After previously downgrading Paramount’s credit rating to junk status, S&P Global says it will take it down another notch following the closing of its pending $110 billion merger with Warner Bros. Discovery.
“We will lower the issuer credit rating on PSKY to ‘BB’ when its acquisition of WBD closes, assuming no material changes to the structure or terms of the transaction due to regulatory considerations, our view of the media ecosystem, or the company’s competitive position due to geopolitical factors or secular pressures,” the firm said in a statement. “We base our decision to lower the ratings by one notch on the commitment by the Ellison family to delever below 3.75x on a net debt basis by 2028 and to 3.0x by 2029 and to take all steps necessary to deliver on those deleveraging targets.”
The move comes as the firm expects Paramount’s leverage to remain elevated for the next two years and only start to improve in 2028. S&P does not expect leverage to fall below its downgrade threshold of 4.25 times until 2029 and warned Paramount’s deleveraging efforts could be slower than forecast due to “missteps in integrating and transforming the new company, an acceleration in secular trends, and geopolitical or macroeconomic factors.”
“The history of the media and entertainment sector is fraught with large mergers that did not realize the anticipated benefits or took longer than expected to achieve synergies and integration,” S&P added. “We believe the combined company can eventually be a significantly stronger business than stand-alone [Paramount Skydance]. However, we would maintain our current view of [Paramount Skydance’s] business given the immensely complicated endeavor of combining two of the largest global media companies and the limited track record of [Paramount Skydance’s] management team in integrating and transforming such companies.”
S&P said it attaches “significant execution risk to a successful transaction/integration of the combined company,” noting that Ellison’s transformation plans are “quite compelling but also incredibly ambitious.”
“All [of Paramount Skydance’s] key sectors face seismic challenges and an increasingly uncertain future,” S&P said. “Consumers’ media consumption has become so fragmented that media’s cultural impact is weakened. And AI is accelerating the shrinking of the quality difference between certain professionally produced and user-generated content.”
While it estimates the combined entity would have an over 30% share of viewing audiences and 20% share of TV ad revenues and increased leverage in negotiations with distributors and advertisers, S&P warned that it’s unlikely the combined entity would slow pay TV’s decline.
S&P first warned it would issue another potential downgrade on Paramount’s credit rating in June, when it maintained its negative credit watch on the company. Per S&P’s website, a BB rating indicates that an entity is “less vulnerable in the near term, but faces major ongoing uncertainties.”
“This rating reflects a speculative nature, suggesting that the entity may be more impacted by economic downturns or other adverse conditions,” the firm notes. “While BB-rated entities might currently manage their obligations, investors should be cautious due to potential volatility.”
S&P forecasts that Paramount-WBD’s leverage will start at about 7.6x and remain at that level in 2027 before improving to 5.1x in 2028. It also expects minimal free operating cash flow in 2026 and over $4 billion in 2027, with “significant growth” in 2028 and beyond.
It also expects over $6 billion in cost synergies but warned it would “depress the company’s EBITDA and free cash flow” primarily in 2026 and 2027. It anticipates a significant portion of those synergies will come from “real estate rationalization, process improvements, and the merger of the DTC streaming tech stack.” Additionally, it said layoffs would come from consolidating linear TV operations and the elimination of corporate overhead.
Paramount expects to close the WBD deal by the end of the third quarter, or Sept. 30. The deal has been approved by shareholders, but remains subject to regulatory approval.
Regulators in the U.K. are gearing up to begin their review of the deal, with its deadline for public comments closing just last month. Paramount has also asked the FCC to approve its foreign investment in the deal, with those investors set to account for 49.5% of the equity of the combined company.
Additionally, the company said there’s “no statutory impediments” remaining after the Department of Justice’s Hart-Scott-Rodino review period expired, though the regulator can still get involved at anytime in the process.
In addition to federal and international regulators, a group of U.S. state attorneys general led by California’s Rob Bonta are also reviewing the deal and weighing whether to take legal action against the merger. Bonta previously told TheWrap that “red flags are everywhere when you have a merger of this type” and that the states are prepared to “act timely,” but declined to provide a specific timeline for when a decision could be made.
In a recent regulatory filing, Paramount disclosed that it has received subpoenas, or civil investigative demands, from various state AGs that focus on the investigation by the Department of Justice and the competitive effects of the merger. It does not disclose which or how many state AGs sent subpoenas.
“We have been cooperating with the state attorneys general in responding to their requests,” Paramount said at the time.
In the event the transaction does not close by Sept. 30, WBD shareholders will receive a 25 cent per share “ticking fee” for each quarter until closing. In the event that the deal does not close at all due to regulatory matters, Paramount will pay WBD a $7 billion termination fee.
