An Apollo Structure Twist, Hollywood Compstakes & Solomon’s Mic Drop

Happy Sunday, and welcome back to Dry Powder. I’m Bill Cohan.

In today’s issue, a close look at how the sudden emergence of Sony in the Paramount bake-off has once again scrambled the calculations facing Shari Redstone and the Paramount special committee tasked with deciding the company’s fate. Plus, notes on Goldman’s blowout quarter.

But first…

• Hollywood’s magic number: It’s proxy season in Hollywood. No, not proxy fight season—although we just got a heavy dose of that, thanks to Nelson Peltz and his unsuccessful attempt to win two board seats at Disney. I’m referring to the documents filed with the S.E.C. that reveal what top executives in Hollywood—including Bob Iger, Bob Bakish, and David Zaslav—are getting paid. Incredibly, for each of those three executives, this seems to be the year of the number 31, as in $31 million. A baffling coincidence, unless of course there’s been a bit of executive comp collusion to ensure nobody gets criticized as an outlier. Safety in numbers, I guess.

  Iger is probably the most underpaid of the bunch—not that I’m worried about him. According to the Disney proxy, he received $31.6 million in total compensation in 2023, while in the last year the Disney stock is up nearly 14 percent. That seems to make sense, alignment-wise, since the C.E.O.’s main responsibility is to increase his or her company’s stock price. And this is why Bakish’s comp is a real head scratcher. Not only did Paramount Global lose more than $1 billion in 2023, but the Paramount stock is down 45 percent in the past year, including the run-up on Friday. Nevertheless, Bakish’s compensation was just behind Iger’s at $31.25 million.

  I’m unclear on the logic for awarding Bakish that much, but it might be similar to the rationale behind Zaslav’s 2023 compensation, which tipped the scales at $49.7 million, according to the proxy, but which may have been closer to $31.7 million in “realized compensation,” I’m told. (That’s the money that ended up in Zaz’s bank account, including the cash bonus of $22 million, his $3 million salary, and the value of a prior equity award that vested in 2023.)

  During the past year, Zaz’s WBD stock is down 41 percent, but his board of directors seems to be paying him based on debt reduction and the increase in my personal bugaboo, “adjusted EBITDA,” both of which he succeeded in doing in 2023. So he gets paid for that accomplishment. At some point, you’ve got to figure the WBD stock will start moving if Zaz continues to pay down debt—there’s already $15 billion paid off and counting—and increase adjusted EBITDA, although this is not investment advice. Both creditors and equity holders love debt paydowns—especially if it results in a move away from the BBB cliff, which might happen this year at WBD.

  Finally, of course, there’s Netflix, the reigning king of Hollywood. If you really want to know how it’s done, just look at Ted Sarandos. His 2023 compensation was a cool $50 million, just as it was the year before. The Netflix stock has been on a tear in the last year, up 75 percent, bringing the streamer’s market value back in the range of $250 billion. Not bad for a company whose rickety performance almost exactly two years ago caused smartypants Bill Ackman to dump his investment in the company, in a fit of almost panic-stricken pique, perfecting a $400 million loss. Turns out that was the exact wrong moment to sell, Bill. Since then, Netflix’s stock is up 164 percent. Which goes to show that not even the smartest investors get it right 100 percent of the time.

The problem with the Ellison deal, of course, is that it nets Shari a 160 percent premium for her Paramount Global stake, contained in National Amusements Inc., her family’s holding company, while offering the other, non-Redstone shareholders a hope and a prayer but bupkus up front. As I noted on Wednesday, in my ongoing talmudic study of the demise of Shari’s empire, it might work—partly because its bells and whistles might actually turn the company’s prospects around. But it might not. Perhaps the problems at Paramount are purely macroeconomic, and can’t be solved even with more money and better executives.

We all know why Shari prefers the Ellison deal—she’s even willing to roll over some of her stock into the new enterprise as a show of support for it—but I’m not sure the special committee of the board of directors will endorse a deal that’s great for Shari and may or may not be good for the non-Redstone shareholders. That’s a long putt. As an old Wall Street hand, as you well know, I am increasingly convinced that so much of this will come down to Gerry Cardinale & Co.’s sales pitch to the special committee of the board. The associates working on that PowerPoint can expect serious bonuses if their narrative and Excel projections can convince Blair Effron and Faiza Saeed, the two talented advisors to the special committee.

Then there is the other option—the recently revealed combination of Sony Pictures Entertainment, Apollo, and Apollo’s Legendary Pictures—which of course is much fairer to all shareholders, albeit not as sweet for Shari. The original Apollo deal was for $26 billion, $12 billion for the equity—an original premium of around 50 percent (when the offer first surfaced)—and the assumption of $14 billion in Paramount’s net debt.

This is obviously a fast-evolving situation, and the sudden emergence of Sony is prima facie evidence of Apollo’s clever deal tactics. What better way to quell concern that a financial buyer will just be hacking away at the Paramount carcass than to bring in a big-time Hollywood player? Now that both Sony and Legendary have joined the deal, I suspect that their combined offer for Paramount will be raised. “The key point is it’s a three-way partnership where each brings something unique,” said one Wall Streeter close to the deal. Legendary distributes its content through Sony, so it’s a natural partner here, and Apollo’s meaningful minority stake in Legendary gives it some serious governance rights—enough controls to make this combined deal possible. I’m also told the Apollo bros are friends with Tony Vinciquerra, the chairman and C.E.O. of Sony Pictures Entertainment.

