Paramount shares rose on news that Sony might join Apollo's takeover bid

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Paramount Global shares jumped 13% on Friday as investors cheered news that Sony Pictures Entertainment is talking with Apollo Global Management about joining Apollo's bid for Paramount.

The beleaguered stock ended the day at $12.44 after posting more than double its normal trading volume. Shares have reached their highest point since February, offering new evidence that many investors appear to be gravitating toward an Apollo/Sony scenario, largely for structural reasons. More importantly, even if the two entities join forces, they have not yet officially entered the arena. Over the next two weeks, David Ellison's Skydance Media, backed by RedBird Capital and other investors, will enter into an exclusive negotiating window with Paramount's controlling shareholder, National Amusements.

While Skydance appeals to many media industry vets given Ellison's strong track record and enthusiasm for keeping Paramount Pictures intact, the deal it seeks has inherent conditions. National Amusements Inc., run by Shari Redstone, owns 77% of Paramount's voting stock but only about 10% of its stock. This means that the NAI deal risks diluting other shareholders. Hence the lukewarm reception so far on Wall Street, although it is worth noting that negotiations are still ongoing.

“It's hard to know how investors will react when there's so much information about what shape different deals will actually take,” one dealmaker familiar with the Paramount talks told Deadline.

Apollo undertook separate initiatives for Paramount Pictures as a separate unit as well as for the entire Paramount Global company. Redstone embraced neither. Reports that the latest offer was priced at $26 billion, including the assumption of Paramount's debt, led to an earlier rally in Paramount shares. As of the end of this week, Paramount's market cap is about $8.5 billion.

Chris Marangi, co-chief value officer at Gabelli Funds, believes Paramount could eventually be worth $30 a share (north of a potential Apollo-Sony bid in the range of $20 to $25 a share). Marangi is not an unbiased party, of course – Gabelli, an asset management company, has the second-highest stake in voting shares in Paramount after NAI.

“Shari is looking to sell her stake, which she can do,” Marangi said in a statement. “But how Skydance will integrate its business into Paramount in a way that benefits all shareholders is the hard part. This is the part that will likely be subject to litigation.”

Marangi noted that Sony has explored other M&A options in the sector, describing the potential merger as “completely synergistic.”

Jim Lebenthal, chief equity strategist at Cerity Partners, is a longtime investor in Paramount. Speaking to CNBC on Friday, he described the experience of holding Paramount stock for so long a “horror show” given its decline and the various fluctuations in the company's performance. He added that Redstone remains a “wild card” in terms of the eventual direction of the deal given her father Sumner Redstone's long pursuit of Paramount Pictures and other key elements of the former Viacom.