Skydance (SKYD.US) fell more than 20% in a single week, and Morningstar lowered its fair value: streaming media growth cannot hide debt pressure

The Zhitong Finance App learned that Skydance Corp. (SKYD.US) declined before the market on Thursday after Morningstar (Morningstar) lowered its fair value forecast from $15 to $12 after separate shareholders' warrants were traded. Analysts pointed out that the company is heavily indebted, traditional TV revenue is falling, and faces execution risks, while mentioning that streaming growth and cost savings may bring upward potential.

Skydance shares fell 0.4% premarket on Thursday. The stock dropped 22% cumulatively this week and is poised to record its worst weekly performance in three years.

Why Skydance's valuation is changing

Skydance's estimated fair value declined after investors began separately trading warrants associated with the acquisition of Warner Bros. Discovery (Warner Bros. Discovery). Morningstar analyst Matthew Dolkin cut his valuation from $15 to $12 per share.

Class B shareholders holding shares on October 13 will receive a share warrant for each share they hold. Starting October 14, investors can trade these warrants separately from Skydance shares. Morningstar's revised valuation excludes the value of these rights, which were previously priced along with shares.

Each warrant allows investors to purchase one Skydance Class B share for $12 until October 13, 2036. However, if the stock price continues to rise above $30 during a set period, the company can close the deadline earlier, forcing investors to act earlier.

Skydance streaming business has potential to grow

Paramount completed the acquisition of Warner Bros. Discovery last week, creating the new merged media giant Skydance, which has major entertainment brands, major streaming platforms, and a huge asset portfolio covering sports and news.

Morningstar anticipates that the investment in Paramount+ and possible bundling or eventual integration with HBO Max will improve subscriber growth and pricing opportunities.

The analyst also believes that the company's production studios and entertainment franchises are valuable. CBS provides another competitive advantage through its audience coverage and sports broadcast agreements, including the right to broadcast NFL games until 2033 and the right to broadcast the NCAA “March Madness” basketball game until 2032.

However, traditional TV is still a major challenge. Morningstar expects the continued decline in pay-TV subscriptions and ad revenue to drag down the business.

Debt and consolidation present risks

The Warner Bros. Exploration deal also left Skydance with huge financial obligations. According to reports, Skydance CEO David Ellison and his family invested around $17 billion to fund the $110 billion deal. They bought around 1.4 billion shares at $12 per share, adding to their previous investment in Paramount.

The deal also relies on billions of dollars in debt and external investor funding, including the Middle East Sovereign Wealth Fund, RedBird Capital Partners, and Korea New World Group. According to Morningstar, Skydance's net debt exceeds six times the adjusted EBITDA. If revenue falls faster than expected or planned cost cuts are not realized, the company will become vulnerable.

The analyst expects Skydance to seek significant savings through consolidated operations, but still doubts that the company can meet its $6 billion annual cost reduction target.

On Stocktwits, retail investors' sentiment about the stock changed from “neutral” the previous day to “bearish.”

Skydance shares are down 47% year-to-date.