Paramount Case Solution

Advanced Corporate Finance

Case Name: Paramount

Group Members:

Ken Fukuda, Michelle Jang, Delgermaa Munkhsuren, Nikhil Tambolkar, Alex Yang and Dorothy Yu

1. Why is Paramount a takeover target?

By 1995 the entertainment industry had seen some fundamental changes in its revenue mix. In the film sector, the largest source of revenue had shifted from theatres (from 52.4% in 1980 to 27.2% in 1995) to home video (from 7% in 1980 to 40.6% in 1995). While number of films produced remained stable film costs had increased on average by 9% annually and seats per theatre had decreased. This redistribution of revenue had resulted in lower revenues per film from theatres however the risk per film was mitigated by surge in rentals, sales of home videos and greater demand for programming from cable networks. In television, both basic and pay cable television viewers had grown dramatically with number of basic and pay cable households having increased 2.4 and 5.1 times, respectively.

Whilst Paramount had been very successful in generating syndication revenues, they were experiencing difficulty in creating a steady stream of original films. The company was under pressure to find additional channels to monetise on its extensive movies and show library as well as Madison Square Garden.

With an estimated Market Value/EBITDA multiple of 11.9x, Paramount was cheap in comparison to the average of its peers (in Exhibit 12). The company had a healthy balance sheet and a manageable debt load with Debt/Equity ratio of 0.25 and interest coverage of 2.44. Additionally, most of the larger participants in the entertainment business were involved in several segments of the company that made the entertainment industry, highly acquisitive industry. Thus, acquisitive nature of the industry, changing industry dynamics and cheap valuation made Paramount an attractive takeover target.

1. Which of the two firms – Viacom or QVC – would make a better fit with Paramount? Which would Paramount management i.e. Martin Davis, prefer if it had to choose?

We think Viacom would make a better fit from two aspects - business synergy (both revenue and cost) and management. Viacom – Paramount combination would add enhanced and complementary distribution capabilities to each company. The opportunities included cross-promotion and utilization of established brand names, utilization of distribution capabilities and further alignment in pursuit of international opportunities. In addition, we expect to see cost reductions by combining the two companies’ overlapping businesses. Thus, the Viacom-Paramount combination had the potential to create a company larger than Viacom and Paramount separately and become one of the largest players in the entertainment industry.