Allen Media Group's recent offer of $14.3 billion for Paramount Global may seem low at first glance, but a closer look suggests that it could become even more appealing over time. According to a bearish investment bank's calculations, this buyout offer, which includes debt, equates to $21.53 per nonvoting share and potentially more for voting shares. However, investors appear skeptical that Paramount's controlling shareholder, Shari Redstone, will accept the proposal. As of early Wednesday, nonvoting shares were trading slightly below $15, representing a mere 8% increase.

Only three years ago, there was a strong argument that a deal at this price would undervalue the company significantly. BofA Securities had then estimated Paramount's worth at $53 per share. Paramount boasts ownership of CBS, a traditional television ratings leader, as well as Paramount Studios, a prominent content engine. Additionally, it offers paid streaming services such as Paramount+ and Showtime, along with a free ad-supported service called PlutoTV. The company also possesses legacy cable channels like Comedy Central and BET, and international broadcast networks. In the event of a deal, Allen Media would be at liberty to divest certain sections of the company to interested buyers, thereby compensating for its initial expenditure.

However, BofA Securities cautions against relying on its previous valuation. Within the past year, the investment bank lowered its estimated value for the company to $32 per share. In fact, an updated sum-of-the-parts analysis conducted by BofA last November suggested that the value could be nearly 30% lower than that figure in the event of a sale. This assessment was based on the belief that Paramount was stubbornly resistant to any buyout offers. Furthermore, BofA projected that without a sale, the company's value would continue to deteriorate. It is worth noting that this analysis predates the news of the Allen Media bid.

The Changing Landscape of the Media Industry

Over the past three years, Paramount and other companies in the media industry have undergone significant transformations. These changes can be attributed to three key factors.

Declining Cable Subscriptions

One major shift is the rapid decline in cable subscriptions. The rate at which customers are leaving cable services has surpassed expectations, with double-digit percentage drops becoming more frequent. This trend has put legacy TV companies in a difficult position, as they were once reliable generators of cash.

Disappointing Growth in Streaming Subscriptions

Another challenge faced by Paramount and its peers is the underwhelming growth in streaming subscriptions. Investor hopes for significant expansion have not been met, causing concern within the industry. This setback has forced companies to reassess their strategies and find new ways to boost their cash flow.

Shift away from Cash-Burning Content Investment

In the past, companies were willing to burn cash to fund content for their streaming services. However, this approach has fallen out of favor recently. Instead, many companies are implementing cost-cutting measures, including layoffs, to improve their cash flow.

Unfortunately, Paramount has not fared as well. The company currently carries a significant amount of debt relative to its earnings power and is projected to produce negative free cash flow this year, following two consecutive years of burning cash. As a result, Paramount's shareholders have experienced a striking 66% loss over the past three years, while investors in the S&P 500 index have enjoyed a 39% gain.

Various media companies, including Skydance Media and Warner Bros Discovery, have expressed interest in acquiring Paramount. However, Bank of America warns that the longer it takes to sell all or part of the company, the lower its value will decline. Paramount's recent reaction in the stock market, with an 8% rise accompanied by worrisome undertones, further reflects the uncertainty surrounding its future.

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