned Comcast ($165 billion), Paramount could be scooped up pretty easily, which would presumably justify Shari’s decision to recombine CBS and Viacom in 2019 (although they were worth more as separate companies).
But that hasn’t happened and it probably won’t happen anytime soon. Who out there wants to pay something like $20 billion—with the control premium—for a declining linear TV network, a movie studio, a money-losing streamer and a group of middling cable-TV channels? And at a time when the Biden administration is overturning mergers in the book industry, who could credibly imagine that an industry deal for Paramount Global would pass muster unscathed? My fear, for Shari, is that there just aren’t that many companies that would be interested and would have the financial wherewithal to make a deal and that can get a deal past regulators. I also imagine that Shari, who once reportedly turned down a billion-dollar-plus deal from her father to buy her stock in the family holding company, would prefer to wait until the markets recover at this point in the cycle.
Comcast has reportedly expressed interest in the company in the past. But we know that Comcast, which already owns NBCUniversal, can’t own both NBC and CBS, so one of them would have to go (but to whom, other than maybe Apollo Global, as I have suggested before), and does Comcast need or want to own both Paramount and Universal? The deal seems like too much brain damage to me. As I have written before, Brian Roberts would be better off holding out until 2024, when he would be able to execute the combination of NBCU and WBD, according to the rules of a Reverse Morris structure, with Zaz as C.E.O. of the combined company rather than trying to process a Paramount Global acquisition. (This is not investment advice.)
Who else is out there that might be interested in Paramount Global? Honestly, I don’t know, unless of course the wiseguys at Apollo wanted to add some heft and content to its growing nationwide network of local television stations. But Apollo also likes a bargain, or a perceived bargain, or buying at a discount and I don’t see Shari doing all that she’s done to get control of Paramount Global to allow for a take-under to occur. And so we sit and wait and wait and wait until Shari, presumably under the wing of the brilliant banker Aryeh Bourkoff, can come up with something that will work, which of course includes continuing to run the company independently for the foreseeable future until it can be turned over to Shari’s kids for them to try to solve.
A telling insight into Shari’s thinking came during last week’s earnings call when Rich Greenfield, the popular Wall Street media analyst, asked Bakish if he had considered selling Showtime instead of folding it into Paramount + and absorbing that $1.5 billion integration charge. Apparently, there had been some offers made to buy Showtime as a standalone entity. Without addressing any offers per se, Bakish’s answer made clear that breaking up Paramount Global into its component parts, à la GE, is not being considered. “We think there’s enormous value to unlock with the integration of Showtime and Paramount+,” he told Greenfield. “Relative to that, if we were to divest the asset, it would have to create more value than our operating plan. That bar is pretty high.” This drama is not coming to an end anytime soon.
The Unexamined Life…
Meanwhile, in FTX world, Judge John Dorsey decided this week to deny the U.S. Trustee’s request for a disinterested, independent examiner to scrutinize the bankrupt company’s financial mess and how it got that way, instead of leaving the examination up to FTX itself and its new management team. This is a head-scratcher, and I think it will prove to be a real loss for the company’s creditors, which for some reason supported the debtor’s assertion that an examiner was not necessary and would prove too costly.
I know such examinations take time and are costly—the estimate here is that an examiner would cost as much as $100 million—but an independent examination is precisely exactly what is needed here. Without an examiner, the creditors and customers will have to rely pretty much solely on the autopsy provided by John Ray III, FTX’s new C.E.O., which is going to be countered by whatever Sam Bankman-Fried says happened, which is also going to be countered by whatever comes out of the criminal proceedings against S.B.F. If I were a FTX creditor (and I’m not), I would have insisted on having an examiner, however costly, so that I could have an outsider’s independent understanding of what happened, and why, laid out in one self-contained report. For example, Anton Valukas’s report in the Lehman bankruptcy proved invaluable. I’m told that the examiner’s report in the Celsius Network bankruptcy case has also proved useful. The same was true of the examiner’s report in the Revco Drug Stores bankruptcy, which I worked on some 30 years ago, during my time on Wall Street.
Many big bankruptcies, such as Enron (where Ray oversaw the carnage), Worldcom, and Global Crossing, had examiners, and there was no question in my mind that an examiner was warranted in a case as complicated and as mysterious as FTX. But Judge Dorsey sided with Ray and the rest of the debtors, citing both Ray’s acumen for getting to the bottom of things and the likely high cost of such a study. “There’s no question that if an examiner is appointed here, the cost of the examination given the scope suggested by the Trustee at the hearing, would be in the tens of millions of dollars, and would likely exceed one hundred million dollars,” Dorsey said at the hearing on February 15. “Every dollar spent in these cases on administrative expenses is a dollar less to the creditors.”
