Credit rating firm S&P Global put studio Paramount on negative credit watch, which means it’s considering lowering Paramount’s credit rating due to its concerns about the studio’s business. According to S&P, that’s due to the media company’s weak free operating cash flow generation, which has been negatively influenced by the studio’s move from linear television to streaming. In other words, they aren’t confident in the company going forward as Paramount+ has struggled.
S&P said in a statement that they believe the company’s free operating cash flow will continue to “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.”
The ratings agency also pointed to the metrics for Paramount’s cash flow and leverage — debt — diverging.
“Paramount’s cash flow metrics are weaker than similarly rated peers,” S&P Global’s Jawad Hussain said in a statement. “Paramount is not the only media company that has experienced weakened free cash flows as it launches and grows its streaming service. However, its cash flow declines have been worse than its industry peers because of its smaller scale, less business diversification, and slower DTC [direct-to-consumer] ramp up.”
'Top Gun 3' in Development at Paramount
S&P isn’t optimistic about the media busines’s shift to streaming as a whole, stating that the margins and cash flow “will be lower in comparison due to greater required content spending, higher technology investments, and higher marketing and subscriber acquisition costs.”
Last year, Paramount’s credit rating slid from BBB to BBB- as its debt received scrutiny. Just last week, Paramount Global announced that it will lay off around 800 staffers to return the business to profitability.
Stock in Paramount Global decreased by 4.5%, or 53 cents Friday to $11.18. Shares in the Hollywood studio also went down last week following the news that Warren Buffett’s Berkshire Hathaway sold a third of its stake in the company. Billionaire investor Buffett’s holding company revealed its fourth fiscal quarter sale Wednesday in its most recent 13F filing with the U.S. Securities and Exchange Commission.
S&P Global will be monitoring Paramount’s ability to “meaningfully improve” its ability to generate cash, looking for “FOCF debt increases above 10% on a sustained basis” by 2025. Its S&P Global Ratings adjusted leverage will also have to decrease below 3.5x. If that happens, the company could be taken off of credit watch.
Berkshire Hathaway first invested in Paramount in 2022 with a $2.6 billion stock buy, which amounted to 15% of the company. That purchase boosted stock in Paramount. The company now owns around 63.3 billion shares after the sale, having sold 30.4 million shares.
The sale occurred alongside speculation that David Ellison’s Skydance Media and RedBird Capital were circling the possibility of taking over Shari Redstone’s controlling stake in Paramount. A merger between Paramount and Warner Bros. Discovery has also been discussed.