WBD/Paramount merger - Variety: Shares of Warner Bros. Discovery, Paramount Dip as Investors Take Stock of Potential Merger

Story from Variety:

Would the combination of Warner Bros. Discovery and Paramount Global — two companies heavily tied to the declining legacy TV biz — make financial sense?

Investors reacted to news of early talks between Warner Bros. Discovery and Paramount about a potential merger, which broke just prior to market close Wednesday. In trading Thursday, as of 10 a.m. ET, shares of Warner Bros. Discovery were down more than 5% and Paramount Global’s stock price was down 2.8%. [Update: Warner Bros. Discovery closed down 1.5% for the day to $11.49/share and Paramount Global had dropped 2.8% to $15.07/share.] The declines came amid an uptick in broader market indexes.

Year to date, Paramount Global shares are down 11.7% as of Thursday’s market close. Meanwhile, Warner Bros. Discovery shares are up more than 20% so far in 2023.

Wall Street wasn’t completely surprised to hear about Warner Bros. Discovery and Paramount Global’s merger talks, with many observers anticipating near-term M&A activity in the sector. “[W]e think these desperate times for media companies are leading them to explore desperate measures,” MoffettNathanson analyst Robert Fishman opined in a Dec. 21 research note.

Paramount Global’s shares rose more than 12% earlier this month on word that Paramount Global chair Shari Redstone had discussed her sale of her shares of National Amusements Inc. (representing a controlling stake in Paramount) with Skydance Media’s David Ellison. Those talks were first reported by Puck on Dec. 7.

The talks between Warner Bros. Discovery and Paramount Global are at the very earliest stage, with Warner Bros. Discovery chief David Zaslav and Paramount Global CEO Bob Bakish having broached the possibility of a union at a Dec. 19 lunch meeting. Sources said Zaslav was motivated to explore a Warner Bros. Discovery-Paramount Global combination given the chatter about Skydance’s talks to buy out Redstone’s NAI stake. There are a number of questions about how a deal might come together.

And other M&A outcomes are certainly possible. Comcast/NBCUniversal is “the third leg to this M&A merry-go-round conversation,” as Comcast CEO Brian Roberts looks to scale up to compete with Disney, Fishman wrote in the note. “At the end of the day, Comcast may be the one strategic buyer with the capital structure and assets required to benefit either Warner Bros. Discovery or [Paramount Global] in a long-term viable way,” he wrote.

Meanwhile, Fox Corp. “would be a much better fit” for Warner Bros. Discovery, according to Fishman, as Fox’s stock is “currently trading at a discount valuation” and owns assets including a national broadcast network, NFL and other marquee sports rights, and Tubi, a leading free ad-supported streaming TV service.

Terms of a potential Warner Bros. Discovery-Paramount Global merger aren’t known. But “Warner Bros. Discovery would likely be paying a hefty premium for a quickly declining linear TV business, allowing it to again double-down on its own pressured business,” Fishman noted.

Warner Bros. Discovery acquiring Paramount Global’s shares in a mostly debt-driven deal would be a “bad idea,” Wells Fargo Securities’ Stephen Cahall wrote in a Thursday note to clients.

In such a scenario, assuming a 30% premium and 20%/80% ratio of equity/debt financing, the combined company would have an estimated $97 billion enterprise value — and whopping debt of around $70 billion. Pro-forma revenue would be $72 billion (50% coming from linear TV) and $13 billion in earnings before interest, taxes, depreciation and amortization (about 90% from linear TV business).

"Warner Bros. Discovery’s debt has been a problem since the merger, and this would only magnify melting ice cube sensitivities,” Cahall wrote. As of the end of Q3, Warner Bros. Discovery’s long-term debt was $43.5 billion, while Paramount Global’s was $15.6 billion.

In another potential M&A scenario, Warner Bros. Discovery and Paramount Global could merge in an all-stock deal, similar to the structure of Discovery’s deal for WarnerMedia. “This has the benefit of not requiring incremental debt, but [Paramount Global’s] controlling shareholders don’t cash out,” Cahall wrote. A third possible option: Warner Bros. Discovery acquires National Amusements Inc. for approximately $2 billion to get NAI’s Paramount Class A shares, giving Zaslav & Co. the ability to make divestitures prior to an all-stock merger of Warner Bros. Discovery-Paramount Global. “We see this as the lowest risk (i.e., best) option for Warner Bros. Discovery (smaller outlay),” according to the Wells Fargo analyst. “This also gives NAI immediate cash so may be most probable.”

As for potential cost-savings a combined Warner Bros. Discovery-Paramount Global might achieve by shutting down Paramount+, Fishman wrote that those “would be smaller than they appear as most content costs associated with the service would merely shift to back to linear rather than disappear.” Fishman added, “Even together, the two would struggle to build a scaled streaming service that would allow the combined company to remain viable as linear cash flows fade away.”