How Wanda Plans to Acquire Paramount

Sumner Redstone
John Shearer/Invision/AP

When a powerful and irascible 90-something hollers “get off my [studio] lot,” most people would tend to listen. But apparently not China’s wealthiest man, Wang Jianlin, and his Dalian Wanda Group conglomerate.

The Chinese mega-corporation is in talks to acquire a 49% of Paramount Pictures, the struggling film studio whose parent company, Viacom, has put the stake up for sale despite a fierce fight over control of the American corporation, multiple sources confirmed. Sumner Redstone, 93, controlling shareholder of Viacom, has said that he is not ready to sell any of Paramount, at least partly for sentimental reasons. He considers the studio his “baby,” acquired in a fierce 1994 bidding war with fellow magnate John Malone.

Redstone’s apparent opposition and the battles he and his daughter, Shari Redstone, are waging to remake the leadership of Viacom persuaded most observers that it would be unlikely that any buyer would come forward to buy Paramount in the short run. That’s not to mention the studio’s diminishing fortunes in recent times. It placed last among the six major studios in 2015 box office returns, with a 5.9% share, only fractionally ahead of “mini-major” Lionsgate, also at 5.9%.

Wanda and Wang, 61,  have been pushing aggressively into the American market — with the 2012 acquisition of the AMC theater chain and the January purchase of film financier and producer Legendary Entertainment. The $3.2 billion value for Legendary — which helped finance the “Dark Knight” and “Hangover” films — was high enough to startle even veteran Wall Street and Hollywood financiers. This year alone the company has spent some $28 billion in deals.

That makes observers loathe to rule out the possibility of Wanda purchasing Paramount, even though they consider the price-tag being mentioned, starting at about $4 billion for 49%, to be exorbitant (while pegging the value of all of Paramount at a plump $8 billion.) Given the studio’s operating cash flow for the last complete year (ending in Sept. 30, 2015) of $111 million, a $4 billion bidder would be paying a stunning multiple of 72 times cash flow. Even using the prior year’s $205 million in operating income would mean a multiple of 39.

(RBC Capital Markets in April came up with a valuation of up to $3.32 billion for Paramount. It relied on a more conservative 12-times estimated EBITDA (earnings before interest, taxes, depreciation and amortization) averaged over five years and added in an additional $1.4 billion for the value of the studio’s film library. Applying a 13-times multiple, kicked the Paramount price-tag up to $3.48 billion. “We think this valuation is more in line with how a strategic partner might approach the possibilities with Viacom,” said RBC, calling the nearly $3.5 billion figure “lofty,” given more recent results.)

Tuna Amobi, an analyst with S&P Capital IQ, called Paramount values reaching as high as $10 billion “extremely rich.” A significant entertainment investor described the upper prices being discussed “silly.”

But Wanda wouldn’t view a transaction that way, said Lindsay Conner, co-chair of the Manatt law firm’s entertainment and media practice, “It makes sense for Wanda because they have acquired some very substantial assets in the U.S.,”  said Conner, who has been involved in other deals with Chinese companies, but not this one. “Buying a significant stake in a U.S. major studio would be a crown jewel for Wanda and fit nicely into their plan of acquiring media assets around the world.

“One would assume they either have some type of signal that the sale being discussed would be approved by Sumner Redstone,” said Conner, “or they believe that they can offer such a significant price that Sumner won’t be able to say ‘No.'”

The skeptical investor, who asked not to be named, did not dismiss Wanda’s talks with Viacom, even at higher prices. “What’s the downside for Wanda or anybody else moving forward right now?” asked the investor. “More legal fees? That’s a minor consideration.”

“In a lot of ways, it does not make sense for them,” said a another source familiar with the situation. “But if you are interested in principle in acquiring a studio, and they are, then you want to get as close to the table as you can. That way you know how a future negotiation might unfold.” The source also declined to be named.

Souring the prospects of a deal are not only the legal clouds over whether a transaction can be completed but the fact that Wanda usually prefers to buy companies outright, as it did with AMC and Legendary. Still, the high price might also be enough to persuade Redstone and the people around him — presumably with daughter Shari the most important player — that it is time to let the maker of “Top Gun” and “Star Trek” go. “I believe, at those prices, it’s a very good deal for Viacom shareholders,” said the investor. “At the end of the day, if the deal is ‘too good to be true,’ then I think all interested shareholder parties will move forward with the sale.”

The clouds around any definitive actions surrounding Viacom have been mounting since last November, when Redstone’s long-time companion and former girlfriend, Manuela Herzer, filed court papers saying that the billionaire was mentally incapacitated and that she should be be installed as his health care agent — overseeing the care of the frail great-grandfather.

The action could have had the effect of locking in Redstone’s previous estate plan, which would have given the now 52-year-old Herzer $50 million and title to his $20 million mansion on a ridgeline above Beverly Hills. But a Los Angeles judge in May ruled against Herzer, saying that Redstone’s videotaped testimony made clear that he no longer wanted Herzer in his life and that he preferred to have Shari, his only daughter, oversee his care.

Redstone responded by striking out not only at Herzer, but others who he said had been disloyal by not properly keeping him informed about corporate business. He tossed Viacom CEO Philippe Dauman and George Abrams off the board that runs his National Amusements theater chain — the panel which also oversees his controlling interests in both Viacom and CBS Corp. He also removed the two men from the board of trustees for his trust, which will determine control of his shares when he dies, or is deemed incapacitated. A National Amusements board remade with two new members then elected to replace five members of the Viacom board of directors and to require that any sale involving Paramount be approved by a unanimous Viacom board. With Redstone and his daughter on the panel, that created an effective veto power over any transaction.

Whether the deal being discussed with Wanda is rich enough to satisfy the elder Redstone’s imperative to “unlock value” remains to be seen. Actions are pending in courts in Massachusetts, Delaware and California about whether the shifts at National Amusements and Viacom were proper. Redstone’s lawyers feel they have an ace in the hole, regardless of whether he is deemed mentally competent: The change of board members and rules was supported by a four-person majority of National Amusements board members, even without Dauman and Abrams votes.

The moves are expected to be just a precursor to the board’s removal of Dauman as CEO. One party involved in the initial bidding for Paramount said that the handling of Dauman’s exit from the company will be another potential complication. The bidder, who declined to be identified, speculated that the Paramount sale would trigger a payment to the departing CEO, who is already one of the highest paid in America, with a $54 million payday in the 2014-15 fiscal year.