Can Warren Buffett save Paramount Global?

Berkshire now owns a 15.3% stake in Paramount, which makes it by far its biggest single shareholder. It is even bigger than that of the founding Redstone family which has a 10.2% stake, though they still control 79.4% of the voting shares in the company. Regular readers of my columns are aware of how much I hate the dual shareholding structure which gives founders and their families an outsized role despite their minimal economic interest. It is scandalous that in this day and age, someone with just a 10% stake can have nearly 80% of votes at the shareholders’ meeting.

Likely substantial losses

Berkshire began buying Paramount shares a year ago and it bought the stake over several months. Buffett’s conglomerate has yet to reveal its average cost, but analysts speculate that it is sitting on substantial losses. Paramount stock is down 87% from its all-time high just over two years ago. It is now just a US$10.4 billion company compared to its US$80 billion market capitalisation at the peak in early 2021.

Still, the dramatic fall in Paramount’s stock price should be seen in a proper perspective. Rivals like streaming leader Netflix’s stock is down 53% from its own peak, Warner Bros Discovery shares are 83% from their all-time high two years ago, while Walt Disney’s shares are 48% from their recent peak in 2021 and Comcast’s stock is down 36% from its recent peak.

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Here is the lowdown: Movies and TV production business has dramatically transformed in recent years from “content is king” to “distribution is the key”, and away from an advertising-based model to a subscription-based one. Paramount is in head-to-head competition against streaming rivals like Netflix, Walt Disney’s Disney+, Amazon.com, Comcast’s NBCUniversal, Warner Bros Discovery and Apple TV+. Netflix, which until recently shunned ads, has shown that while content remains important, the key is direct-to-consumer distribution and the use of algorithms to understand what content customers want and when. Tech companies like Amazon, Alphabet’s YouTube and Apple are combining their chops in artificial intelligence and machine learning with their ability to create content and deliver it on demand by streaming it to customers globally.

The old ad-supported TV business that was the backbone of giants like Disney which owns ABC, Warner Bros Discovery, owner of HBO and CNN, Paramount which owns CBS, Comcast which owns NBCUniversal, and of course, Rupert Murdoch’s Fox Corp, is slowly losing its lustre. Rates of cord-cutting from cable and satellite worsened in the first quarter. Dish Network, a satellite TV operator, reported last week it now has less than half as many subscribers as it had a decade ago.

As cord-cutting — consumers refusing to renew subscriptions of expensive cable TV packages and instead subscribing to streaming services like Netflix — takes hold, subscription revenues are declining. Moreover, with fewer people watching TV networks, ad revenues have been in a free fall for some years now. Global economic slowdown has dampened enthusiasm for ad spending. The recent Hollywood writers’ strike is making things worse for media firms which cannot roll out new content to win back viewers. With less new programming to schedule, advertisers are likely to hold back on new commitments for the foreseeable future.

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Media firms are not sitting still as subscription and ad revenues dry up. Paramount is cutting 25% of staff in its domestic cable networks and shuttering its long-standing MTV News division after 36 years on air. Paramount recently unveiled a restructuring plan that combines its Showtime channel with MTV Entertainment Studios. It recently merged Paramount+ and Showtime streaming services into a single product and is seeking greater integration between its vast cable TV and streaming offerings. Paramount+, its flagship streaming service, added 4.1 million subscribers — one million more than analysts had anticipated — in the last quarter. Paramount now has a total streaming base of over 60 million subscribers, ahead of Comcast’s Peacock with 21 million but behind Warner Bros Discovery with 96 million streaming subscribers.

Paramount will save US$500 million just with its annual “dividend modification” — 79% dividend cut. CFO Naveen Chopra noted on Paramount’s earnings call that the move “does not mean that we intend to spend more than previously planned on streaming”. It was, he said, merely an effort to “de-lever our balance sheet, which is generally a smart thing to do in an uncertain macro environment”.

