- We contacted a Hollywood producer friend who over a long career has produced blockbuster after blockbuster. He says Paramount is indicative of the entire industry mess.
- He believes a starting point that makes the most sense would be Sony doing the deal.
- Sony is best equipped to deal with the true north of the entire deal:Star making to generate IP appealing to all audiences, as in the past.
- Key question: Does valuations of PARA IP in the deal reflect good guesses or simply along assumptions unproven by any criteria that counts?
Our premise here:
Through the seemingly endless thickets of all possible Paramount (NASDAQ:PARA) deals now going on a ludicrous dead end, we have heard from the financial community, the bidders, and investors utterly fed up with the unfathomable delays in getting a deal, any deal, done and done. Working through a mass of data and opinion, I came to the conclusion that the one true north, keystone to unfolding a final deal, really sits with not the distributors or owners of IP but with the people who actually create, nurture, and produce content.
What I discovered was that the tent pole elements that hold up as critical for a viable deal are all based on two things: One, the true value of the present library IP and two, the real-world possibilities of future IP landing in markets that can attract the largest audiences in the genre and beyond.
The valuing of the businesses all have flaws:
1. We know what the IP produced in the past, by any way of applying a depreciated value to its audiences of today vs. the future earnings is flawed. Setting investor banking valuations via projections is a guess at best.
2. The most pressing need for an entertainment/media company today is to arrive upon a business model that could succeed past present chaos. Three years from now, someone will get it. But valuing a deal today in terms of what ifs ahead needs a lot more common sense than what we see on the table to date. Pencils need to be sharpened once and for all, with IP assets priced with the best guess possible that all can agree on.
We tested our theory on the stock with a front line, veteran movie and TV producer with a pure gold track record. He has been the key talent and brain behind a series of blockbuster movies that have brought in grosses in the billions. He is currently engaged in developing two films. I asked him how he evaluated the current green-lighting execs in the industry. His replied with a mystic smile and “No comment.”
That view was the opener of a lengthy interview that was the springboard of this PARA outlook that, I believe, has not had enough media coverage to date. An outlook to have an impact on pricing this deal in a way that meets Shari’s personal needs and provides comfort in paying National’s debt, her fellow shareholders of the parent. A fair premium for all holders and freedom from any post-deal litigation exposure – government or corporate. My interviewee, a thirty-year entertainment powerhouse, believes that this far in, “few get it but many who talk a good game have proven they can’t”.
Above: Great timing now–if Sony finally gets to the finish line.
Mr. Powerhouse weighs in on the PARA deal and other ants at the picnic and concludes a Sony deal meets the common-sense criteria.
Let me begin here by introducing “Mr. P” as much as our rules’ discussion apply. For obvious reasons, he is an active producer, currently at work on major films in various stages of development. As noted, his track record is gold. And yes, it includes a handful of flops. But overall, he is a man who can get a green light on his name alone. Perhaps not as easy as it was, ten years ago, but he still has the reputation of being “money”.
As a matter of fact, our interviewee has also been a sophisticated personal investor himself over many decades in many sectors, including media/entertainment.
He is an old friend from very early in my career, when he was still writing live show material for major casinos. He subsequently migrated into screenwriting, directing and fast up the greasy pole to producing major films for the big five studios and independents. He agreed to talk to me in depth because he feels his experience and appraisals of the industry now have not been as widely circulated as they should. Not him per se, he added, but a wider consensus of top executive producers who have been, “understandably, bashful in sharing their views”.
For the same reason, he established rules for our discussions: No attribution, direct identification of himself or other producers and IP creators who are friends or associates. And wherever possible, paraphrased answers to get the sense right but not trigger guessing games as to who is speaking.
What follows are what I believe to be his most valuable insights for investors, from the POV of an industry producer veteran, of the endlessly pending PARA deal.
His key takeaways: Some paraphrases and quotes were agreed
1. What haunts the PARA deal is specifically reflected in the macro mess in the entire industry. At the heart of it is the raw fact that nobody can accurately predict the earning power of current IP that could be the basis of an offer that meets the test of fairness to all with skin in the PARA game.
