Viacom CEO Dauman Pursuing Paramount Stake Sale

Philippe Dauman - H 2016
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"We have been approached by several potential strategic investors," CEO Philippe Dauman said during an investment conference Tuesday. Viacom shares surge as much as 5 percent.

Viacom chairman and CEO Philippe Dauman has decided to consider a sale of a minority stake in Paramount Pictures to a strategic investor in a bid to help prop up the ailing media giant after a string of wrong-way moves that rippled the company's stock price.

Dauman told analysts during an investor conference Tuesday that Viacom has "been approached by several potential strategic investors" about taking a minority stake in Paramount, long considered one of the conglomerate's crown jewels. Analysts have pegged an outright sale could value the studio at up to about $5.5 billion — a big drop from the $9.8 billion Viacom paid for it in 1994. 

"We believe that pursuing a transaction with a strategic minority investor ... would be a great benefit strategically and financially to both Paramount and Viacom," Dauman said. "To that, I've decided to go forward with substantiative discussions with a select group of potential strategic partners for Paramount."

There has already been heavy speculation on Wall Street that Chinese investors might want to purchase Paramount, the studio behind such franchises as Mission: Impossible, Star Trek and Transformers. Wall Street analysts have often mentioned Chinese Internet giant Alibaba and Chinese conglomerate Dalian Wanda Group, which owns cinema chain AMC Entertainment and Legendary Entertainment, as companies that could be interested in buying into a Hollywood studio.

They were again name-checked by analysts on Tuesday. A media banker also suggested Apple and Amazon as possible strategic investors, along with an entity in John Malone's field of influence, such as Lionsgate, since the mogul has highlighted the importance of content consolidation.

Paramount has been under-earning and has not put out as much product as its rival studios have in the past few years. The soft movie slate at Paramount has led to a slump in earnings. For the quarter ending Dec. 31, Paramount posted a $146 million operating loss that Dauman bemoaned during last week's earnings conference call with analysts as a "brief income slump" that left the studio "significantly undervalued."

However, Dauman flagged to Wall Street in 2015 that the turmoil would be short-lived as Paramount is committed to returning to a full 15-film slate in 2016. The studio has been picking up more projects lately (a George Clooney movie, Suburbicon, in Berlin, and Vin Diesel's next xXx project, taken from Sony). And on Feb. 12, the studio dated three more Transformers films (one each June in 2017, 2018 and 2019).

Paramount has also expanded its early-stage TV production business to take advantage of appetite for original content across the industry, from cable networks to SVOD players like Netflix and Amazon.

Some observers speculate Paramount's recent activity in TV and film — even concerning the moves that are merely announcements of things to come — may be a way to boost the value of the studio in preparation for a sale.

Wall Street on Tuesday rallied behind the idea of selling a stake in Paramount. The stock, which has been cut in half in the past year, surged after Dauman announced he would entertain offers. Shares were trading up 83 cents, or 2.3 percent, to $37.69 in early afternoon trading in New York. The stock had been up as much as 5 percent earlier in the trading session.

"Viacom is in a position where it is looking to catalyze the stock and could use extra capital to reduce its leverage ratio, which is currently running ahead of where I believe they are comfortable," Drexel Hamilton analyst Tony Wible tells THR

Gimme Credit analyst Dave Novosel tells THR the comments were also “great news for bondholders, since that unit has been an albatross in recent years.”

Jefferies analyst John Janedis said in an investor note from his firm's conference, where Dauman announced the Paramount plans: "This sale would open several doors for Viacom as a partnership with a strategic partner could allow for new distribution, possibly in untapped markets. Despite Paramount's robust film pipeline, the asset has been relatively under-appreciated by investors. Therefore, in addition to the operational benefit of a sale, it would help to set a floor value for the asset — a benefit for the stock."

Mario Gabelli, the largest investor in Viacom behind controlling shareholder and chairman emeritus Sumner Redstone, also tweeted approval on Tuesday: Viacom "announced logical first step ... monetize Paramount via [joint venture]. Have partner bring in cash and digital distribution know how."

“Bringing in a partner to help monetize Paramount is an important step and something we’ve specifically urged the company to pursue," said activist shareholder SpringOwl, which has been calling on management to take all sorts of actions to boost Viacom's financials and stock price. "The positive reaction in share price illustrates the support we have among shareholders."

Viacom and Wall Street observers didn't immediately detail companies that have actually approached Paramount about a possible deal.

Gabelli had last year raised the idea of Alibaba as a minority owner of Paramount. The two companies have an established relationship. The Chinese company's Alibaba Pictures last year announced a deal with Paramount focused on Mission: Impossible — Rogue Nation as its first Hollywood investment. In addition to an investment of an unspecified amount in the Tom Cruise-led franchise film, Alibaba Pictures also collaborated with Paramount in the areas of online ticketing, merchandising and promotion of the movie in China.

Zhang Qiang, CEO of Alibaba Pictures, said at the time: “Mission: Impossible — Rogue Nation is our first step toward internationalization, and Alibaba Pictures looks forward to collaborating with more international movie studios where we can consolidate resources, technologies and talents to establish a world-class integrated entertainment platform for the film industry."

Meanwhile, fellow Chinese giant Wanda “seems like they are moving towards film more after they did the Legendary deal” for $3.5 billion, says Wible. Wanda chairman Wang Jianlin said in 2014 that his company had held talks to acquire a stake, preferably a controlling stake, in Lionsgate, but its owners were only willing to sell a minority stake. He also said that Wanda had held discussions about investing in MGM.

Novosel said, when asked about possible suitors, that “maybe a group of billionaires could combine with a smaller independent studio.”

Dauman's comments seemed to exclude private equity firms that are not strategic, but purely financial investors, some Wall Street observers argued.