Paramount Global stock plummets as merger discussions become complicated

If a merger goes smoothly, it can indicate the health and growth of a particular sector of the economy. Unfortunately, merger talks between Paramount Global (NASDAQ:PARA) and Skydance Media seem to be causing some consternation recently.

The recent decline in PARA stock has left value seekers with more questions than answers. On the other hand, stock prices generally do not fall unless there is uncertainty. If everything is known in advance, value opportunities will not present themselves to investors.

But with Paramount Global stock at risk of falling below $10, there’s a fine line that separates valuation from a value trap. If the company does not resolve the problem quickly, its stock price may fall further.

Paramount Global and ‘Mountain of Distrust’

The Wall Street Journal doesn’t use this expression often, but it recently declared that Paramount Global is facing a “mountain of distrust.” As Skydance deal talks stall, “ordinary shareholders” are left with “little choice but to vote.”

Let me back up for a moment. The public first learned last December that Paramount Global was considering a possible merger with Skydance Media, a media production company led by CEO David Ellison. In early April, private equity firm Apollo Global Management (NYSE:APO) offered $26 billion in cash for its merger with Skydance.

Skydance rejected Apollo’s offer, so talks between Paramount Global and Apollo continued and are still ongoing, but this is where things get more complicated. Ellison is seeking control of Paramount Global and has offered to buy Paramount’s parent company, National Amusements. But that won’t happen unless Paramount Global merges with Skydance Media.

So if Ellison wants to build a media empire, he definitely wants to see the Paramount-Skydance merger complete. If he takes control of Paramount Global, it would effectively open a new chapter in the long history of the iconic film company, which dates back to 1912.

Even if Ellison really wants a merger, it doesn’t necessarily reflect the wishes and intentions of other stakeholders. Paramount Global’s current shareholders may feel they have no say in the negotiations or the company’s future path.

It is debatable whether there is truly a ‘mountain of distrust’ facing the company, but there may at least be a mountain of discontent. Three Paramount Global board members are expected to leave the company “amid merger talks with Skydance Media,” according to “people familiar with the situation” and the Wall Street Journal (via Reuters).

Again, there are more questions, but few definitive answers. Are these board members leaving in protest? Is this a sign of trouble or a breakdown in negotiations between Paramount Global and Skydance Media?

More uncertainty, more worry.

Moving past the Paramount-Skydance soap opera, there’s another reason Paramount Global’s investors feel uncertain about its immediate future. Especially with the company’s next earnings report expected to be released soon.

Paramount Global plans to announce its first quarter results and then hold a conference call after the stock market closes on April 29. To be honest, shareholders may want to exit their positions before quarterly earnings are released.

For what it’s worth, Paramount Global achieved adjusted earnings of 4 cents per share in the fourth quarter. Of course, if the stock price exceeds $10, it is not a big profit.

Wall Street has much higher expectations for the first quarter. That means earnings of 34 cents per share. At the same time, the entertainment sector environment has not gotten any easier for legacy businesses like Paramount Global.

TV media is Paramount Global’s largest business segment, with fourth-quarter revenue down 12% year-over-year. Worst of all, Paramount’s film division revenue fell 31%.

So these are dangerous times for Paramount Global as it moves toward content streaming and competes with Netflix (NASDAQ:NFLX). This is inevitable, and the way forward remains unclear.

So even if the price falls below $10, PARA stock doesn’t look like an attractive deal. Current shareholders should thank their lucky stars for the profits they may reap and consider taking them off the table before it’s too late.