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Paramount Global has been put on “credit watch negative” by ratings agency S&P Global due to discouraging trends in its cash flow.
S&P last December had warned about tough sledding for Paramount in 2024. A senior agency executive said the company “has to show us a path” to profitability in streaming in order to see a credit ratings rebound.
In a report Friday warning of another potential downgrade, S&P said Paramount’s free operating cash flow “remains weak.” The report blamed “the ongoing deterioration of the linear television ecosystem and the shift toward a lower margin direct-to-consumer (DTC) streaming model.”
The news only adds to recent investor uneasiness about Paramount as it mulls its strategic options. Company executives and controlling shareholder National Amusements have engaged in talks in recent months to gauge buyers’ interest in acquiring some or all of the company, though the talks remain at a fairly preliminary stage. Paramount was formed by the merger of CBS and Viacom in 2019. Its share price, down 4% in Friday morning trading, has drifted down to less than one-third of its level at the close of the merger.
S&P noted in its report that it is introducing cash flow metrics into its assessments across the media sector, combining them with measurements of company debt. That move triggered the warning about Paramount’s credit.
Moving forward, the agency said, cash flow across the industry will be “weaker than historical levels because the significant cash flows from the linear TV businesses will degrade rapidly as pay-TV subscribers continue to decline and advertisers migrate spending to streaming platforms.” Streaming margings and cash flows, which are replacing legacy linear TV, are lower given the level of spending required on content and technology, plus subscriber acquisition and retention.
Although Paramount and other traditional media companies have a chance to be contenders in the streaming era, S&P added, “the environment is more competitive than the traditional linear model due to the highly competitive landscape and higher churn dynamics.”
While Paramount is not the only company to face pressure on its cash flow as it transitions to streaming, “its cash flow declines have been worse than its industry peers because of its smaller scale, less business diversification, and slower DTC ramp up,” S&P concluded.
Free operating cash flow was negative in 2022 and is expected to be “minimal” in 2023. Paramount will report its fourth-quarter and full-year results next Wednesday.
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