Welcome back to Dry Powder. I’m Bill Cohan.

Paramount Global learned a hard lesson with Simon & Schuster, which it is now offloading to KKR at a steep discount. BET, among other assets, is likely next as the company makes itself bite size. In today’s email, notes on the fallout from the S&S deal, and what it portends for Shari’s next moves.

It should have also been obvious to PRH’s then-management, and its swarm of high-priced lawyers and bankers, that the deal would not fly and should never have been attempted. But PRH found out the hard way. It lost at trial, got embarrassed with lots of damning emails, and had to pay Paramount a $200 million termination fee and also cough up many more millions in legal fees.

The subsequent fallout at PRH was material: Markus Dohle, then the C.E.O. of PRH and the architect of the S&S deal, resigned in December 2022, just weeks after a federal judge blocked the combination. A few weeks after Dohle exited, in January 2023, Madeline McIntosh, the C.E.O. of PRH in the U.S. and Dohle’s direct report, also resigned. Since then, PRH has continued to restructure its businesses, offering buyout packages to a variety of senior employees—those over 60 years old and who have been working for the company for a number of years—and then outright firing others (including my editor).

It turns out that at a book publishing company, even the largest one, an unexpected payment of $200 million can blow a big hole in an income statement. And that hole can be filled in one of only a few ways: by taking out bodies, some who go voluntarily and some who go the hard way.

And so Paramount will likely get a deal for S&S done with KKR, at a purchase price of $1.62 billion, or 25 percent less than the price that PRH had agreed to pay. The spin coming out of Paramount’s Times Square headquarters suggests that the purchase price reduction is ameliorated by the breakup fee, plus the cash-flow it has received from S&S during the last 12 months, ending in March 2023 (the last period for which Paramount financials are available publicly). Under the impressive leadership of Jonathan Karp, S&S generated revenue of $1.2 billion in the 12 months ending March 31 and operating income of $255 million, a margin of 21 percent. No wonder KKR wants the business.

But, unfortunately for Paramount, KKR appears to be getting S&S at roughly 6.4x operating income. That sounds like an old-timey deal multiple, and significantly reduced from the just-bygone market where private-equity firms thought nothing of paying 11x EBITDA—the average purchase price for P.E. deals back in the heady days of 2021, before the Federal Reserve started raising interest rates.

In its reporting on the sale, the New York Times seems to have bought into the Paramount spin. “Though KKR is paying less than what Penguin Random House had agreed to pay, the difference is made up partly by the cash Simon & Schuster has generated over the last two years and the termination fee paid to Paramount,” the paper reported on Sunday. But these are independent events. The break-up fee was paid in 2022 and Paramount would have had the S&S cash flow regardless, until the day a sale closed. The $555 million difference between what PRH agreed to pay and what KKR agreed to pay is part of the pain that Paramount will have to accept for its original sin. Still, Bakish said on Monday he was thrilled. “We are very happy with this deal,” he said. “It’s a great outcome for our company.”

But $555 million is a material difference—more than 5 percent of Paramount’s market value—and evidence, it seems to me, of a challenged auction process, led by LionTree’s ace banker Aryeh Bourkoff. Yes, Aryeh, got the deal done in a very difficult environment, and that’s to his credit, and it’s also hard to sell the same asset twice in a few years, especially after the government succeeded in blocking the first one. Yet the significantly lower purchase price suggests that interest from other financial buyers was muted at best, and that Paramount couldn’t risk trying to sell S&S to Rupert Murdoch’s book publisher, Harper Collins, at whatever price he may have been offering Bakish. Either way, it’s another win for Aryeh, whose sale of The Athletic to The New York Times Company a year ago was a lowkey masterstroke in the art of dealmaking. Aryeh has long been Shari’s favorite banker, and she will likely be calling on him often in future years to slim Paramount down into salable shape, as I have long predicted.

The real winner in this long-running saga is bound to be Jon Karp, who probably gets a fat contract that pays him well plus equity in S&S that could be worth millions to him if he continues to lead the company on its current trajectory, along with the guiding operational hand of the P&L wizards at KKR. In an email to S&S staff yesterday, Karp noted that the “fascinating and stimulating” discussions with KKR began this past spring. “All of us from Simon & Schuster who participated came away from those conversations impressed by KKR’s acumen, as well as their team’s desire to help our business grow and thrive in the future.” If and when KKR decides to sell S&S, or take it public, Karp’s equity will be very valuable. Let’s face it, this is probably the outcome Karp favored all along.

In any event, for starters, Paramount has to complete its mini-Disney-like sale process. In addition to S&S, Paramount is also trying to sell Black Entertainment Television, which one of its predecessor companies, Viacom, bought in 2000 for $2.7 billion.

Paramount has been negotiating a sale of BET with Tyler Perry, who has offered less than the $3 billion that Paramount reportedly wants for the company. At that price, Paramount is hoping to get roughly 9x BET’s $325 million in EBITDA. But it’s not clear, to me anyway, why BET would, or should, command that high an EBITDA multiple in this era of linear TV decline, even with an engaged audience and ancillary revenue opportunities. Perry may be the best buyer—he already owns 25 percent of BET’s streaming business—so Paramount would be wise not to negotiate too aggressively over the BET sale with him. It could end up with nothing, or another broken M&A process.

