The assessment is prompted by ongoing issues with linear, a "slow pivot" to streaming scale and the merger agreement with Skydance Media
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Moody’s is reviewing whether to downgrade Paramount Global’s credit ratings to junk status, and it’s not just the recent agreement to merge with Skydance Media that’s driving the assessment.
“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 firm said in a statement on Tuesday.
Moody’s ratings action will be dependent on its review of the following:
Ratings under review includes Paramount’s s Baa3 senior unsecured notes rating, Baa3 backed senior unsecured notes rating, Ba1 junior subordinate debt ratings, (P)Baa3 senior unsecured shelf rating, and Prime-3 short-term commercial paper rating. Additionally, subsidiary Viacom Inc’s ratings are being reviewed for a possible downgrade, including its Baa3 senior unsecured notes rating and Ba1 junior subordinate debt ratings.
On Sunday, David Ellison’s Skydance Media reached a $8 billion deal to acquire Shari Redstone’s National Amusements and merge with Paramount.
The deal, which is expected to close in the third quarter of 2025 subject to regulatory approval and other customary closing conditions, includes $2.4 billion for National Amusements, including $1.75 billion for the equity and the assumption of $650 million in debt. Additionally, non-NAI shareholders will receive $4.5 billion and $1.5 billion in new capital will be used to pay down Paramount’s $14.6 billion in long-term debt and recapitalize its balance sheet.
Class A shareholders can elect to receive $23 cash per share or 1.5333 shares of Class B stock of new Paramount. Class B shareholder can elect to receive $15 per share or one share of Class B stock of new Paramount, which is subject to proration if those elections exceed $4.3 billion in aggregate. If shares are elected over cash, reducing the cash required to under $4.3 billion, the $1.5 billion of cash going to Paramount’s balance sheet could grow up to a cap of $3 billion.
Skydance’s consortium of investors, which include RedBird Capital Partners and the Ellison family, will control 70% of shares outstanding and have 100% voting ownership in new Paramount, which will remain public. The deal also includes a 45-day go-shop provision, in which Paramount would pay a $400 million breakup fee in the event that the company receives a better offer from another bidder.
On a conference call with investors on Monday, Ellison, who will serve as CEO and chairman, and Jeff Shell, who will serve as president, said they would “rebuild” the Paramount+ platform to increase time spent, offer subscribers improved recommendations and reduce churn.
They also plan to utilize artificial intelligence to “turbocharge content creation capabilities” and lower costs, leverage Skydance Media and Paramount’s combined portfolio of animation and sports content and to explore potential partnerships and content licensing opportunities. And they made clear that asset sales are still on the table.
The pair have identified $2 billion in cost reductions via efficiencies and other synergies.
Looking ahead, they expect Paramount to reach $3.4 billion in adjusted operating income and produce an estimated $32.6 billion of revenue in 2025. Then in 2026, the company will produce $4.1 billion in adjusted OIBDA, $32.9 billion of revenue and return to investment-grade status with all credit rating agencies. They’re also looking to de-leverage from approximately 4.3 times to 2.4 times by 2027 and produce $4.5 billion in adjusted operating income and $33.5 billion in revenue that year.
While acknowledging the positive credit attributes of the transaction, such as the cash infusion, increased use of technology and restructuring savings, Moody’s argued that the company is facing “significant secular pressures” on its linear business that will not reverse or stabilize, putting “existential pressure” on the company to transition to streaming.
“The DTC business seems highly unlikely to achieve Tier-1 scale (at least 200 to 250 million global subscribers) given its current paying subscriber base of 71.2 million as of Q1 2024 and pace of growth and investment. Tier-1 scale is likely needed to give a provider any chance of replicating the linear revenue and cash flows and to mitigate the decline in its linear businesses,” the firm added. “While joint ventures and partnerships may seem like an attractive alternative to outright consolidation, we note that very few of those types of arrangements between media and entertainment companies proved successful and survived over the last half century.”
Moody’s also pointed out that the margin differential between cable and broadcast versus streaming is a “significant problem,” noting that the former is in the 40% to 45% range while the latter when profitable and at scale are in the low 20% range, or about half.
“To fully mitigate the losses that will occur over time in the legacy businesses, streaming revenues will need to double their linear revenues to match the same EBITDA unless they significantly increase the ad support, a challenging feat for Paramount,” the firm continued. “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. 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.”
Moody’s review comes after credit ratings agency S&P Global downgraded Paramount to junk status in March. At the time, S&P warned that more downgrades could be forthcoming unless it improved its streaming losses.
In its own statement on Tuesday, S&P Global’s media and entertainment managing director Naveen Sarma said that it would maintain its BB+ credit rating with a stable outlook until more information on is available on Skydance’s strategy and plans, the financing details of the transaction, and the ownership breakout between the Ellisons and RedBird.
Sarma warned that the 14-month timetable for closing presents a potential risk as “worsening secular industry pressures (and the potential for macroeconomic headwinds) could impede the company’s ability to achieve its strategic and financial targets.”
“Our assessment of the company, post the transaction closing, will be driven by Skydance’s ability to improve Paramount’s operating metrics, which could lead to lower leverage and improved cash flow,” he added. “Given the ongoing secular headwinds affecting the global media and entertainment industry, in particular, the decline in the pay-TV bundle, the shift of advertising away from legacy media platforms, and changing studio model, we could reassess our ratings thresholds for Paramount and for its industry peers.”
To return to investment grade status, S&P Global is looking for adjusted leverage below 3.5 times and free operating cash flow and debt above 10%.
Paramount, who has all fixed rate debt, no material near term debt maturities and an untapped $3.5 billion revolving credit facility, previously announced it would sell its stake in Viacom18 as part of an effort to reduce the company’s leverage.
New co-CEOs Brian Robbins, Chris McCarthy and George Cheeks have also laid out a long-term strategic plan for the company to help return to investment grade credit metrics and accelerate streaming profitability. That plan includes streaming partnerships, divesting assets and $500 million in cost cuts in areas including legal and corporate marketing. The company’s streaming business is currently on track to reach domestic profitability in fiscal 2025.
At an employee town hall last month, the executives said they’ve hired bankers to help with asset sales. Four individuals familiar with the matter previously told TheWrap those assets could include BET Media Group, Pluto TV and the famed Paramount lot, which would be leased back for the studio’s use. The trio are also advancing talks with potential partners in international markets that will “significantly transform the scale and economics” of its streaming business.
The co-CEOs will provide an update to Wall Street during Paramount’s second quarter earnings call in August.
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