Could Paramount’s flirtation with Bronfman strain the Skydance partnership?

Just as David Ellison’s Skydance Media was closing in on the $8.4-billion acquisition of Paramount Global, the deal took another unexpected turn. This week, Edgar Bronfman Jr., heir to the Seagram liquor company, convinced Paramount’s independent board members to consider his competing bid for National Amusements Inc., the Redstone family’s investment firm, and a minority stake in Paramount.

After weeks of securing investors, Bronfman submitted his offer late Monday, just two days before the bidding window closed. He sweetened his proposal to a $6 billion bid. Now, the race is on until Paramount’s September 5 deadline to decide who will take control of the media empire that includes CBS, Comedy Central, Nickelodeon, MTV, and the iconic Melrose Avenue studio.

“This has been a very strange process,” said Charles Elson, founding director of the Weinberg Center for Corporate Governance at University of Delaware. “This company has provided more ‘theater’ than any other company I can think of. It’s just remarkable that here we are.”

Extending the deadline to accommodate Bronfman did not please the Skydance team. On Thursday, Skydance’s lawyers sent a firm letter to Paramount’s special committee of independent directors, accusing them of violating the terms of their agreement. The letter, as per three people familiar with the matter, highlighted disagreements but was not expected to derail the Skydance bid.

NYU Stern School of Business Professor Melissa A. Schilling warned that this late-stage flirtation with another bidder is fraught with risks. “It’s not cost-less to do this,” Schilling said. “It is creating conflict with Skydance and, should they prevail, they are going to come in angry. That’s not a great way to start a marriage.”

Bronfman is exploiting a clause in the Skydance agreement, which set a 45-day “go shop” period during which Paramount’s board can solicit higher offers. According to sources, Paramount’s willingness to entertain Bronfman’s bid might partly aim to guard against shareholder lawsuits. The sales process has already triggered legal actions, and efforts to secure additional bids could demonstrate they explored all options, aiding their defense.

“This process could be designed to put a check mark in the due diligence box for shareholders, saying: ‘We looked out for you,'” Schilling noted. Possible motivations for stretching the process could also include angling for more concessions from Skydance.

Skydance, backed by figures such as Oracle co-founder Larry Ellison and RedBird Capital Media, has already adjusted its offer twice. Yet some shareholders have voiced concerns over the terms, particularly the all-stock nature of the transaction and the valuation of Skydance at $4.75 billion. They argue this could dilute Paramount’s stock value, a scenario reminiscent of the problematic AOL-Time Warner merger 25 years ago, Schilling said.

“One of the things the AOL-Time Warner deal taught us is that the company initiating the transaction may be overvalued,” Schilling added. “AOL’s stock was valued super high during the internet bubble, enabling them to turn unrealized gains into tangible assets.”

To garner support, Skydance allocated $4.5 billion to buy shares from Paramount investors, offering nonvoting Class B shares at $15 each. In response, Bronfman identified a $1.7-billion fund to offer Class B investors $16 per share. Both offers aim to inject $1.5 billion into Paramount’s strained finances to pay down debt after the deal’s completion, which awaits federal regulatory approval and is expected to take about a year.

Additionally, Bronfman promised to match Skydance’s proposal to buy out National Amusements for $2.4 billion. After paying off $650 million in debt, the Redstone family would walk away with $1.75 billion. Sumner Redstone had structured the company, formerly Viacom, with two stock classes to retain family control via National Amusements, which holds 77% of Paramount’s voting Class A shares. However, the majority of equity is held by nonvoting Class B shareholders, posing challenges.

“The controlling shareholder can move on their own whim instead of doing what other shareholders would agree to,” Elson explained.

“Go shop” clauses are uncommon in competitive auctions but standard for selling financial firms or privately held companies, Schilling noted. Skydance has the right to match Bronfman’s offer, adding to the complexities.

Most analysts believe Bronfman faces an uphill battle to outbid the Ellisons. Media analyst Richard Greenfield of Lightshed Partners speculated this week, “We simply cannot fathom why Bronfman and parts of his investor group would be pursuing Paramount so aggressively unless the Redstones and members of the Paramount Special Committee wanted him to.”

Greenfield pondered, “Maybe the Redstones have had second thoughts about selling to Skydance/Ellison?”

Source: Los Angeles Times