Skydance Stock Struggles In First Days Of Trading

Skydance shares closed down about 7% in day two of trading after a dip Tuesday, a second down session in a rocky NYSE debut for the merged company as investors started to weigh in.

The combination of Paramount and Warner Bros. Discovery finally closed, a big step forward. A legal settlement with Attorneys General who tried to block it went very much in the company’s favor. Beyond that, “It’s a show me story,” says Matthew Condon, an analyst at Citizens.

Wall Streeters are wary of SKYD’s $80 billion in debt, high leverage, and ability to both generate a promised $6 billion in cost synergies ($3 billion each in 2027 and 2028) and ramp up content spending. There’s quite some excitement around streaming as HBO Max and Paramount+ catapults top-tier status, but little clarity still on structure, strategy or pricing.

Chairman and CEO David Ellison and co-chief executive Ynon Kreiz at a press conference Tuesday reiterated a commitment to reduce leverage dramatically by 2028 and insisted they can spend and save at the same time.

Condon is more sanguine than some with a “market overperform” rating and a $14 price target on the shares, which closed Wednesday down 6.8% at $8.98.

“If you’re building a best-in-class content platform, and this is going to hopefully create a must-have streaming platform, between all the IP that Warner Bros. has and Paramount has and with 30 films coming per year that gives you a steady stream of content coming to streaming. You’ve got all these sports rights. You’ve got a $30 billion content budget. How do you optimize that to really go after the best opportunities? There are a lot of things that can go right here.”

With the stock so low, he thinks “the risk/reward” looks favorable.

But much of the deleveraging framework, Condon acknowledged, assumes the underlying businesses continue to perform largely in line with their pre-transaction trajectories, making execution incredibly important.

“The question is, can they actually achieve” what they’ve promised, asked analyst Rich Greenfield on CNBC. “Because what Warner Bros. Discovery ran into, the tidal wave they ran into, was their legacy business. The core [cable programming] businesses eroded faster than the synergies could be piled on. And so that’s going to be the real challenge facing David Ellison and Ynon Kreiz.”

“We remain quite cautious on the ability of the company and its management to avoid integration and execution problems that have bedeviled other major media mergers,” said Doug Creutz of TD Cowen, who has a “hold” recommendation on the stock.

The co-CEOs have modeled a cash ramp-up in coming years but meanwhile there’s not a big cushion if churn rises, cable network declines accelerate, the box office softens again or there’s macroeconomic or geopolitical disruption. The company can’t issue more debt after Paramount’s just-concluded massive bond sale to finance the merger. Skydance does have the Ellison family’s backing. It could also potentially find new equity investors

One Wall Streeter believes there will be will a secondary offering at some point. “There are a lot of groups that helped in financing the deal, including the Ellisons themselves, who are going to want to sell stock … So why rush to get involved when a lot of stock is going to hit the market at some point?”

For now, “They need to launch streaming, show synergies, cohesiveness among management, and tell the story to investors.”

The Street will get an update on the new Skydance when it reports third quarter earnings.

“We remain guarded on the ability for management to reach its $3B net synergies goal by YE27 [year end] and $6B by YE28, but they still sound confident in their ability, and it will be quite impressive if they hit their goals – $6B is 11% of pro forma expenses, so it is not out of the realm of possibility, but we want to see how it unfolds,” said David Joyce of Seaport Research in a note.