On Thursday, Wolfe Research revised its rating on Paramount Global (PARA), raising it to Peer Perform from Underperform. The adjustment reflects the firm's recognition of Paramount's asset strength and discretionary cash flow potential, which have been highlighted by recent press reports indicating a possible bidding war between Skydance and Apollo.
The speculation regarding Paramount's future gained momentum last spring following the company's dividend cut and a significant investment by BDT & MSD into National Amusements, which holds a majority of Class A shares in Paramount. The Wall Street Journal reported on Wednesday that the likelihood of Paramount being sold to Skydance has increased, with Apollo showing flexibility in negotiations.
The report suggests that Skydance has entered an exclusive 30-day negotiation period to discuss a merger with Paramount, and terms have been established with Shari Redstone. Given this development, analysts see a higher chance that the potential secondary transaction, which would merge Skydance into Paramount, will gain approval from Paramount's independent committee of directors.
The upgrade comes in the absence of a specific price target, aligning with the firm's methodology. The rationale behind the upgrade is the diminished opportunity to leverage Paramount's downside for further value, as the prospects of a change in ownership become more tangible.
The potential merger with Skydance is assessed to be advantageous for all shareholders. The exclusive merger discussions suggest a strategy by Skydance's management that could integrate the company into Paramount beneficially for all parties involved. Following a significant share price increase on Wednesday, analysts calculate that the implied enterprise value to EBITDA multiple for Paramount's Film segment would be at least 15.4 times, factoring in conservative valuations for CBS and cable networks. This multiple is deemed reasonable given the strong cash flows from the company's film library.
In conclusion, the upgrade to Peer Perform for Paramount Global reflects a broader consensus that the company's current stock price is supported by its strategic positioning and the potential for a successful merger with Skydance.