If you think Allen Media Group’s $14.3 billion offer this past week for
Paramount Global
is too low, just wait. It’s likely to look more generous as time passes, judging by one bearish investment bank’s buyout math.
The offer, $30 billion including debt, works out to $21.53 per nonvoting share, and more for voting shares. Investors seem to be betting that Shari Redstone, Paramount’s controlling shareholder, isn’t going to accept. The nonvoting shares closed Thursday at $14.68, 7% above the pre-offer price.
Just three years ago, there was a solid case to be made that a deal at that price was too low. BofA Securities at the time valued Paramount at $53 a share. It owns CBS, a longtime leader in traditional television ratings; content engine Paramount Studios; and the paid streaming services Paramount+ and Showtime, plus a free one supported by advertisements, Pluto TV. There are also legacy cable channels like Comedy Central and BET, and international broadcast networks.
But by early last year, BofA had marked down its value for Paramount to $32 a share. By November, it said that an updated sum-of-the-parts analysis would likely produce a value nearly 30% lower than that, assuming a sale. It lowered its price target on the stock all the way to $9, based on the belief that Paramount was overly resistant to a sale, and that without one, the company’s value would continue to erode. This past week, BofA stuck with $9, writing in an investor note that Paramount is an attractive takeover target, but that deal timing is difficult to predict, and there are “more questions than answers” about things like asset sales and debt management.
Three things have changed for Paramount and its peers over the past three years. First, cable customers are leaving faster than expected—subscriptions are declining at double-digit percentages. Second, growth in streaming subscriptions has broadly fallen short of investor hopes. Third, burning cash to fund content has fallen out of favor. So companies are turning to layoffs and other cost cuts to boost cash flow.
The exception is
Netflix,
which recently reported blowout subscriber gains and is generating a growing stream of free cash. Essentially, the streaming script has flipped. Legacy TV companies that were once reliable cash generators are now iffy ones. Paramount, which has considerable debt relative to its current earnings power, is expected to produce negligible free cash this year after two years of burning cash. Netflix, which was once a prodigious cash burner, is looking increasingly like a show business Death Star, capable of outspending even giant
Walt Disney
on streaming content.
Paramount shareholders have lost 66% over the past three years, while
S&P 500
investors have made 39%.
Media entrepreneur Byron Allen previously tried to buy Paramount’s BET Media Group for $3 billion. Other media companies have expressed interest in Paramount, including Skydance Media and
Warner Bros. Discovery.
BofA’s view is that the longer it takes to sell all or part of Paramount, the lower its value will fall.
CVS Health
reports fourth-quarter results this coming Wednesday, and the anticipation is…undetectable, actually. Earnings are expected to come in a smidgen lower than a year ago, for both the quarter and the year. They’re little changed from two years ago. Wall Street expects another modest decline this year. The stock has sharply underperformed the U.S. market over the past one, three, five, and 10 years.
What happened here? This is a company that once had a vision for the “retailization” of healthcare, with its Minute Clinics and nurse practitioners. Its drug counters were supposed to reap benefits from sharing a parent company with Aetna, the big health plan provider, and Caremark, a pharmacy-benefits manager, or PBM.
There are only three major PBMs, which buy drugs for large groups of payers. Economists call that an oligopsony—a market dominated by a few buyers. You’d think a thing like that would be lucrative, especially for a buyer that’s related to a big seller.
UnitedHealth Group,
another mash-up of a PBM and health plan, but without its own druggist, is shining. Its shares have returned 719% over the past decade, or triple the S&P 500’s return.
There are no CVS bears among 28 analysts tracked by FactSet, so I checked in with George Hill at Deutsche Bank, who downgraded shares to Hold from Buy in March 2022. They’ve since slid to $74 from $108. CVS’s biggest problem is that pharmacy retail is a bad business, says Hill, citing
Rite Aid’s
bankruptcy and
Walgreens Boots Alliance’s
shattered stock price as evidence.
The big three PBMs pay for about 90% of prescriptions, making druggists price takers, says Hill. There are 25% too many U.S. drugstores by his count, with little differentiation among chains. “Do you care if you walk into a CVS, a Walgreens, or a Rite Aid? The answer is probably not,” he says. Big box stores and grocers can use drug counters as loss leaders. And Caremark faces just enough competition from fellow PBMs to keep it from being too generous with CVS’s pharmacy business.
CVS trades at a price/earnings ratio of around nine, versus 20 for the broad market. The problem is that earnings are likely to decline this year and possibly next year, says Hill.
There are some promising signs. The previous CEO envisioned stores as the center of healthcare delivery, which kept services simple. Under new management, CVS is pushing into higher-end services. Last year, It bought Signify Health, a provider of in-home health evaluations, and Oak Street Health, a primary care provider with a focus on seniors. And it’s closing hundreds of CVS stores
J.P. Morgan analyst Lisa Gill, who is bullish on CVS stock, says that drug retail now brings in less than a third of operating profit, and the pieces are in place for the company to return to steady growth. As it does, the valuation is likely to rise, she says. Companies that run health plans are trading at about 14 or 15 times earnings, she points out, and UnitedHealth, an investor favorite, goes for 18 times.
Write to Jack Hough at jack.hough@barrons.com
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