The Sony-Apollo deal would be all cash, of course, and treat all shareholders equally, and presumably “fairly,” one of the most important litmus tests for the special committee. But there would be nothing extra for Shari, which I’m sure will irk her to no end—unless the Sony/Apollo group can narrow the gap between Ellison’s offer to Shari and their offer to all shareholders. If they can’t, and even if they can, Shari can simply veto the Apollo deal, with no questions asked, or answered. Indeed, that’s the Achilles heel of the Apollo deal, regardless of how logical and “fair” it may seem. But Shari can’t just jettison both deals and let the stock plummet. I mean… she could, of course. But she won’t, not at this point in the arc of the Redstone saga. (This is not investment advice.) So a game of chicken appears to be afoot. How high might Apollo go? And what could RedBird do in response?

A former Sony executive shared that the deal would be structured as a joint venture between Sony, Apollo, and Legendary. Sony would not consolidate the joint venture on its balance sheet, suggesting that it would be a minority investor here, despite providing the majority of the capital. (Fewer voting rights, perhaps?) Television and film overhead at Paramount could get eliminated, including marketing, distribution, business affairs, digital programming, etcetera. That might generate $3 billion in savings. The extraordinary Paramount lot, near Hancock Park, would get sold for as much as another $1 billion. Paramount’s films would go to Sony Pictures, and any projects in production, on the shelf, or that need a turnaround, would also go to Sony, which would then distribute them, and the Paramount television productions, for a fee.

This Sony-related person seems to think that CBS, its affiliated television stations, and the Paramount cable networks will be bought by Apollo separately and put into a new company that Apollo could lever up significantly with all sorts of fancy financial engineering. Sony would potentially own a minority stake, which could be permitted. Of course, there would likely be some serious tax consequences for moving all these assets around or selling them. Presumably, Apollo would have some thoughts on that. “If Apollo/Sony put a clean cash deal at a decent M&A premium on the table, it will be tough for Shari to say no,” the former Sony executive elaborated. It also seems to be the deal that Mario Gabelli, the largest non-Redstone holder of Paramount voting stock, prefers. He tweeted the other day that Sony “brings” gaming, music, theatrical content, distribution scale, and global reach to the table, while Apollo adds “financial engineering,” money, and the ability to own TV stations, important given the F.C.C. rules on foreign ownership. Is this all enough to put Sony-Apollo-Legendary back in pole position? We’re not there yet, not by a long shot. But it sure looks like we’re heading for a spectacular Hollywood ending.

It’s amazing what can happen to an income statement when the money-losing businesses are jettisoned and Goldman gets back to what it does so well: making money (from investment banking, trading, private-equity investing, and wealth management). And, boy, has the stock responded. In the last six months, since it has become clear that Goldman would get back to business, the stock is up 35 percent. That’s better than Morgan Stanley (up 25 percent), JPMorgan Chase (up 26 percent) and on par with Bank of America (up 37 percent.) The market value difference between Goldman and Morgan Stanley, once as wide as some $40 billion, has narrowed considerably to around $17 billion.

All of which is probably very good news for David Solomon, now into his sixth year as Goldman’s leader. I think it’s safe to say at this point that he’s no longer the “embattled” C.E.O. of Goldman Sachs. He seems to have weathered the storm that followed him nearly everywhere he went last year. Sure, Goldman still has Goldman-type problems: it’s still probably losing too many talented people to other firms—including Philip Berlinski, its treasurer, to a hedge fund earlier this month—and its investment banking division has yet to fire on all its usual cylinders since M&A and underwriting activity is still slower than in some previous years.

But I think the worst is definitely behind Solomon at this point, and he probably doesn’t need to worry about the Glass Lewis and ISS proxy fights that urge shareholders to separate his C.E.O. and chairman titles and to reject the executive compensation plans. Goldman’s annual shareholder meeting is April 24. These kinds of shareholder proposals always manage to get a fair amount of attention at this time of year. But they rarely succeed, at least in this country, and I seriously doubt that they will succeed this year at Goldman Sachs.

The next hurdle for Solomon, I suspect, will be the question of succession, but that’s years away. Solomon is only 62, and as far as I know, Goldman doesn’t have a mandatory retirement age. (Jamie Dimon is 68 and shows no sign of going anywhere soon, giving plenty of cover to both Solomon and Brian Moynihan, at BofA, who is 64.) Goldman C.E.O.s usually leave organically when they are poached to become Treasury secretary. I don’t see that happening to David, in either a second Trump or second Biden administration. So he’ll probably stick around for as long as he can and then be succeeded by his longtime deputy, John Waldron, the Goldman president and C.O.O. Waldron is 51 and perfectly positioned both age-wise and experience-wise to succeed Solomon when the time comes. Succession at Goldman? Check.