Michael Wolff on Viacom's Real Motives in a Rushed Paramount Sale

Philippe Dauman salivates over deep pockets and a possible play to fend off Sumner Redstone's daughter as China and private equity powers line up for a studio stake or perhaps much more.

This story first appeared in the April 1 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.

A major movie studio does not come up for sale very often. When it does, it means an epochal power shift in Hollywood — or at least it signifies for the buyer epochal ambitions. Rupert Murdoch strode to the head of the media business with his purchase of 20th Century Fox in 1985. Sumner Redstone became Sumner Redstone by winning a battle to buy Paramount Pictures in 1993. There were big, if shattered, studio dreams for the Japanese (Universal Studios and Columbia Pictures, which Sony Corp. still owns), the French (Universal), the Coca-Cola Co. (Columbia) and Ted Turner (MGM).

But more recently, the movie studios that launched the modern entertainment business have seemed less central to media fortunes, demanding a substantial commitment of capital and generating low returns and, increasingly, less prestige. Hence, the decision in February by Viacom to put less than half of Paramount on the block has generated something like a collective "huh" or, perhaps, "jeepers." Viacom's embattled chairman and CEO Philippe Dauman all but waved a giant flashing neon "For Sale" sign at a March 7 investor conference, touting a "once in a lifetime opportunity" to own a piece of one of Hollywood's original studios. "It is a crown jewel out there," Dauman said, which of course is not something that sellers of crown jewel assets typically have to announce.

And yet, by most accounts, what has moved this decision is the otherworldly sale price that Wanda, the Chinese movie theater chain and real estate developer, is said to have paid recently for Legendary Entertainment — and all the other money that might be poised to rush out of China. If Legendary is worth a reported $3.5 billion, might Paramount, previously regarded as worth somewhere less than $3 billion, fetch … $10 billion? That'd be epic.

Indeed, a sense of desperate hurry-up-and-grab-it was suggested by the odd circumstance that few in Hollywood seemed to have any inkling of Viacom's interest in selling. Not a peep or rumor was heard. Nobody was prepping the books. Which likely meant that the decision was made entirely and suddenly in New York as Viacom suffered growing woes at its cable networks and Redstone's health declined. In this new climate of overeager foreign money, and amid the quickly escalating internecine war at Viacom between Dauman and Shari Redstone, daughter of controlling shareholder Sumner, and with Paramount's long-lagging performance, magically unlocking unexpected value might seem like a gift from God. Chinese strategic players Wanda, Alibaba and Hony Capital are said to be looking at Paramount's sales presentation, along with Blackstone, Carlyle Group and TPG on the private equity side.

On the other hand, what does it look like for a major media company to unload its studio? That's never been done. Would Viacom still be Viacom without owning one of the six majors — without a true, feet-on-the-ground, international distribution network, something only the majors have?

Hence, selling merely a stake in the studio might seem a possible way for Viacom to have its cake and eat it, too. (Some speculated that this announcement was just another effort by Viacom to pursue its so-far-unsuccessful strategy of amassing cash to buy back stock.)

And yet, a minority interest? Isn't that the entire point about a studio, having control? Doesn't Chinese money want to own? If it's just about putting a toe in the U.S. water, for both strategic and financial players, there are many safer ways than a passive ownership position to participate in a studio's business, from funding slates to securitizing libraries to making distribution deals. Studios already are efficient investment vehicles without having to get tied up in the perils of long-term limited ownership.

But you do have to own — and be ready to dearly pay for — ultimate bragging rights and epochal ambitions. In fact, Paramount as it stands, without someone else's ambition and commitment of capital, is hopelessly lesser rather than greater, producing only a handful of films in 2015 (the easiest way to temporarily boost cash flow at a studio is to make fewer expensive movies) and cutting the kind of overheads, like foreign offices, that give a studio its value. It's the sick-man studio, its weakness largely considered to be its management — so why would you want to buy into that weakness without the ability to change it?

On the other hand, a minority stake merely may be the opening ask — a way for Viacom to test the market. When Viacom in 2007 sold Famous Music, the music publisher owned by Paramount for almost 80 years, it said it was looking for a management agreement with another publisher — then, at the last minute, it agreed to a full acquisition by Sony.

Or a minority stake can offer a path to control. It's a divesti­ture without looking like one. Everybody hears minority and thinks 20 percent, but what if it's 50 percent, meaning an independent board out from under Viacom's thumb — or even 40 percent, with a whole series of approval rights and negative options, in which little can be done without the consent of the minority holder, which would effectively be running the show. And with, to boot, a timely option to buy the part it doesn't own.

And, indeed, rather than a sale of a significant interest making Dauman look weak and merely to be rearranging the deck chairs during his sinking tenure, it might serve as the ultimate way to cement his position in a post-Sumner Redstone environment. When it was truly Redstone's company, there was a standard policy at Viacom: no key men. At Paramount, big stars were always asking for key-man provisions in contracts for Sherry Lansing when she ran the studio and was their benefactor — so they could walk if she was fired — but Sumner's rules stood in the way. Now, with Dauman speaking for 92-year-old Sumner, the new partner at Paramount might be able to name Dauman as a key man and freeze him and other members of Viacom senior management in place — certainly making it vastly more difficult for Shari Redstone in her campaign to oust him.

Or if the value of Paramount in fact turns out to be through the roof, then that becomes the deus ex machina by which Dauman buys out Redstone's controlling stake (through his holding company National Amusement) and settles his war with Redstone's daughter, Shari. Hence, selling Paramount, a seeming act of desperation, becomes an act of genius.

So, yes, however it happens, the sale of Paramount may well be epochal, introducing new power, fortifying old power and, in the process, possibly making Paramount count again, too.

Michael Wolff writes frequently about the media business. His latest book is Television Is the New Television.