Skydance shares closed about 7% lower in the second day of trading Wednesday after falling the day before, a second session of declines during a rocky NYSE debut for the combined company as investors began to weigh in.
The combination of Paramount and Warner Bros. Discovery has finally been finalized, a big step forward. A legal settlement with attorneys general who tried to block the project was very favorable to the company. Beyond that, “it’s a story to tell,” says Citizens analyst Matthew Condon.
Wall Streeters are wary of SKYD’s $80 billion debt, high gearing and ability to generate the promised $6 billion in cost synergies ($3 billion each in 2027 and 2028) and increase content spending. There is some excitement around streaming as HBO Max and Paramount+ catapult to top-tier status, but little clarity yet on structure, strategy or pricing.
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Chairman and CEO David Ellison and co-CEO Ynon Kreiz reiterated at a news conference Tuesday their commitment to significantly reducing debt by 2028 and insisted they can spend and save at the same time.
Condon is more bullish than some with a “market outperform” rating and a $14 price target on the shares, which closed Wednesday down 6.8% at $8.98.
“If you’re building a premier content platform, and that’s going to hopefully create a go-to streaming platform, between all the intellectual property from Warner Bros. and Paramount and with 30 movies coming a year, it gives you a constant stream of streaming content. You have all these sports rights. You have a $30 billion content budget. How do you optimize that to really capture the best opportunities? There’s a lot that can be done here.”
With the stock so low, he thinks the “risk/reward ratio” looks favorable.
But much of the deleveraging framework, Condon acknowledged, assumes that the underlying businesses continue to operate largely in line with their pre-deal trajectories, making execution extremely important.
“The question is whether they can actually deliver” what they promised, analyst Rich Greenfield asked on CNBC. “Because what Warner Bros. Discovery encountered, the tidal wave that they faced, was their historic business. The core (cable programming) businesses eroded faster than the synergies could be accrued. And so that’s going to be the real challenge facing David Ellison and Ynon Kreiz.”
“We remain fairly cautious about the ability of the company and its management to avoid the integration and execution issues that have plagued other major mergers in the media industry,” said Doug Creutz of TD Cowen, who recommends “holding” the stock.
The co-CEOs have modeled increased cash flow in coming years, but in the meantime there isn’t much room to maneuver if churn rises, the decline of cable networks accelerates, the box office slows again or there are macroeconomic or geopolitical disruptions. The company can’t issue more debt after Paramount’s massive bond sale to finance the merger. Skydance has the support of the Ellison family. It could also potentially find new stock investors.
One Wall Street investor believes there will be a secondary offering at some point. “Many groups have helped fund the deal, including the Ellisons themselves, who will want to sell shares… So why rush to get involved when a large number of shares are going to hit the market at any given time?”
For now, “they need to launch streaming, show the synergies, the cohesion within management and tell the story to investors”.
The Street will receive an update on the new Skydance when it reports third-quarter results.
“We remain cautious about management’s ability to achieve their net synergies target of $3 billion by year 27 (end of year) and $6 billion by year 28, but they still seem confident in their ability, and it will be quite impressive if they meet their targets – $6 billion is 11% of pro forma spending, so it’s not out of the realm of possibility, but we want to see how it goes will unfold,” David Joyce of Seaport Research said in a note.
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