I think this is penny-wise and pound foolish. The examiner’s report also may have located valuable assets in and around this convoluted estate that would have paid for the cost of the report many times over. As well, an examiner’s report lays out in gory detail what happened, and why, by an independent party without a horse in the race. Now, the public may never know what happened to drive FTX into bankruptcy. Essentially all the parties, except for the U.S. Trustee, argued that they are doing their own investigations into what happened and so an independent examiner would be duplicative to their efforts and needlessly wasteful.
A friend in the courtroom on February 15 texted me that the Sullivan & Cromwell attorney representing FTX “ran circles” around the U.S. Trustee’s attorney during the hearing and that she “seemed woefully outmatched.” S&C argued that Ray “knows what he’s doing” and that his examination is underway so “what’s the point in starting over,” my friend conveyed, and that since “this stuff is so sensitive” you wouldn’t want “to risk someone poking around who doesn’t know what he’s doing.” S&C’s bottom line argument was that an examiner’s report is expensive and superfluous. Judge Dorsey agreed. To me, that’s the wrong decision and we, the public, as well as the creditors, will lose out. C’est la vie; c’est la guerre.
The New Kings of Wall Street
The Carlyle Group is reportedly teaming up with Apollo, Blackstone, and others on a $5.5 billion financing package to buy out Cotiviti, a healthcare analytics company, in what could be the biggest deal ever for the private credit market. For some, this effort signals that the recent chaos in the corporate debt markets may be ending. But to me, this signals quite the opposite: that the chaos in the debt markets continues, and may in fact just be getting started.
The big Wall Street banks are still grappling with the ongoing (and long overdue) pain caused by the Federal Reserve’s decision to fight inflation by ending its Quantitative Easing program and beginning a course of action—still underway—to increase interest rates dramatically. The Big Banks that committed to providing financing for such deals as the buyouts of Twitter, Citrix (aka “Shittrix” on Wall Street), Nielsen, and Tenneco are still paying the price for providing that financing during one interest rate environment—pre-Fed Pivot—and then trying to syndicate the loans (without much success) in another interest rate environment.
In other words, the loan syndication market on Wall Street is gummed up. And it won’t be working smoothly again for quite some time, is my guess. And then there is still the overarching problem of trillions of dollars tied up in the collateralized loan obligation and corporate bond markets—debt issued in the low interest-rate environment for which foolish investors are paying the price now. The investors around the world that bought junk bonds, yielding less than 4 percent back in the late summer of 2021, are paying the piper now that the average yield on a junk bond is more than double that amount, and closer to 8.5 percent. Until this massive amount of low yielding debt gets re-priced downward to deal with the new interest rate environment and investors come to grips with their losses, the new issuance market will be moribund at best.
Naturally this has provided a lucrative opportunity for the new Kings of Wall Street, the private credit mavens at places like Apollo and Blackstone. Of course, they are the ones contemplating providing the financing for Carlyle’s Cotiviti deal, because the traditional Wall Street sources of such financing are pretty much closed for business these days until the current problem loans get sorted out. This is a function of both the regulatory requirements for increased reserves and capital against these poorly performing loans, plus their lack of capacity to do new business. That’s what happens when you are in the moving business and you are forced into the storage business. That leaves the door open for the Apollos and Blackstones to step in and make coin. “Private credit is the only game in town,” Sachin Khajuria, the founder of the hedge fund Achilles L.P., said on Bloomberg TV in December.
These are not banks, in the traditional sense anyway, and therefore aren’t regulated by the Fed and can do things these days that banks can no longer do. Take Apollo, for instance, which is still largely thought of as a private equity firm. But that’s not really true anymore, and hasn’t been for a while. Of Apollo $500 billion-plus in assets under management, only about $100 billion is invested in private equity. The rest, more or less, is invested in private credit deals—debt deals where Apollo can put a ton of money to work at large spreads because the credit markets are in disarray at the moment.
Indeed, what we’re witnessing in real time is not the return of functioning credit markets but a changing of the guard. The new Kings of Wall Street—at least at the moment—are Blackstone and Apollo, which are both stampeding toward $1 trillion of assets under management without any slowdown in sight. You can’t keep interest rates close to zero for some 13 years straight without a price being paid, and TradFi is paying that price right now. It’s being replaced by a bunch of wildcat alternative asset managers having the time of their lives.
This article has been updated with corrected pricing for Paramount+.