Why can't Paramount Stock have a Hollywood ending?

It seems like Paramount Worldwide (FOR 3.04%) (AT 5.35%) shareholders cannot take a break. There are at least two parties seeking to buy out the media mogul, but he remains somewhat of a market laggard. Paramount stock is trading down 13% in 2024, compared to a whopping 44% over the past year.

Redemption interest sets a floor on the stock, but why is the ceiling falling? It's not an action. It's a trash compactor. Paramount has a lot to do before its fragile bones start to crack under the pressure. Let's assess where we stand after a hectic few weeks of redemption activity. It's still not too late for this storyline to have a happy ending.

Teleport me

The first contender to appear on the porch of Paramount was Skydance by David Ellison. It makes sense. Ellison comes from financial royalty. Larry Ellison is his father. However, young Ellison made his living in Hollywood. Skydance has helped produce some of Paramount's biggest hits in recent years, including Top Gun: Maverick and some of the most recent installments in the Impossible mission And Star Trek franchise.

Skydance had neither the means nor the desire for a traditional takeover. His two-pronged approach would begin by looking at Shari Redstone's National Amusements, which owns 5% of Paramount's shares but controls 77% of the preferential voting shares. The second step would be to orchestrate a buyout of the entire company. Both sides entered a period of exclusive buyout negotiations, but that window ended this weekend.

Skydance and Paramount may continue to reach an arrangement, but now another suitor is knocking at the door as the lemonade swirls. Sony (SONY 0.08%) and private equity giant Apollo (APO 1.31%) are teaming up for a more conventional acquisition valued at $26 billion. The good news is that this would likely be a financially superior transaction for current shareholders than Skydance's potentially dilutive proposal. However, it would also take more time to close and overcome serious regulatory hurdles.

Sony's presence more than Apollo's would expose the combination to antitrust scrutiny. Some assets of the two entertainment giants are expected to be sold, if the deal itself is approved.

This gang will self-destruct in five quarters

Time is not on Paramount's side. It published problematic financial results last week. Revenue rose just 6%, with the 24% rise in revenue from its unprofitable streaming business held back by low single-digit growth for its television media and filmed entertainment segments. . It fell well short of analysts' revenue targets in back-to-back reports. Its operating and reported losses are improving and Paramount managed to generate positive free cash flow during the quarter. However, you don't show your CEO the door last week and cut your dividend by 79% like they did last year if the future is bright.

The future is unclear. Growing its audience for Paramount+ and other direct-to-consumer platforms comes at the expense of the rest of its business. Even the typically patient Warren Buffett has had enough. He began trimming his stake in Pararmount last year. The entire remaining position was unloaded in the first quarter of this year.

That's not to say Paramount is toast. It is better for a struggling media outlet to have at least two interested buyers rather than one or none. There aren't many other parties likely to crash on the suitors' porch here. Big media companies and even bigger consumer tech giants that could benefit from Paramount's catalog probably won't even attempt a deal that probably won't pass a regulatory sniff test.

The ideal solution would be for Paramount to run away, but that's the kind of fresh thinking that doesn't usually come from inside a company with a thorny ownership structure. In the movies, the easiest way to get out of a trash compactor is to block it and force your way out. Your turn, Paramount.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the securities mentioned. The Motley Fool has a disclosure policy.