Wolfe Research doubtful on Paramount-Skydance’s optimistic post-merger forecast

Wolfe Research downgraded Paramount Global (NASDAQ:PARA) on Tuesday to “underperform” from “peer perform” on the company’s financial assumptions post-merger with Skydance and raised doubts on whether the deal will help the media giant grow its direct-to-consumer business.

“Skydance will address Paramount’s DTC scale deficit with tech, money, and partners… With a breakup of the company off the table, the investment debate simplifies: can Paramount invest profitably in DTC? Are forecasts low enough? Respectively, we are cautious and negative,” Wolfe Research analyst Peter Supino wrote in a July 9 research note.

The research firm was not confident about Skydance’s optimistic forecast while the legacy Paramount business was declining. “We are concerned about Skydance’s assumptions… that legacy Paramount will provide ~$2.4B in OIBDA in 2025 and 2026, or ~$2.9B with the benefit of $500M of expense reductions, which are both part of today’s management plan and Skydance’s $2B of cumulative cost reductions,” Supino wrote.

Wolfe justified its rating downgrade by pointing out that Paramount’s special committee reiterated “immediacy and probability of closing as priorities,” effectively shutting the door on Apollo and Sony, which the research firm regarded as the “best” buyers of Paramount (PARA) from the perspective of common stockholders.

Word on the Street

Wells Fargo, commenting on the Skydance deal, said in a July 8 report that “we expect cost improvements too. Still, investors will likely be concerned that DTC doesn’t pay off fast enough to offset linear declines.”

“Our worry is that synergies account for 29%/36% of ‘25/’26 OIBDA. Investors have been hurt when peers like WBD and DIS have spoken to big cost cuts that haven’t translated into higher Street ests,” Wells Fargo analysts added.

UBS said that strategic shifts are likely through the Paramount-Skydance merger, but that would require navigating a tough industry backdrop. The research firm has a “sell” rating, citing uncertainty about the deal structure, different shareholder terms, and the 45-day go-shop period.

Morgan Stanley says the Skydance transaction brings new ownership, more capital, new verticals, and a focus on tech. The merger will help address declining linear TV revenues which could be through selling TV assets, injecting $1.5 billion of new equity into the company, and extracting $2 billion in run-rate cost savings.