Let’s assume for a moment, though, that between the two sales, Paramount walks away with $4.5 billion in cash. Paramount has $13.5 billion of net debt, as of March 31. If Bakish decided to use the $4.5 billion in cash from the sales of S&S and BET to pay down that debt—always a good use of cash—Paramount would still have $9 billion in debt. On the earnings call on Monday, Bakish said he would be using much of the cash from the sale of S&S to pay down Paramount’s debt. (Good move, Bob.)

Along with its $10.5 billion of equity value, that would make Paramount a $20 billion bite, comprised of a linear TV network (CBS) that will be a tough sell under any circumstances; a movie studio that is riding relatively high nowadays; a money-losing streaming business; a deal with the Taylor Sheridan cinematic universe; and a group of cable TV channels, including MTV, Comedy Central, and Nickelodeon, that have seen better days.

Paramount also owns Showtime, a premium pay-TV channel. It was once upon a time a very powerful mix—in fact, as recently as 2021, when the company generated $28.5 billion of revenue and $6.2 billion of operating income, a margin of a whopping 22 percent. But those days are over. Revenue last year was $30.2 billion but operating income was down to $2.3 billion, a decline of 63 percent. Paramount’s version of EBITDA—“Adjusted OIBDA”—was $3.3 billion in 2022, down 26 percent from $4.4 billion in 2021.

At a mere 6x EBITDA, Paramount Global’s valuation is pretty tempting these days. Of course, its valuation in the market is not what Shari would sell it for, even if she would consider a sale. She obviously would want a significant premium to the current trading price to convey control to another party. And, aye, there’s the rub. What looks tasty at 6x EBITDA, might not look so scrumptious at 9x EBITDA, or some such. I don’t see the epitaph to the Redstone family’s three decades long ownership of Paramount Global being that Shari sold out cheaply.

And yet: Who wants to catch the falling knife, and pay up for it? Paramount has become a petri dish for the study of the decline of linear TV versus the fight for economic survival of its nascent streaming business—just as Paramount’s largest shareholder, Warren Buffett, articulated so beautifully and sharply at his annual meeting in Omaha, back in May. (To be clear, Buffett is the largest economic shareholder in Paramount but Shari still controls nearly 80 percent of the voting stock, so what she says goes and there’s nothing Buffett can do about that. It’s still a mystery why Buffett bought into Paramount, to be honest. I suspect his younger partners wanted to get a piece of the company before a sale and that Warren regrets the move.) Investors seemed to be taking a victory lap on Monday because Bakish said losses in Paramount Global’s streaming business had narrowed in the second quarter to $424 million. Some great business.

Apple? No. Google? No. Microsoft? Please, no. What about Amazon? This is a combination that almost makes sense to me. If Jeff Bezos was willing to pay $9 billion for MGM, a subscale movie studio, maybe he’d be willing to step up for Paramount Global at a $25 billion purchase price in order to get a bigger Hollywood footprint and a bigger news gathering operation in CBS that he could potentially combine with the Washington Post. With a market value of nearly $1.5 trillion, $25 billion is materially immaterial for Amazon, so why the hell not give Paramount a go? Hard to get excited about it, though.

How about Sinclair? The company is the second-largest owner of television stations in the U.S. I am sure Sinclair would love to get its hands on CBS, if it could. But it’s not going to happen. Sinclair has a market value of less than $900 million, making a $20 billion purchase far, far out of the money, even if it were to team up with a private equity behemoth, like Blackstone, Apollo or the aforementioned KKR.

What about Nexstar Media Group, the nation’s largest owner of TV stations? Its market value is nearly $7 billion, almost on a par with Paramount’s $10.5 billion. If Nexstar were to partner with a private equity firm, I could see a deal coming together. But a Paramount-Nexstar combination might very well run into the antitrust police problem and it still would be a long shot. If Marc Rowan, the C.E.O. of Apollo, is right and private equity’s best days as an industry are behind it—it’s “in retreat,” he said—it’s going to be tough for a private equity firm to pony up the many billions of dollars that a Nexstar-Paramount Global deal would require. I don’t really see this either.

So how do Buffet and Shari (and Aryeh) get out of the Paramount Global mess? If I were Warren—spoiler alert, I’m not—I’d sell down now and take my losses, which can be easily absorbed into his vast empire, which also includes at the moment a record $147 billion of cash. (This is not investment advice.) If he were hoping that Paramount Global would be swept up into the inevitable media consolidation that is still to happen, I just don’t see it, not with its current configuration of assets and how they are performing.

So what’s a Shari to do? Her family’s roughly 10 percent economic stake in Paramount Global is worth around $1 billion these days. That would probably be enough for most people. But as recently as 2015, if various published reports are accurate, the Redstones were once worth around $5 billion. So Shari has overseen a reversal of fortune.

And so if I were Shari—another spoiler alert, I’m not—I would probably take the company off the market, although she would deny that it is on the market. She might as well wait and see what happens from here. Pay down debt. Move the company off the BBB cliff and further up the investment grade scale. Maybe slowly increase the five-cent quarterly dividend. Maybe pray for a miracle that Bakish can keep more people from cutting their cords and can make streaming profitable. And then maybe also pray that Bezos isn’t done building his little media empire. Otherwise, Shari may have to let another generation of Redstones figure it all out.