In a significant blow to Paramount Global, S&P Global has downgraded the media company's credit rating to junk status. The decision was primarily driven by the continued decline of pay-TV and the increasing competitiveness of the streaming industry.

S&P Global announced on Wednesday that it had lowered Paramount's rating from BBB- to BB+. The rating agency attributed the downgrade to the "accelerating declines in linear media and the shift toward a more competitive and less certain streaming model." This move was already foreshadowed by S&P's previous warning about a possible downgrade due to adjustments in its ratings evaluation metrics.

While Paramount has made efforts to reduce its debt levels, the latest report from S&P highlighted that the company's ratio of free operating cash flow remains a concern. The forecasted ratio is expected to fall below the key threshold of 10%, even with significant reductions in streaming losses over the next two years. S&P emphasized that Paramount must execute its plan to improve streaming losses to mitigate any further negative impact on its ratings.

This development comes amidst continuing speculation about the future of Paramount. The company, which began 2024 as a strong contender for a major merger or acquisition in the media sector, has been implementing austerity measures such as downsizing its workforce and divesting non-core assets like real estate holdings and book publisher Simon & Schuster. Paramount's controlling shareholder, Shari Redstone, has reportedly received multiple offers and expressions of interest from private investors looking to acquire parts or all of the company.

Despite the downgrade, S&P's report did highlight a few positive prospects for Paramount. The assumption that streaming losses will significantly improve due to increased average revenue per user (ARPU) resulting from mid-2023 price increases and modest subscriber growth was noted. Additionally, the report mentioned the potential stabilization of the linear TV operation, with the company expected to benefit from political advertising this year and its long-term NFL rights.

Nevertheless, S&P cautioned that if these assumptions fail to materialize due to intensifying competition in the streaming industry or a more rapid decline in linear television, a reassessment of ratings or outlook could be necessary.

In response to the news, Paramount's stock experienced a 3% increase, closing at $11.70 on Wednesday. However, it is worth noting that the stock is still far below its value when the Viacom-CBS merger was finalized in 2019. Several offers for parts of Paramount's portfolio or the entire company have reportedly exceeded its current market value of $8 billion. Notably, Apollo Global Management has expressed interest in acquiring the company's film and TV studio operation for a reported price of $11 billion. However, Redstone has shown resistance to the idea, considering Paramount Pictures as a crucial component of the company.

The downgrade by S&P Global serves as a clear indication of the challenges faced by Paramount Global in the evolving media landscape. The company's ability to navigate the streaming industry's competitive atmosphere and improve its financial performance will be crucial in determining its future prospects.