Hollywood Reporter: As Paramount Drama Kicks Into High Gear, Wall Street Tries to Make Sense of “Volatile” Stock

Story from Hollywood Reporter:

The board room and executive suite drama at Paramount Global escalated on Monday, with Bob Bakish leaving his role as CEO and a trio of executives taking over just days before an exclusive negotiating window for a sale to David Ellison’s SkyDance Media and partners closes.

Veteran company leaders Chris McCarthy, George Cheeks and Brian Robbins will make up an “Office of the CEO,” running Paramount on a day-to-day basis for now. The three will work with the Paramount board and CFO Naveen Chopra.

“We’re finalizing a long-term strategic plan to best position this storied company to reach new and greater heights in our rapidly changing world,” McCarthy told a conference call following Paramount’s first-quarter earnings report after the market close on Monday that lasted just nine minutes and didn’t allow for analysts’ questions. As of 11:15 a.m. ET on Tuesday, Paramount shares were down 4.3 percent, at $11.72.

The big-picture outline McCarthy mentioned didn’t sound like a huge immediate change from Bakish’s strategy so far. “The plan is focused on three pillars,” McCarthy highlighted. “First, make the most of our hit content; second, strengthen our balance sheet; and third, optimize our streaming strategy.” Bakish’s strategy had also featured three talking points, namely “maximizing content with the biggest impact,” “driving to streaming profitability,” and “further unlocking the power of One Paramount.”

Following the report, Wall Street analysts took stock of the leadership transition. “In With the New: Will Triumvirate’s Updated Plan See Light of Day?” Guggenheim analyst Michael Morris wondered in the headline of his report, in which he stuck to his “buy” rating and $19 stock price target on Paramount. “Each replacement one-third CEO is fairly well-known by investors having participated in public meetings over their tenures,” he emphasized about the new leaders of Paramount. “Investor focus remains on the potential for an ownership change, though no additional details were provided.”

Morris’ conclusion: “We look forward to more detail from the Office of the CEO, but believe it may be moot if press reports of progress on a Skydance combination come to fruition.”

TD Cowen analyst Doug Creutz, who has a “hold” rating with a $14 price target on Paramount shares, echoed that notion. “Bob Bakish Replaced by CEO Hydra,” he wrote, a reference to the many-headed serpentine monster in Greek and Roman mythology. “Unsubstantiated reports suggest that Bakish was replaced because he was not in favor of Paramount merging with Skydance. We suspect this is a very temporary solution until M&A discussions are finalized one way or another.”

Morningstar analyst Matthew Dolgin went a step further. “It appears the company is simply biding time until it either merges with Skydance or accepts a superior takeout offer,” he argued.

Bank of America analyst Jessica Reif Ehrlich on Tuesday reiterated her “underperform” rating and $9 stock price target on Paramount, citing various unanswered questions. “These include: 1) who is making the strategic decisions at the company, 2) what is the timing/terms of a potential sale, and 3) what would the strategic direction of the company be if no transaction is executed, and current ownership remains in control?” she wrote. “Given the lack of transparency, we believe it is challenging to handicap the potential outcomes. As a result, we believe shares will remain volatile.”

MoffettNathanson analysts Robert Fishman and Michael Nathanson similarly noted in their report that Paramount’s earnings and leadership updates provided “few answers.” They have a “neutral” rating and $12 stock price target on Paramount.

“The new trio outlined an early priority list while finalizing a long-term strategic plan. Of course, it is hard for investors to put much time into dissecting the plan without any details,” the analysts highlighted. “And more importantly, it is unclear how long this trio will get the opportunity to lead Paramount — if all goes according to Skydance’s plan, the tenure of this triumvirate will be short, with Ellison and former NBCU CEO Jeff Shell looking to take the lead roles.”

The MoffettNathanson team also commented on reports of a “best and final” offer from Skydance, “including a $3 billion cash sweetener to better help swing non-voting shareholders in favor of the deal.” Those Class B shareholders have worried that the Skydance deal would benefit Shari Redstone, whose National Amusements is the controlling shareholder of Paramount, but would dilute them. The analysts’ conclusion: “One of the biggest questions at this point is whether Paramount will hold a ‘majority of the minority’ vote on the deal, previously unexpected. If in fact Shari Redstone is now open to putting any Skydance deal up for a vote, this would help bring some relief to common shareholders worried they might be getting the short end of the stick in any proposed deal.”

Sanford C. Bernstein analyst Laurent Yoon joked about the short earnings call in the headline of his report, in which he maintained his “underperform” rating and $11 price target on Paramount’s stock: “This title is longer than the earnings call; all eyes on the deal.”

He then shared his take on the “best and final” offer with a “$3 billion cash infusion to be used to pay down debt and to fund buybacks.” Argued Yoon: “Ellison & Co. would want to use the cash to pay down debt to strengthen the balance sheet to set up the new company for growth while the ‘board’ would want to allocate a big chunk towards buybacks to appease Class B shareholders. Would it be enough to prevent years of litigation? Probably not.”

The expert also wondered if Sony and Apollo, which have reportedly considered a joint bid for Paramount, will make “a viable offer,” explaining: “Assuming $26 billion is the floor, then the board has the fiduciary duty to evaluate the offer, and it would be especially problematic if the duo makes an offer before the board formally accepts Skydance’s offer. Time is running out for the duo, but the game is not over yet.”

Given all the M&A talk and boardroom intrigue surrounding Paramount, its earnings and business updates received little attention. But some of the analysts commented on them, nonetheless.

“Lost in the shuffle was a strong operating quarter with consolidated revenue growth, increases in both direct-to-consumer subscribers and average revue per user, and margin expansion ahead of consensus estimates,” Morris highlighted. “Results were bolstered by record ratings at a Super Bowl that went to overtime (only the second time ever) and continued positive impact from lower content spend as post-strike production re-ramps.”

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