Paramount sinks as ratings agencies scrutinize its debt

Shares of Paramount are down 7% on Tuesday as investors get skittish about the $79 billion in debt the company would have following a merger with Warner Bros. Discovery.

Fitch Ratings on Monday evening downgraded Paramount to junk status, calling its acquisition “highly complex” and noting that it expects heightened regulatory scrutiny in key jurisdictions. Fitch also placed the company on “rating watch negative,” indicating Paramount could get a further downgrade after the deal goes through. Per the agency’s statement:

“The downgrade reflects competitive pressures across the media sector and continued FCF [free cash flow] headwinds from significant transformation costs. Fitch believes PSKY’s leverage and FCF may remain outside negative rating sensitivities longer than we anticipated.”

On Tuesday, S&P Global changed its outlook on Paramount to negative, stating that Paramount’s $111 billion acquisition would “increase its leverage well above our 4.25x downgrade threshold for the current rating.”

In simple terms, what this all means is: ratings agencies have become concerned about how much debt Paramount will carry following the proposed merger, and whether it will be able to reliably generate earnings to pay off that debt, considering the difficulty of merging two large companies and the highly competitive nature of the media industry in general. Competing with cash-heavy companies with more wiggle room, like Netflix and Google’s YouTube, Paramount will have its work cut out for it.

All that debt would also mean lots of cost cutting, including job cuts in an already tough Hollywood labor market. Paramount on Monday said it expects $6 billion in “synergies” from the companies’ overlaps. The majority, the company said, would come from “nonlabor sources.” Netflix co-CEO Ted Sarandos, who was outbid for Warner Bros., told Bloomberg in an interview over the weekend that he thinks the deal will include $16 billion in cuts:

“This deal is dependent on a lot of cost-cutting. We were in the books of Warner Bros., and the biggest cost centers are people in productions. There’ll be cuts in excess of $16 billion. They are telling people who lend them the money that’s gonna happen in 18 months or so. It would be less production, less people working.”

As IndieWire put it earlier this week, the deal has the potential to make debt one of the most powerful executives in Hollywood.