When mergers go smoothly, they can signal health and growth in a particular segment of the economy. Unfortunately, Paramount Global’s (NASDAQ:PARA) merger discussions with Skydance Media only seem to be creating consternation lately.
The recent fall-off in PARA stock leaves value seekers with more questions than answers. On the other hand, stock prices typically don’t drop unless there’s uncertainty. If everything is known in advance, value opportunities won’t present themselves to investors.
With Paramount Global stock threatening to break below $10 though, there’s a fine line separating value from a value trap. If the company can’t resolve its issues soon, there could easily be more share-price depreciation in store.
Paramount Global and the “mountain of distrust”
It’s not every day that The Wall Street Journal uses language like this, but it recently declared that Paramount Global faces a “mountain of distrust.” As the Skydance deal talks drag on, “regular shareholders” evidently have “few options aside from voting with their feet.”
Let’s back up for a moment. The public first learned that Paramount Global was considering a potential merger with Skydance Media, a media-production business led by CEO David Ellison, in December. Fast-forward to early April, when private-equity firm Apollo Global Management (NYSE:APO) offered $26 billion in cash to merge with Skydance.
Skydance rejected Apollo’s offer, so Paramount Global’s talks with Apollo continued and are still ongoing, but here’s where it gets even more complicated. Ellison seeks to take control of Paramount Global and has offered to buy out National Amusements, Paramount’s parent company. However, that won’t happen unless Paramount Global merges with Skydance Media.
Thus, Ellison certainly wants to see the Paramount-Skydance merger go through if he wishes to build a media empire. If he does end up taking control of Paramount Global, it would effectively mark a new chapter in the long history of an iconic film house with a history that dates all the way back to 1912.
Even if Ellison really wants the merger to happen, it doesn’t necessarily reflect the desires and intentions of other stakeholders. Paramount Global’s current shareholders might feel that they have no say in the negotiations — or in the future path of the company.
Whether there truly is a “mountain of distrust” facing the company is debatable, but there may at least be a hill of discontent. According to “people familiar with the situation” and The Wall Street Journal (via Reuters), three Paramount Global board members are expected to leave the company “amid merger talks with Skydance Media.”
Again, there are more questions, but definitive answers are few and far between. Are these board members leaving as an act of protest? Is this a sign of trouble or a breakdown of negotiations between Paramount Global and Skydance Media?
More uncertainty, more worries
Moving past the Paramount-Skydance soap opera for a moment, there’s yet another reason for Paramount Global’s investors to feel uncertain about the near future. Specifically, the company’s next earnings report is due for release soon.
Paramount Global will publish its first-quarter financial results and then conduct a conference call on April 29 after the close of the stock market. To be perfectly frank, shareholders might want to exit their positions before the quarterly earnings release.
For what it’s worth, Paramount Global did manage to eke out adjusted earnings of 4 cents per share in the fourth quarter. Of course, that’s not a huge profit when the share price is over $10.
For the first quarter, Wall Street has substantially higher expectations: earnings of 34 cents per share. At the same time, the entertainment-sector landscape hasn’t gotten any easier for a legacy business like Paramount Global.
TV media is Paramount Global’s largest business segment, and its revenue fell 12% year over year in the fourth quarter. Worst yet, Paramount’s movie-segment revenue cratered by 31%.
Thus, it’s a perilous time for Paramount Global as it is effectively forced to pivot to content streaming and thereby compete with the likes of Netflix (NASDAQ:NFLX). That’s an unenviable task, and the path forward remains unclear.
Hence, even if it goes below $10, PARA stock doesn’t look like a compelling bargain. There’s just too much that’s up in the air, and current shareholders should thank their lucky stars for any profits they may have — and consider taking them off the table before it’s too late.
