Viacom yielded to pressure from investors and analysts this week, announcing that it will explore a sale of a minority stake in Paramount Pictures — and setting off feverish speculation about who wants a piece of the the studio behind “Star Trek” and “Mission: Impossible.”
When it comes to the guessing game going on across investment circles, most of the betting centers on Amazon, the deep-pocketed tech giant that is making a big push into original content, as well as Chinese powerhouses such as Alibaba and Dalian Wanda Group that have been making inroads in the U.S. by buying up entertainment assets.
The flight of capital out of China as the country grapples with currency and economic turmoil could make a Paramount deal attractive to Chinese investors. But there are reasons a Chinese company might be wary of taking the plunge. For one thing, China has a tight cap on the number of U.S. films it allows into its market, and some of these companies, such as Alibaba, have a relatively small Stateside presence, which could stretch them thin.
There are also studio players that might want to take a stake in hopes of bolstering their scale, such as STX Entertainment, flush with cash from backers such as TPG and China’s Huayi Brothers. Lionsgate, which is in talks to merge with Starz, has been mentioned as a possible contender. But observers said it’s not clear that a minority stake in Paramount would be of interest to a company already active in the movie business. Established players would likely be more interested in buying the studio’s library, but the deal on the table, as outlined by Viacom chairman-CEO Philippe Dauman on Tuesday, leaves Viacom firmly in control of Paramount.
In a note to staff, Dauman said that the media company will continue to control the Hollywood movie studio, but argued that bringing in a strategic partner would give Paramount more firepower in a shifting media landscape.
“A strategic partner can enhance Paramount’s business by adding overall expertise, funding expanded production, building on our distribution clout and scale, and providing new creative opportunities for our employees, our talent and our studio production partners,” Dauman wrote. “A partnership also brings strategic and financial benefits to Viacom overall and unlocks significant value for our shareholders.”
One Hollywood investor said that Paramount might be an attractive takeover target but that under the current regime a deal is less likely. The studio has a long road ahead of it. It lacks the breadth of franchises of competitors such as Disney and Warner Bros., which boast the likes of “Star Wars,” DC Comics and Marvel in their arsenals, and it is trying to restock its pipeline after reducing the number of films it has produced in recent years. Paramount has been slow in producing new franchises to replace its aging film series, including “The Terminator” and “Transformers.”
“If they wanted to sell it outright there might be a lot of people interested,” the investor said.
Other major media companies have been hit hard in recent months by concerns about the long-term health of the cable business in a world where consumers are increasingly seeking out cheaper, digital alternatives. But Viacom’s problems are manifold. It faces declining market share at Paramount, ratings headaches at channels such as MTV and Comedy Central, and the failing health of founder Sumner Redstone, who recently stepped down as chairman.
The reaction across Wall Street was mostly positive, with Viacom’s stock climbing as much as 5% on the news it would explore the sale of Paramount stake, before leveling off in the late afternoon. Shares closed up 1% for the day at $41.01.
Even critics of Dauman praised the move. SpringOwl, an activist investor with a tiny position in Viacom, released a statement calling the decision “an important step.”
“It’s a smart move,” Eric Jackson, managing director of SpringOwl, told Variety. “I’m not sure it’s even possible to sell Paramount while Sumner’s alive. So under the circumstances, it’s the best action that they could have taken.”
Matthew Harrigan, an analyst with Wunderlich Securities, said the move was a “slight positive,” but one that will not have a significant impact on the stock price. Viacom’s biggest challenges are with its cable assets, he said.
“The most important thing remains getting MTV Networks working again,” said Harrigan.
The shopping of a Paramount stake is likely a bid by its corporate parent to pump up the value of the studio, despite its tepid financial performance of late, said one hedge fund manager. Analysts peg the value of Paramount at $4 billion, but that could climb as potential backers circle.
“This is the first step in a two-step process,” said the manager, who declined to be named. “They would like the world to view the value of this investment based on replacement value — what would it cost to re-create a studio, with all its distribution power — which would be a higher value than that for the company just based on a multiple of (earnings).”
The manager said it is more likely that such an investment would come from an overseas firm — perhaps China or India — where individuals and companies presumably would put a higher value on gaining ready access to Paramount’s film and television distribution channels.
Wanda Group of China recently acquired Thomas Tull’s Legendary Pictures in a deal valued at $3.4 billion, while Perfect World Pictures of China made a five-year, $500 million investment in Universal Pictures’ film slate.
With tumult in the Chinese financial markets and the currency in retreat, rich investors and companies are seeking investment in the U.S. and other Western countries. Most Western investors would not make such a large investment in Paramount, unless they are able to “drive the bus,” taking immediate control of the company, while Chinese investors might be more patient about growing their stake over time, the U.S. hedge fund executive said.
“Given what is going on in China, there is a strong desire among high net-worth individuals, who can afford something more than just buying a penthouse apartment on 57th Street,” said the hedge fund manager. “They are looking to get money out of China and place it in the United States and get those returns back in the United States, not in China.”