Saving US$500 million in dividends annually is a savvy move for a company that had a cash burn of US$554 million in the March quarter. By cutting its dividends and addressing its cash burn by cutting costs elsewhere, Paramount is clawing back out of the deep hole it found itself in.

Rivals are aggressively moving to address their own cost structures. On May 10, Disney announced its streaming losses narrowed to US$659 million from US$887 million, even as it lost four million subscribers in the last quarter. Disney is now chasing profits rather than new subscribers in markets like India, where average subscribers pay nearly a fifth of what they pay in its home market, the US. Disney now has 157.8 million paid subscribers globally, compared to market leader Netflix which has 232.5 million subscribers. Disney has already laid off 4,000 of the 7,000 employees it plans to fire this year as part of a drive to slash US$ 5.5 billion in costs. Warner Bros Discovery is also focusing on profits over growth and wringing out cost savings from its vast array of entertainment assets.

CBS-Viacom merger

Some of you might recall that in these columns, I wrote about The end of the era of powerful media moguls (October 2018). The piece focused on Sumner Redstone, the then 95-year-old chairman of two listed media firms, top TV network CBS, and entertainment powerhouse Viacom. A year after I wrote that column, Shari Redstone merged the family's two listed firms to form ViacomCBS, and in 2020 Sumner died at 97. Two years ago, the combined firm was renamed Paramount Global. If you are interested in the saga you might want to read a new book, Unscripted: The Epic Battle for a Media Empire and the Redstone Family Legacy, written by New York Times columnist James Stewart, which was published last month.

The whole reason for combining the CBS and Viacom was that a merged company might look more attractive to a buyer than as two separate ones. Neither Shari nor one of her children is reportedly interested in building and managing Paramount for the longer term. The thinking was that either another media conglomerate or a tech giant like Apple, Google’s owner Alphabet, Amazon or Facebook that coveted media assets, might pay a big premium to buy the combined firm.

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Paramount has long been seen as an acquisition target or a company that will eventually get gobbled up. Ironically, in its current state, it has become harder to sell. Legacy media firms like Comcast, Disney and Warner Bros Discovery do not want to buy because they are already in several businesses that Paramount is in and as such, it would be difficult for them to get regulatory approval for a merger. Amazon bought MGM Studios last year. That leaves Apple and Google, and maybe even Facebook, as a long-shot acquirer.

Clearly, US$10 billion is not that much money for trillion-dollar tech behemoths, but the Redstones and Buffett would want to get at least a 40% to 50% premium on top of the current price. The way I see it, it is unlikely any of the tech giants will fall for that. Some analysts I have spoken to say perhaps the company will get carved up into two or three pieces with several private equity players taking control. But as the US economy falls into a recession later this year and with interest rates unlikely to come down anytime soon, private equity players are in no rush to acquire money-losing media assets that require a lot of capital and hard slog to squeeze profits over the long term.

So, what’s Buffett’s game plan? In Nebraska last weekend, he clearly played his cards close to his chest. Buffett likes stock buybacks and dividends. Paramount Global may look like an undervalued company but without buybacks and with dividends slashed to a minimum, Berkshire is not being paid to sit around and wait for a big payday at some point in the future. Though Buffett has a reputation for being a patient investor, he can be ruthless and cut-and-run when he realises that he might have to wait forever. He famously bought IBM stock for US$170, but when the old tech giants’ fortunes turned for the worse, he quickly dumped his entire stake at a loss.

These days, however, Buffett leaves stock-picking mostly to his proteges, Ted Weschler and Todd Combs, though as CEO he is still responsible for major portfolio changes like Paramount. The big question in the mind of investors is whether Berkshire will help Shari broker a deal with one of the tech giants or a private equity player. Or will he bail out given his strong views on the extremely tough video streaming environment? The 92-year-old Oracle of Omaha no longer has anything to prove to anyone anymore, and has only his stellar reputation to protect.

Assif Shameen is a tech and business writer based in North America