PARAMOUNT's "ASSET PLAY"
Paramount's TV Media segment alone covers the enterprise value of the entire company at today’s prices. Meaning you get the streaming business, Paramount Studios and Publishing asset for free.
Paramount Global is a global media company with a diverse portfolio of assets, including the traditional TV Media network, Paramount + streaming service, Film studios, and Publishing divisions. The company's stock price has been on a downward trend in recent years and is now trading at 0.4x book value. One reason for the pessimism surrounding Paramount is the competitive landscape in the streaming market. Netflix, Disney+, and Amazon Prime Video are all major players in the streaming space. Additionally, the traditional TV Media business continues to be in a secular decline.
Despite the industry headwinds, the disconnect between today's share price and Paramount's intrinsic asset value is attractive. The TV Media segment alone is worth more than the entire enterprise value of the company at today’s prices, meaning you get the rest of the assets, Paramount +, the Film studios, and Publishing divisions for free. The valuation of the remaining assets is less certain and can be thought of as a free option with a high potential upside. The entire thesis rests upon the controlling shareholder, National Amusements, monetizing the remaining assets.
What is TV Media worth
Consensus estimates TV Media will make $4.71bn in EBITDA in 2024, down from $4.78bn in 2023, despite CBS having both the Super Bowl and presidential election coverage in 2024. Peer Fox Corp trades at 6.7x EV/EBITDA. Publicly traded broadcasters GTN, SBGI, SSP, NXST, and TGNA trade between 5.7x-7.0x EV/EBITDA. It’s not hard to justify a range of 5.5x-6.0x for TV Media, especially if you believe CBS is a gem.
Using 5.5x-6.0x EV/EBITDA gives us a range of $40-44/share for TV Media. The entire company, not just the TV Media segment, carries $25/share in net debt. Net, that’s $15-$19/share in equity value for the TV Media business or 15%-46% upside versus today's market price of $13.
The point is that Paramount's share price today is well-covered by the TV Media business.
The obvious question is how will TV Media be monetized. Will it eventually be spun as a separate entity that Paramount retains a large stake in, allowing the company to continue to benefit from TV Media’s free cash flow. Or will the divisions be sold in conjunction with a plan to sell the non-TV media assets.
The future is uncertain, but the free optionality of the remaining assets is not.
The Rest of the Businesses
The direct-to-consumer (D2C) business, Paramount +, is harder to value, given the losses it generates. Assume it’s worth anywhere between zero (it will never turn a profit) and 2x sales. That gives you a range of up to $25/share.
The film studio was rumoured to be worth $8bn when Dalian Wanda was a suitor in 2016. Let’s assume the value of the studio has not changed since 2016. If a buyer will pay $8bn, less than what Amazon paid for MGM studios, then that’s $13/share. Assuming the film studio's 62-acre lot in Hollywood hasn't appreciated in the past seven years is highly conservative but represents roughly $4 per share at today's book value.
Finally, we have the publishing division, Simon and Schuster, a non-core asset that was sold to Penguin for $2.2bn and then blocked by U.S. Regulators due to anti-trust concerns. Following the block by U.S regulators, Paramount agreed to sell Simon & Schuster to private equity giant KKR for $1.62 billion which equates to $2.5/share.
Adding up all of the divisions gets you a sum of the parts of $56-$66sh, or 310%+ upside. The high end of the range would obviously require everything to go right. Evidently, the asymmetry in the shares seems attractive, assuming all of the assets of the company are monetised correctly.
Key catalysts include an announcement to sell all, or some, of the company at attractive prices or investors begin to recognize Paramount’s intrinsic value is multiples above today's share price.
Balance Sheet
Another reason for the undervaluation of Paramount is the company's debt load. Paramount has a lot of debt, which is weighing on its stock price.
A lot of Paramount debt has long-dated maturities trading in the 70s-100, BBB- rated and would be puttable at 101 in a change of control.
Additionally, Paramount doesn't have a maturity wall until 2026 (~$729mn maturities between now and then), so there is time to address these issues.
In terms of Liquidity, Paramount has $5.2bn ($1.7bn cash + $3.5bn undrawn revolving credit facility) as of 2Q 23, providing ample firepower and time for management to resolve headwinds and unlock value for patient investors.
Overall, Paramount Global is a complex company with both challenges and opportunities. However, for patient investors, the potential rewards outweigh the risks.
Disclaimer:
The information and opinions expressed on this blog are for informational and educational purposes only and should not be construed as financial advice, investment recommendations, or solicitations to buy or sell any securities.