Paramount to merge with Skydance: Should you buy the stock?

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on Jul 8, 2024
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  • Paramount Global to merge with Skydance Media for an EV of $28 billion.
  • Strategic merger aims to revive Paramount amidst financial challenges.
  • Technical analysis: Stock needs to cross $14.54 for bullish momentum.

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In a blockbuster development reshaping the landscape of Hollywood, Paramount Global (NASDAQ: PARA) has announced a merger with Skydance Media, marking a significant shift for the iconic studio.

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This agreement, worth approximately $28 billion, not only ends the storied Redstone era but also heralds a new chapter under the leadership of David Ellison, CEO of Skydance, and former NBCUniversal executive Jeff Shell.

The merger, detailed in a two-step process, involves Skydance and its partners acquiring National Amusements, which holds the Redstone family’s controlling stake in Paramount, for $2.4 billion.

The second phase will merge Skydance with Paramount, infusing the combined entity with $1.5 billion to strengthen its balance sheet. This strategic move is designed to fortify Paramount against the fast-evolving dynamics of the entertainment industry, where streaming services are becoming increasingly dominant.

Paramount has been under financial scrutiny, having seen its market value plummet by approximately 70% since the recombination of Viacom and CBS in 2019.

The company’s struggles have been exacerbated by its underperforming streaming service, Paramount+, and declines in traditional linear TV sectors like CBS and MTV.

The merger is seen as a vital step in revitalizing Paramount’s offerings and financial health, potentially stabilizing its position in the competitive market.

Wall Street’s response and financials

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Wall Street’s response to this merger has been cautiously optimistic, with Paramount’s stock rising over 4% in pre-market trading following the announcement.

Analysts are keenly observing how the integration of Skydance’s robust film production capabilities with Paramount’s extensive distribution network will play out.

This merger could potentially leverage blockbuster franchises like Mission Impossible and Top Gun to drive viewer engagement and revenues, especially in the streaming domain.

Financially, Paramount is grappling with substantial challenges. The company’s recent earnings reports reflect a significant downturn, with a decline in both revenue and profitability.

Analysts’ expectations for the upcoming quarter are tepid, with an anticipated earnings per share (EPS) of $0.13 on a normalized basis and $0.07 on a GAAP basis, highlighting ongoing pressures on operational performance.

The valuation of Paramount in light of these financials and the merger news is a critical aspect for investors. The transaction offers $15 per share for non-voting Class B shares and $23 for Class A voting shares, representing a considerable premium over recent trading prices.

This pricing strategy could attract interest from minority shareholders and potentially stabilize the stock in the short term.

As the company moves forward with this transformative merger, the strategic focus will likely shift towards integrating Skydance’s assets and enhancing Paramount’s digital and streaming strategies.

The goal is to create a more resilient entity capable of competing more effectively in the global entertainment market, dominated by giants like Netflix and Disney.

With all these foundational changes, the question now shifts from corporate maneuvers to market performance.

How will Paramount’s stock respond in the longer term to these strategic shifts? Is the merger enough to rekindle investor confidence and drive a sustained increase in stock value?

To answer those questions, let’s take a look at the charts. As we delve deeper into the technical aspects, we’ll explore the potential trajectories for Paramount’s stock and whether the current optimism can translate into long-term gains.

Can the bullish momentum be sustained?

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Paramount’s stock skyrocketed to over $100 in January 2021 as the now-defunct hedge fund Archegos propped up the company’s stock with dubious maneuvers to inflate the stock price. The stock immediately fell to $40 following Archegos’ bankruptcy.

PARA chart by TradingView

Since then the stock has remained in an extended downtrend that persists to this day. Although the stock is poised to open with gains today, unless it crosess above its recent swing high above $14.54 it will continue to be in the grips of bears in the short, medium and long-term.

Hence, bullish investors must wait for the stock to give a daily crossing above $14.54 before initiating a long position.

They can further bolster their positions by acquiring more shares once the stock’s 50-day moving average crosses above its 100-day moving average.

Traders bearish on the stock must also remain cautious as this short-term bullish momentum can turn into medium-term bullishness if the stock doesn’t give up today’s gains.

If the stock starts showing weakness after today’s move, one can short the stock with a stop loss at $14.60. If the bearish momentum prevails, we can see the stock falling below its recent swing low at $9.54 where one can book profits.

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