Wednesday, July 24, 2024

Credit Agencies Warn That Paramount’s Legacy Businesses Are a Concern, Despite Skydance Deal

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The credit agencies are weighing in on Paramount Global, fresh off the deal that would hand control over the entertainment giant to David Ellison’s Skydance.

Moody’s warned in a note that is placing Paramount’s ratings on review for a downgrade, a move that would rate the company’s debt at “junk” status.

“The review for downgrade is prompted by the ongoing secular pressures on the company’s television networks and the slow pivot to reach direct-to-consumer (DTC) streaming scale and Paramount’s announced agreement to merge with a smaller scale independent film and TV studio in Skydance,” the credit agency warned in the note, published Tuesday morning.

“Moody’s believes that the company will endeavor to build on its own franchises as outlined in the Skydance Consortium new strategic plan. But without much more avid IP such as more evergreen franchises to build on or heavier investment by Paramount, we believe that the company may remain competitively disadvantaged,” the note continued. “Therefore, either a new materially different strategy is needed or it is possible that the initial investment into the company by the Skydance consortium may not be sufficient to stabilize the credit profile. As a result, it is possible we could downgrade the ratings in the coming months, well before the pending merger closes.

In other words, while Skydance has a plan, there is a long window before the deal closes, and the existing pressures on Paramount’s linear businesses may force Moody’s to make the call. That being said, the deal, once it closes, will inject the balance sheet with cash, helping it de-lever. And RedBird’s Andy Gordon told analysts Monday that “we expect to be investment-grade by all rating agencies sometime in 2026 and you can see the deleveraging profile from approximately 4.3 times today to 2.4 times by 2027.”

S&P Global, meanwhile, which downgraded Paramount’s debt to junk back in March, released a note of its own Tuesday, writing that while it viewed the Skydance deal “positively,” it is taking a wait and see approach to what it will mean for the company’s debt.

“For now, the issuer credit rating remains ‘BB+’ with a stable outlook until more information is available,” S&P wrote.

“We view these initial comments positively, but note that we will continue to evaluate the transaction as more details emerge and will ultimately evaluate the impact to Paramount’s credit quality by management’s ability to execute its strategy,” the note continued. “The company expects the transaction to close in the first half of 2025. The 14-month timetable to closing presents a potential risk for the company as worsening secular industry pressures (and the potential for macroeconomic headwinds) could impede the company’s ability to achieve its strategic and financial targets.”

Skydance won the battle for Paramount on Sunday, with Shari Redstone agreeing to sell her National Amusements to the consortium, which also includes RedBird Capital and Larry Ellison. As S&P noted, however, regulatory approval could take a year or more, presenting serious risk in a fast-moving industry.

Ellison, for his part, told THR that existing leadership will have power to execute on strategic plans in the meantime.

“Given how dynamically the landscape is changing, we think it’s really important that the company not be paralyzed in any way, shape or form, and obviously, for those conversations to continue and to explore and we will obviously be a part of the decisions that are made within all the appropriate guidelines,” Ellison said.

Paramount has no material near term debt maturities and an untapped $3.5 billion revolver, giving it some flexibility until the deal closes.

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