2. His many decades in the business have not given him what he believes will be a realistic assessment of the time ahead when Hollywood figures out what will be a business model for max profit, revenues, costs. “Nobody I know is anywhere near solving this massive dilemma” between building audiences and offering IP with extensive multi-generational appeal.
3. PARA’s IP is rich and varied. But to really be honest and fair, among their treasures and dogs, he believes the way to date they have handled some of the best ones are terrible. As an example, he cites Stark Trek. It’s among the best they have. It has proven itself over many generations – it’s seen as something of a cult, understandably.
But its appeal is multi-generational. PARA has not focused sufficiently to broaden its exposure, to build a stable of new stars yet preserve its heritage. “Trekkies young and old want to see the Captain – a kind of hologram of the original Captain Kirk but nuanced for today. By now, we should have a vibrant cast of exciting new characters. The platform extensions for this are tremendous.”
4. “We used to make stars, now we make so-so stories we hope can ride on the props and CGI. We need to create stars, not just competent actors, but ones with that ‘star quality’ that transcends story, genres, and time.” Star building the way it used to be was the core mission of the studios. The old timers knew, that above all, the decision to see a movie was heavily dependent on the stars. They were the draw. Go through any great grosser in any decade, pick out the super biggies and see how many had mega stars leading. Take the Mission Impossible IP. Yes, the action and could CGI work with a very competent, talented Mr. No-Name actor will do business, But will it reach anywhere near what a Tom Cruise lead will? My guess, nowhere near.
Why did Selznick relentlessly pursue Clark Gable, ultimately making it a family matter as he pursued his father-in-law L.B. Mayer to release him from MGM for Gone With The Wind?
“I’m not a generational snob, or a nostalgic embracer of anything old time. But through the lens of my decades in this business, I remain wedded to the conviction that while many values inhabit successful movies, the one factor with the best grossing track record is a star.” He added that yes, you can have outliers that are hits. And yes, stars can be in crappy movies. But he tells, “When I pitch a movie, past or present, the number one question I get from any Mr. or Ms. Greenlight is always, ‘Who do you want, and are they available?’ And if it doesn’t register ‘star’ or ‘star in the making’ they have to love the concept on first sight before getting to ‘How much?'”
Bottom line:
“Hollywood has forgotten how to build stars. What we see now are social media viral young actors or those who have been in surprise hits, then run through a handful gender friendly imitations and they die.”
“I’m not saying it’s easy. It never was. But the word bankable was the key and despite critics, it still is. Among the rarities today, Ryan Gosling or Ryan Reynolds. Both stars in progress most recent outings have not done well. But it comes with the territory. These guys will have long careers ringing the cash register if they are marketed and casted well the way in was with patience and smart exploitation.”
Endgame:
Across the streaming board, we get agitated just thinking about the endless overkill and underkill in the management and creation of IP that has the best chance to provide earning power that gives owners the heft to project future valuations. And those numbers can translate into assets that can pass the test of whatever number comes up as the deal sealer.
Secondly, our producer friend also believes that among all the candidates for PARA who thus far have appeared, SONY can deliver the best outcome for buyers, sellers, and investors. Direct quote:
The majors don’t always execute acquired logos very well. Just think of the ton Disney spent on Fox? Not everyone will agree, but in my opinion, they fumbled the ball on it. Fox is an orphan at Disney. I can cite others. Sony, I believe, is capable of setting PARA IP from its studio work, to distribution and marketing of doing the best job of squeezing the best return on PAPA assets.
Holders of both PARA shares need to think beyond the premium–though obviously that’s and endgame for sure. But I suspect that in order to reach a closed deal, Sony may have to throw a stock component into the deal that gives comfort to holders that their expertise and track record will produce the kind of returns that will help move the successor stock to higher territory because they are among the companies that “get it” according to “Mr. P”.
Sony may well need to sweeten the offer–not by that much, but if they do, it presents to holders a reason now to accept the deal plus a kicker if they wind up with Sony shares aimed at a better future bet.
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