Warner Bros Discovery and Paramount Global Face Mounting Concerns Over Proposed Merger
Warner Bros Discovery and Paramount Global are under scrutiny from Wall Street analysts as they contemplate a potential merger, with concerns raised about the significant increase in debt and the burden of declining traditional television assets.
The news of the possible merger caused both companies’ shares to extend losses, following a sharp drop the previous day after reports surfaced of a meeting between their CEOs to discuss the deal.
Analysts are skeptical about the financial viability of the merger, noting that both companies are already heavily indebted and may need to issue further debt to facilitate the deal. Quilter Cheviot technology analyst Ben Barringer commented, “It looks like a play for survival at all costs. Both businesses are heavily indebted, and it is likely further debt will need to be issued to make this deal possible.”
The merger, if completed, would establish the largest movie studio in Hollywood and create a streaming business with the third-highest U.S. subscribers. Additionally, the combined entities would account for up to 40% of total time viewed on traditional TV. However, the ongoing decline in the TV business, their main profit engine, is expected to pose challenges in managing the additional debt resulting from the merger.
Warner Bros Discovery has attempted to bolster its cash flow and reduce costs aggressively in recent months but still grapples with approximately $45 billion in debt. Paramount Global carries about $15 billion in debt.
Analysts have raised concerns about the timing of the proposed deal, pointing out the upcoming U.S. Presidential election and the potential regulatory uncertainties surrounding large mergers. Ross Benes, eMarketer senior analyst, noted, “It’s risky to push a deal of this size during an election year when antitrust legislation is making a comeback.”
The expected timeline for any deal is likely after April 2024, marking the end of the two-year lock-up period following Warner Bros Discovery’s previous merger in 2022. Some analysts suggest that the merger talks could prompt NBCUniversal-owner Comcast to consider its own move with Warner Bros Discovery, given its substantial market value of nearly $180 billion compared to Warner Bros Discovery’s $30 billion and Paramount’s approximately $10 billion.
MoffettNathanson analysts commented, “At the end of the day, Comcast may be the one strategic buyer with the capital structure and assets required to benefit either WBD or PARA in a long-term viable way.” The evolving situation underscores