Paramount Earnings: Results Were Good but Weighed Down by the Warner Mess

Key Morningstar Metrics for Paramount Skydance

• Fair Value Estimate
  : $15.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : None
• Morningstar Uncertainty Rating
  : Very High

What We Thought of Paramount Skydance’s Earnings

Paramount Skydance PSKY reported decent second-quarter results, with cost savings leading to profit growth across segments and streaming sales accelerating. However, ongoing developments in the Warner Bros. Discovery WBD saga make it clear that the deal will incur extra costs, regardless of the outcome.

Why it matters: Under no circumstances will Paramount cleanly merge with Warner under its intended deal, nor is there a possible outcome in which it will operate as currently constructed without severe financial consequences.

• The antitrust lawsuit is set to begin in March, and we see three potential outcomes: Paramount wins its suit and acquires all of Warner, it loses the lawsuit and is prevented from combining with Warner, or it is forced to divest assets following a settlement or a trial outcome.
• If Paramount wins its suit in spring 2027, it will incur about $2 billion in extra fees due to the delay. If it loses, it will owe Warner a $7 billion termination fee. If it divests assets, it will lose the opportunity to achieve some of the $6 billion in synergies it expects.

The bottom line: We reduce our fair value estimate to $15 per share from $20. We maintain a high likelihood that the deal closes with minimal divestitures. We currently estimate the fully merged value at about $17 per share. Our stand-alone Paramount fair value estimate would drop to $13 from $20 based solely on the termination fee.

Key stats: We estimate pro forma second-quarter revenue was down about 4.5% after folding Skydance into the studios business. However, the firm’s adjusted EBITDA margin expanded 330 basis points to near 16%.

• Streaming revenue rose 9% year over year, and the firm added 2 million net Paramount+ subscribers. The segment generated $366 million in adjusted EBITDA, at a record 15% margin. The timing of content costs and the lack of UFC and World Cup tailwinds should result in slower growth in the second half, but the long-term trajectory of rapid sales growth and margin expansion remains intact.