(Bloomberg) — David Ellison, movie producer, tennis fanatic and heir to a technology fortune, is on the verge of adding another title: media mogul.
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Ellison is in negotiations to take charge of Paramount Global, the media giant that owns CBS, MTV and Nickelodeon. He and his backers have agreed to pay a little more than $2 billion for Shari Redstone’s National Amusements, the family company that controls Paramount.
But that deal won’t close unless Ellison can merge his production company, Skydance Media, with Paramount, and a number of hurdles stand in his way, including how to satisfy the company’s other investors.
Ellison and Paramount’s independent directors have committed to a month of exclusive talks, a sign both sides believe a definitive agreement is within reach. They have already settled on the general framework of a deal that would value the much-smaller Skydance at about $5 billion.
With 77% ownership of Paramount’s voting rights, Redstone will be getting a premium price for the shares held by National Amusements, which also owns a chain of movie theaters. But other Paramount shareholders could see a great deal of dilution if the company acquires Skydance at the price being discussed. To get buy-in from those investors, negotiators are discussing a dividend or stock repurchase, according to people with knowledge of the matter. They may also eliminate the two-class share structure that gives the Redstone family control over Paramount with less than 10% of the overall stock.
Ellison would serve as chief executive officer of the combined company, according to the people, who asked not to be identified due to the sensitive state of the negotiations. His father Larry, the co-founder of Oracle Corp., is one of several names being floated for the role of chairman, they said.
Ellison, 41, has been pursuing Paramount for months, sensing a rare opportunity to own one of Hollywood’s oldest studios. Paramount Pictures, founded in 1912, is the home of The Godfather, Star Trek and Forrest Gump. But to do so, he will need to take on Paramount’s money-losing streaming service and a collection of cable networks that have been hemorrhaging viewers for more than a decade.
Redstone, 69, has been loath to part with Paramount, resisting overtures from Netflix Inc. and others for the media empire cobbled together by her late father Sumner over nearly 40 years. But Paramount’s poor performance has left Shari, now in control of her family’s holdings, with few options. The company’s market value has fallen by more than 65% since the Redstones merged CBS Corp. and Viacom Inc. to create Paramount Global, and just last month the credit ratings firm S&P downgraded its debt to junk.
Redstone decided last year she was ready to sell and brought on a team of financial and legal aides to oversee the process. She has received offers to buy her family holding company, the Paramount movie studio and the company’s TV networks. Some would have made her more money than the Skydance deal, others would have been simpler, but she saw none as promising as Ellison’s.
Apollo Global Management Inc. initially offered to buy just the studio. After Paramount’s credit rating was cut, the private equity firm stepped forward with an offer of $26 billion, including the assumption of Paramount’s $14.6 billion in debt. Redstone, however, doesn’t believe Apollo has lined up all the financing.
Warner Bros. Discovery Inc. explored a bid, but investor reaction to that proposed marriage has been negative, reflecting skepticism about merging two companies that make almost all of their money from declining cable TV networks.
Despite rumors of other bidders, including a strategic buyer and a well-heeled individual representing a consortium – one not so different from Ellison – those suitors have yet to materialize, at least in the public.
Redstone has come to see Ellison as her best option. Both are scions of billionaires and grew up aiming to prove themselves on their own terms. Ellison wants to own the business – not just parts – and cares about the namesake Paramount studio and its Hollywood legacy. He was also raised around technology luminaries like Steve Jobs and believes the company could thrive if it invests more in technology.
Ellison and his supporters, which include his father, RedBird Capital Partners and KKR & Co., intend to rebuild Paramount and are willing to invest billions of dollars in the business, according to the people. They have also already assessed which assets they want to hold or sell.
They want to preserve the Paramount+ streaming service and explore merging it with a peer, such as Peacock or Max, although they haven’t yet talked with either of those operators, according to the people. They have also discussed some kind of deal with Amazon Prime Video. Merging two services, which current management has also discussed, would eliminate billions of dollars in costs.
They may try to sell some assets, including BET (Black Entertainment Television) and Paramount’s international TV networks, but don’t plan a fire sale of the legacy TV networks. They see value in the CBS broadcast network, for example, which has rights to the National Football League and Big Ten football.
Jeff Shell, the former chief executive officer of NBCUniversal, will take a senior role at the company and advise Ellison, according to people familiar with the plans.
It took Paramount’s board several months to warm up to Ellison’s overtures. While Redstone will receive a premium for her voting shares, owners of Paramount’s common stock will probably not see a huge windfall.
More likely they’ll have to accept a merger that puts a high value on Skydance and gives its backers a substantial minority interest in the combined company.
While Skydance is a growing company that produces films, animation, scripted TV and sports documentaries — and already works with Paramount on franchises such as Top Gun, Star Trek and Mission: Impossible — that’s a tough pill for a company that generates $30 billion a year in sales and owns a vast film and TV library.
Shareholders will need to believe that a new management team can grow a business that has been in decline. Shari Redstone, who may keep a stake in the company to participate in the upside, believes in Ellison, a successful entrepreneur with deep pockets and an experienced team around him. For a company that missed the chance to sell for a much higher multiple and is now teetering on the edge of inexorable decline, that may be as good as it gets.
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