Investment Thesis on Paramount Global (NASDAQ: PARA)

Paramount Global (PARA) shares present a compelling investment opportunity due to their significant undervaluation relative to their intrinsic value and potential acquisition interest from major players such as Sony and Apollo Global Management. The ongoing financial and strategic maneuvers by the company’s major shareholders and potential buyers highlight the likelihood of a lucrative buyout, making PARA an attractive medium-term investment.

Key Investment Points

1. Undervaluation Relative to Acquisition Offers:
   • PARA shares are currently trading at $12-$13, significantly below the $22-$41 per share range suggested by recent non-binding acquisition offers.
   • A non-binding offer from Sony and Apollo Global valued Paramount at $26 billion, which could translate to a share price significantly higher than the current market value.
2. Strategic Interest and Potential Buyout:
   • Sony has long been interested in acquiring Paramount, seeing strategic value in its content and media assets.
   • Apollo Global Management’s involvement and the potential synergies from merging Paramount’s assets with Sony’s existing portfolio underscore the strategic value of Paramount.
3. Significant Voting Shareholder Activity:
   • The major voting shareholder, Shari Redstone, is under pressure to raise cash to pay debts, which could lead to a sale of Paramount.
   • National Amusements (NAI), controlled by Redstone, holds a significant 77% of voting rights in Paramount, making the sale of these shares crucial for any potential deal.
4. Disparity Between PARA and PARAA Shares:
   • PARA shares (Class B) are trading significantly lower than PARAA shares (Class A), despite having the same economic rights.
   • The large short interest in PARA shares, coupled with the relative illiquidity and difficulty in shorting PARAA shares, has exacerbated this disparity.

Valuation and Potential Upside

1. Sony-Apollo Bid Valuation:
   • The $26 billion bid, if it assumes the debt, suggests a share price of approximately $41 for both PARA and PARAA shares.
   • Without assuming the debt, the offer still represents a substantial premium over the current market price, potentially valuing PARA shares at around $22 each.
2. Sum-of-the-Parts Valuation:
   • Paramount’s diverse assets, including studios, streaming services (Paramount Plus, Pluto TV), and television networks (CBS, MTV, Nickelodeon), suggest a total valuation significantly higher than the current market capitalization.
   • A conservative estimate values Paramount’s assets at approximately $30 billion, suggesting a substantial upside from the current market price.

Risks and Considerations

1. Economic and Market Conditions:
   • The performance of Paramount’s financial services is tied to broader economic conditions. A slowdown could adversely impact financial results.
2. Regulatory Hurdles:
   • The deal, particularly with foreign entities like Sony, requires regulatory approval, which could pose challenges.
3. Uncertainty in Deal Terms:
   • The precise terms of the Sony-Apollo offer remain unclear, and investor sentiment could fluctuate based on new information or changes in the deal structure.
4. Short Interest:
   • PARA is one of the most shorted stocks in the S&P 500, which could lead to volatility and impact the stock price negatively in the short term.

Conclusion

Given the substantial undervaluation of PARA shares, the strategic interest from Sony and Apollo, and the potential for a significant acquisition premium, investing in PARA shares or long-dated call options presents a compelling opportunity. The current price disparity between PARA and PARAA shares and the potential for regulatory and strategic catalysts further bolster the investment thesis. Therefore, PARA shares are recommended as a strong buy for investors seeking significant medium-term gains.