Paramount Global is on a watch by S&P Global for a possible credit rating downgrade over weaker cash flow concerns as the major studio pivots from linear TV to the streaming space.
“The margin and cash flows generated by DTC [direct to consumer] streaming businesses, which are replacing the linear TV segment, will be lower in comparison due to greater required content spending, higher technology investments, and higher marketing and subscriber acquisition costs,” S&P ratings director Jawad Hussain said in a statement Friday.
Stock in Paramount Global, which is led by CEO Bob Bakish, slid by 53 cents, or 4.5 percent, to $11.18 on Friday during late-morning trading, with shares in the Hollywood studio last week taking another hit when Warren Buffett’s Berkshire Hathaway reported a one-third stake cut in the media conglomerate.
Last year, the studio’s credit rating was lowered from BBB to BBB-, and its debt is now under renewed scrutiny, “with negative implications,” including for another possible downgrade as S&P starts to weigh cash flow along with leverage metrics when measuring Paramount’s debt worthiness.
“We believe FOCF [free operating cash flow] will be weaker than historical levels because the significant cash flows from the linear TV businesses will degrade rapidly as pay TV subscribers continue to decline and advertisers migrate spending to streaming platforms,” S&P warned in its report.
The rating agency said it expected to resolve its latest watch on Paramount in the coming weeks after weighing up the upcoming fourth quarter financial results, due out on Feb. 28. S&P added that it planned to introduce cash flow metrics when measuring the wider U.S. media sector.
Paramount, which has 63 million global streaming subscribers, is using NFL games to sign up new Paramount+ subscriptions, but those live sport rights are expensive. On Feb. 13, the company unveiled plans to cut an estimated 800 jobs as part of what Bakish called “part of streamlining costs.”
“While there will be opportunities for Paramount and other media companies to capture consumers and advertisers as they migrate to digital platforms, the environment is more competitive than the traditional linear model due to the highly competitive landscape and higher churn dynamics,” S&P argued.
Buffett’s stake sale coincided with market speculation that David Ellison’s Skydance Media and RedBird Capital were eying a potential takeover of Shari Redstone’s controlling stake in the conglomerate. Another media mogul, Byron Allen, also made a play for Paramount Global by revealing a $14.3 billion offer to buy all outstanding shares in the studio.
Should a deal for Paramount Global come to pass, market analysts expect significant divestitures, including Skydance and Paramount possibly combining their filmed entertainment studios for greater scale as a content producer.
