Paramount Shares -18.26% YTD, Could Junk Credit Rating Improve Outlook For PARA?

In what has been a very challenging few years for the mainstream media sector, Paramount Shares (NASDAQ:PARA) have taken quite the tumble. With the PARA share price almost 90% below the ATHs hit in 2021, the stock has struggled in the past 12 months to shift sentiment, and are 45.98% in the red over the period. This is all happening against the backdrop of competitors for eyeballs in the streaming space outperforming traditional media.

In a stark contrast of fortunes, shareholders of Netflix (NASDAQ:NFLX) have been riding a green wave over the past 12 months, with a 74.38% gain. Fellow streaming player Disney shares (NASDAQ:DIS) are also firmly green, having added 22.65% over the same period.

Despite having posted a 7.49% gain over the past month, recent news does not seem to be coming to the rescue of PARA shareholders, who may continue to experience a bumpy ride.

Credit Rating Drop Adds To Pressures

In a move reflecting the seismic shifts in the media landscape, Paramount Global has now seen its credit rating slashed to non-investment grade, or “junk,” by S&P Global Ratings. The downgrade to BB+ from the lowest investment grade level of BBB- comes as a response to intensifying challenges within the television segment, a foundational pillar of Paramount's business.

S&P Global Ratings has pointed to the “downside ratings pressure” stemming from the persistent declines in the traditional pay-tv sphere. Linear media, once the cornerstone of broadcast and cable television, is experiencing accelerated deterioration as consumers continue to cut the cord in favour of streaming services. This transition has left companies like Paramount grappling with a fiercely competitive streaming environment, where the fight for viewers' attention and subscription dollars is intensifying.

This challenging backdrop forces Paramount to embark on a critical two-year journey focused on significantly curtailing its streaming losses to fend off any additional rating downgrades. S&P's grim outlook underscores the urgency for Paramount to recalibrate and strengthen its competitive position as the market continues to pivot away from legacy media models.

In response to these headwinds, Paramount has not sat idle. The media giant has been actively divesting non-essential assets and scaling back its workforce, indicative of austerity measures deployed to streamline its operations and buffer against financial stress. However, this strategic belt-tightening has also coincided with conjectures around the company's ownership, as controlling shareholder Shari Redstone is purported to have received several propositions to partially or entirely sell Paramount.

In one notable instance, Apollo Global Management threw its hat in the ring with an $11 billion offer for Paramount's acclaimed film and TV studio operations. Despite the allure of such bids, sources suggest that Redstone remains steadfast in her commitment to Paramount Pictures, considering it a linchpin of the conglomerate's identity and long-term strategy.

Market Reaction Muted, Analyst Targets Above Current Mark

Market reactions to the downgrade have been mixed, though somewhat muted. Paramount's stock nudged upward since the downgrade was announced on Wednesday, with one analyst view even being positive on the news. Wells Fargo (holding a price target on PARA of $15) say that S&P's downgrade voids change of control provisions which potentially makes an acquisition more attractive.

Wells believe that if anyone makes a bid for Paramount they will not need to repay and reissue debt, substantially reducing the risk for acquirers. If this interpretation is correct, it is quite possible that more interested parties may emerge with debt change of control being void.

Current analyst consensus on the stock is at a mark of $13.29 (12.91% above the pre weekend close), with a high bar of $19 against a low mark of $9.

With plenty to digest for PARA stock followers, markets will be closely monitoring for clues on the next phase.

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