Skydance is seeking to become of Paramount importance for streaming

The tectonic plates of consolidation are once again on the move with The New York Times breaking the story on Sunday that Shari Redstone, the President of National Amusements, Inc. (NAI) and Chair of Paramount Global, is in talks with Skydance to sell a controlling stake in NAI. Skydance, while much smaller in both size and scale than Paramount, is majority owned by the Ellison family (the father of whom, Larry Ellison, co-founder of Oracle, is an investor) and recently secured an investment round from private equity (PE) firm KKR. It is also backed by Tencent Media, which bought a minority stake in Skydance back in 2018. If the deal goes through, it will transform Skydance into a major player in TV and film – to the scale and scope of Paramount streaming rival, Warner Bros. Discovery. For Paramount, it will end long-running speculation about its future, and it will secure financial backing from PE and lucrative additional distribution rights (into the Chinese market via Tencent Video).

Skydance has launched the next chapter in consolidation

Founded back in 2006, Skydance Media has built a reputation as a production partner for the major studios, securing multi-year co-financing, as well as production and distribution deals with Paramount and Apple TV+ in 2022. Skydance’s key area of genre focus has been  action (the most popular TV and film genre in MIDiA’s Q3brand tracker survey), sci-fi or fantasy genres. Over this time, it has learned how to build genre project-development expertise, both for new content and for re-booting existing intellectual property. (Skydance was the production partner for Top Gun: Maverick, the second highest grossing film of 2022).

As important as its genre production expertise is, Skydance’s access to both capital and distribution markets is potentially its most valuable competitive feature. Being both private and backed by PE allows Skydance a degree of flexibility that is not available to Paramount (Paramount is a legacy media entity with a long history of corporate governance challenges, inherited market assumptions and a high debt profile – it had a net debt position of $13.8 billion in Q3 2023, up from $12.4 billion in Q3 2022). This $855 million loss, which Paramount incurred in the first nine months of 2023, on the back of the $22.01 billion in revenues, reveals that the logic behind seeking a buyer is becoming more and more compelling for Redstone.

Perhaps the most appealing aspect of a takeover of Paramount by Skydance would be the reduced exposure of the combined entity to advertising (which currently accounts for 32.6% of Paramount’s total revenues). In the uncertain period of 2024, advertising revenues are likely to remain uncertain as advertisers and consumers hold back from increased expenditure. At the same time, subscription growth is likely to remain well-constrained as retention pressures continue to impact the wider subscription market outside of Asia Pacific. This makes the likely improved access to the Chinese market, via Tencent video, of particular importance for investors. All told, Paramount has significant upside from making this deal happen. What the structure looks like and whether the resulting entity remains public will all have a significant impact upon the wider direct-to-consumer video landscape, as escalating costs will continue to heap investor pressure towards seemingly inevitable consolidation.