'Rearranging deck chairs on the Titanic?' Analysts have questions and doubts after Paramount CEO Bakish's ouster.

By Bill Peters

'Sit back, grab your popcorn, and enjoy the rest of the show,' analyst says

With Chief Executive Bob Bakish out at media and entertainment giant Paramount Global, all eyes, at least on Wall Street, are on the prospect of a merger deal with Skydance Media. But as analysts churned out their reactions, skepticism prevailed.

After Bakish's departure - announced Monday, amid reports of tensions between him and Paramount (PARA) controlling shareholder Shari Redstone - and the installation of a three-executive "Office of the CEO" in his place, Wall Street analysts still had piles of questions on the path ahead for the company, with or without a merger. Some expected more drama, particularly with shareholders, on the horizon.

"Paramount has long been steered by a family whose personal interests don't always align with shareholders and it's not clear that this move will change that dynamic," Ross Benes, senior analyst at Emarketer, said of Bakish's ouster.

He said in an email that Paramount's network was still popular, and said its studio and streaming services were among the company's positives. But he said its debt and the declining value of its large TV business, where the flight from cable toward streaming remains a threat, remained big obstacles.

"Arranging a new quixotic leadership structure may appease those looking for new blood," Benes continued. "But the dramatic removal evokes a feeling of rearranging deck chairs on the Titanic."

Shares of Paramount were down 4% on Tuesday. The stock is down 50% over the past 12 months.

The company and the rest of the entertainment industry have grappled with steeper pressures for streaming profits, wilting revenue from cable TV, layoffs and cost cuts. Following last year's strikes, TV production has been slow to return, and executives have been more cautious on new projects.

Paramount - the product of a massive fusing together of CBS and Viacom - owns Paramount Pictures, the streaming service Paramount+ CBS and Comedy Central, among other media properties. News outlets had reported on Bakish's possible departure prior to Monday's announcement.

CNBC reported that Bakish was opposed to a merger with Skydance, which multiple reports have said is in exclusive merger talks with Paramount that are set to expire on May 3. Bakish argued that the merger with Skydance, which was founded by David Ellison and is behind films like "Top Gun: Maverick," would dilute shareholders, CNBC said. While Bakish was a longtime ally to Redstone, CNBC reported she had lost her trust in him.

The investment firm Apollo Global Management Inc. (APO) has reportedly also expressed interest in buying Paramount, possibly via a team-up effort with Sony (SONY). And other investors have said the talks with Skydance have shut out rival bids and benefit Redstone at the expense of other shareholders.

"Given what we believe are the terms, we think this deal stinks," Morningstar analyst Matthew Dolgin said in a research note on Tuesday.

As he explained, based on reporting in the Wall Street Journal, Ellison would buy Redstone's controlling stake in Paramount for up to three times Paramount's stock price. Paramount would then buy Skydance at a marked-up valuation. Paramount would issue more stock to buy Skydance, with the heftier supply of shares lowering their value overall for other stockholders.

"The exclusivity window is set to expire on May 3, but it looks like Paramount's directors are on the edge of a dereliction of their fiduciary duty to shareholders," Dolgin said. "We expect taking the Skydance deal will open up the company and directors to shareholder lawsuits."

The New York Times has reported that Skydance has tried to make its offer more palatable, offering up $3 billion in cash to help Paramount pay off debt and repurchase stock. Skydance has also offered to give shareholders more ownership in the combined company, the Times said.

Paramount on Monday said the new Office of the CEO would be made up of George Cheeks, president and CEO of CBS; Chris McCarthy, president and CEO, Showtime/MTV Entertainment Studios and Paramount Media Networks; and Brian Robbins, the president and CEO of Paramount Pictures and Nickelodeon.

That office, the company said, would "develop a comprehensive, long-range plan to accelerate growth and develop popular content, materially streamline operations, strengthen the balance sheet, and continue to optimize the streaming strategy."

Wall Street, meanwhile, was waiting for more clarity on a deal. JPMorgan analysts said the stock will likely stay in a holding pattern as investors wait for more detail on its path forward.

"While we expect the new controlling owners could pursue a significantly different path than prior or current management, a transition is likely to play out over an extended period and amid a continued challenging media environment and given this backdrop we remain Underweight," they said, referring to their more downcast rating on the stock.

"We also think investors would look skeptically on another internal transformation in the event a deal with Skydance is not reached," they added.

BofA analyst Jessica Reif Ehrlich, in a research note on Tuesday, said the departure raised questions about who was making strategic decisions at the company, the timing of a deal, and the company's direction if no deal ultimately emerges.

She said that an eventual deal could still help the stock. But she said that as the merger that created Warner Bros. Discovery Inc. (WBD) showed, execution following a deal can take time.

"Given the lack of transparency, we believe it is challenging to handicap the potential outcomes," she said. "As a result, we believe shares will remain volatile subject to press reports."

Dolgin, at Morningstar, said a bid from Apollo and Sony would face questions about Apollo's ability to secure financing, and the involvement of Sony, whose headquarters lies abroad.

Benchmark analyst Daniel Kurnos said in a research note on Tuesday that other outcomes could still emerge besides a merger with Skydance. But he said he was skeptical about a bid from Apollo and Sony.

"However, all reports, media checks, etc., suggest it is Skydance or nothing (still a real possibility), so sit back, grab your popcorn, and enjoy the rest of the show," he said. "Who knows, maybe someone will manufacture a real twist to this drama at the end."

-Bill Peters

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

04-30-24 1444ET

Copyright (c) 2024 Dow Jones & Company, Inc.