Viacom Deal to Sell Big Paramount Stake Worth the Wait

 | Jul 27, 2016 | 9:00 AM EDT
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Viacom (VIAB) CEO Philippe Dauman has been working to sell a minority stake in Paramount Pictures in order to raise cash for the company. Two weeks ago, reports emerged that a deal had been reached to sell a 49% stake in Paramount to China's Dalian Wanda. According to these reports, Wanda was willing to place an overall $10 billion valuation on Paramount. That's much higher than expectations earlier this year, when Dauman first announced his intention to sell a partial stake; at that time, most analysts thought Paramount was worth $4 billion to $5 billion.

On the surface, this is a very good deal for shareholders. Indeed, we had advocated for a stake sale like this to help demonstrate to the market the true value of Paramount.

Wanda is a strategic partner for Viacom. Some investors we have spoken to in the past couple weeks don't seem to grasp how large and influential Wanda is today in the global media world.

Wanda is the largest theater owner in China. Some analysts estimate 50% of future box office receipts will come from that country. Through its ownership of AMC Entertainment Holdings (AMC) , Wanda owns the most theaters in America, and it has been pursuing the No. 4 U.S. player, Carmike Cinemas (CKEC) . Wanda also is going to become the largest theater owner in Europe through its $1.2 billion Odeon and UCI purchase.

Wanda's Wang Jianlin is worth more than $30 billion himself and is on track to do $16 billion of merger deals this year.

Wanda's purchase of Legendary Pictures last January for $3.5 billion caused waves in Hollywood. However, it also led to the breakthrough development of "Warcraft." Although the film tanked in the U.S., it raked in more than $150 million in Chinese box office receipts in the first five days of release there. Legendary now has green-lit the film adaptation of Pokemon Go.

If the future of Paramount and all of Hollywood is in China, Wanda would be an excellent partner. And $10 billion is a very robust valuation for Paramount considering that Viacom's market cap is less than $20 billion.

However, Viacom's Dauman has been engaged in a corporate governance battle with controlling shareholder National Amusements over the last few months and, 10 days ago, National Amusements put out a statement opposing the sale of the Paramount stake.

National Amusements wasn't saying it is against a deal with Wanda per se nor against the concept of a minority stake sale in Paramount. Instead, National Amusements said it wanted a new Viacom board in place to make this decision rather than the current one.

National Amusements removed Dauman and four other directors several weeks ago and replaced them with five new candidates to improve Viacom's corporate governance. Dauman naturally opposed this move and sued to block it. The courts will weigh in soon on this matter, but all indications are they will support National Amusements' right to take these actions.

Although the dispute might delay a deal with Wanda (or potentially other players), it appears that minority Viacom shareholders will do better with National Amusements' new board slate in place.

If Wanda wants to do a deal now, it likely will still want to do a deal with the Redstones in a few weeks when the new board is in place. The price for the Paramount stake could go down, though that appears unlikely if there are other potential partners for Paramount or Viacom as a whole showing interest.

Also, Dauman gave Viacom notice in late July that he might tell the company in one month that he considers himself to have received constructive dismissal in the next 30 days. With that, he would likely ask for his severance package. If he did, the path would be clear for the new board and for a potential Wanda deal then.

Like other Viacom shareholders, we want to see a much higher stock price for the company. The Wanda offer for the Paramount stake seems like a good step in that direction. If we have to wait a few weeks to see the new board put in place for that deal to happen, that's fine, especially if it leads to more bidders expressing interest.

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