The synergy effect will have to wait even longer! Citi raised Skydance (SKYD.US) collaboration costs to 4 billion dollars, but still maintains a “buy” rating

The Zhitong Finance App learned that Citi has released a 3Q26 model update report for Skydance Corp (SKYD.US). A team of analysts led by Jason Bazinet said in the report that based on the company's latest guidelines, the total cost of achieving the synergy effect was raised from the previous 3.2 billion US dollars to 4 billion US dollars, and it is expected that the time to achieve the synergy effect will increase. Meanwhile, management comments about the weakness of Warner Bros.'s business prompted Citi to lower its Studio business revenue forecast. However, the report believes that there will be no structural changes in the company's underlying business, so maintaining a “buy” rating and a target price of $10 corresponds to about 8 times the expected corporate value/EBITDA in 2028.

According to the report, Skydance achieved revenue of 7 billion US dollars in the third quarter of 2026, which is basically in line with FactSet's consensus estimate of 7 billion US dollars; the adjusted EBITDA was 1 billion US dollars, which is about 10% higher than the consensus estimate of 913 million US dollars. According to the report, Paramount (Paramount) assets are still expected to reach the high-end of the 2026 adjusted EBITDA target of $3.9 billion.

Management confirmed that it is expected to achieve 30% of the target operating rate synergy by the end of 2027 and 70% by the end of 2028. The cost of transformation is estimated at $4 billion, of which the 2027 expenditure is expected to be between $1.5 billion and $2 billion. Management also mentioned progress in integrating Pluto and Bet+ into Paramount+; in addition, Paramount+ and HBO Max will be bundled in early 2027, followed by platform integration in the fourth quarter of 2027.

Revenue forecasts are divided, profit forecasts are lowered

Citi raised the total cost of achieving the synergy effect in the report and expects the synergy to take longer to materialize. Affected by this, the report lowered the 2028 adjusted EBITDA forecast from US$17.709 billion to US$16.175 billion, a decrease of 8.7%; the 2027 adjusted EBITDA forecast was lowered from US$15.576 billion to US$13.733 billion, a decrease of 11.8%. Revenue forecasts are generally stable: 2027 revenue is expected to be $72.324 billion, and 2028 is $75.357 billion.

By sector, DTC's revenue forecast has been raised, with increases of 1.0% and 1.8% in 2027 and 2028, respectively; TV Media revenue was lowered by 0.5%, respectively; Studio revenue was slightly reduced by 0.1% due to weak Warner Bros. business. On the profit side, adjusted EBITDA forecasts for TV Media, DTC, and Studio have all been lowered, while company-level cost forecasts have risen markedly. The report predicts an adjusted EBITDA margin of 19% in 2027, compared with the previous forecast of 22%; 21% in 2028, and 24% previously forecast.

In terms of earnings per share forecast, Citi narrowed the expected loss per share from $0.16 to $0.05 in 2026, but drastically lowered the expected earnings per share from $0.18 to $0.04 in 2027, and fine-tuned the expected earnings per share from $0.65 to $0.63 in 2028.

Cash flow bridging and leverage levels attracted attention

In response to management's previous statement that “the break-even balance is expected to be better in 2027, including collaborative implementation costs,” the report said that this comment may put some pressure on equity values, and some customers require Citi to provide free cash flow bridging.

Starting from EBITDA, which excludes synergy effects and realized costs, after deducting net interest, taxes, cash transformation costs included in adjusted EBITDA credits, differences between content cash expenses and content amortization, and capital expenses, Citi expects the company's free cash flow of US$1.5 billion in 2027 to rise to US$7 billion by 2030, which is about US$3 billion lower than management's target of US$10 billion.

The report also notes that its recurring synergy is estimated at $8 billion, which is higher than management's target of $6 billion; this judgment is based on the scale of cost reductions achieved by Skydance after acquiring Paramount. The report predicts that the company's net debt/EBITDA will be about 6.2 times at the end of 2026, 5.6 times in 2027, 4.6 times in 2028, and 3.8 times in 2029.