Paramount Earnings: CEO Has Gone, For-Sale Sign Is Up; Good Results Would’ve Been Nice to Learn

Key Morningstar Metrics for Paramount

• Fair Value Estimate: $20.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Paramount’s Earnings

Paramount’s PARA first quarter was very good, especially in terms of profitability. However, performance is an afterthought. On a 10-minute earnings call, management briefly outlined financial results and took no questions. We don’t expect Paramount as it’s currently constituted to operate independently for much longer.

Paramount reported nearly $1 billion in adjusted EBITDA, up from $548 million a year ago and good for more than 5 percentage points of margin expansion. A reduction in direct-to-consumer expenses (which now include primarily streaming services) drove the improvement. DTC’s adjusted EBITDA loss improved by nearly $250 million to a $286 million loss, primarily because of improved domestic profitability. While we didn’t hear details, the firm has expected to realize savings by consolidating the Showtime network with Paramount+.

CEO Bob Bakish stepped down. Paramount is not searching for a new CEO and will be led by the “Office of the CEO,” which will be run by three executives. It appears the company is simply biding time until it either merges with Skydance or accepts a superior takeout offer. Our $20 fair value estimate remains, but we fear the board may favor a deal with Skydance, which we don’t think would be in shareholders’ best interests.

The Wall Street Journal reported that Paramount is negotiating with Skydance’s David Ellison to complete a complex transaction. Given what we believe are the terms, we think this deal stinks. The proposal involves Ellison buying Shari Redstone’s controlling stake in Paramount via National Amusements for 2.5-3.0 times Paramount’s current stock price. Paramount would then acquire Skydance at a nosebleed valuation based on reported revenue and profit. Paramount plans to issue shares to buy Skydance, severely diluting the remaining Paramount shareholders, and then continue to operate as a public company.