Paramount Global's (NASDAQ:PARA) (NASDAQ:PARAA) long-term debt rating has been cut to junk status at S&P -- a move that Wells Fargo now says may actually make an acquisition of the company easier, by freeing up obligations to repay debt.
S&P cut Paramount to BB+ from BBB- due to degraded credit metrics from accelerating declines in linear media, and the ongoing shift toward a less certain (and hotly competitive) streaming model. The firm expects free operating cash flow-to-debt will remain below 10%, and that adjusted leverage will stay above 3.5x beyond 2025.
"We are not experts on debt terms," Wells Fargo's Steven Cahall writes, "but we believe that most of PARA's debt instruments have language that means if one rating agency moves to [high-yield], which S&P has just done we believe, then it negates change of control provisions."
"This means if anyone makes a bid for PARA they will not need to repay and reissue the debt," substantially reducing risk, he continues.
Paramount (PARA) (PARAA) has a market capitalization just under $8B, but with net debt of about $11.4B. Apollo (NYSE:APO) has an bid for Paramount's studios at $11B, which would be a premium to market cap -- but for the debt.
If Paramount takes Apollo's offer, a RemainCo of linear assets and Paramount+ would be levered less than 2x with nearly $2B in EBITDA, Cahall said -- and a studio sale could yet draw higher bids, with BET and Nickelodeon serving as other unlockable assets.
"We think any party interested in all or pieces of PARA, including studios, IP, CBS and real estate, are more likely to emerge now that the debt CoC is void," Cahall said, noting that creates more sum-of-the-parts upside potential.
S&P shifted Paramount from negative watch to stable. Moody's has a long-term rating of Baa3 with a negative watch, and Fitch has a BBB- with negative watch.
After the news, PARA was +1.9% to $11.58; PARAA +1.6% to $21.66.
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