Paramount Skydance’s move on Warner Bros Discovery marks major plot twist
The bid comes only weeks after Skydance inked a deal to buy Paramount
The best movies have an abundance of plot twists. The M&A mania sweeping US media is not far off.
Paramount Skydance, backed by the deep pockets of Oracle co-founder Larry Ellison and headed by his son David, is preparing a bid to acquire Warner Bros Discovery. That’s only weeks after Skydance inked a deal to buy Paramount.
This would be a colossal transaction. Warner Bros’s market capitalisation duly shot up from $31bn on Wednesday to $47bn by Friday’s close. Throw in net debt and that takes its enterprise value to about $71bn. Paramount Skydance’s EV is less than half of that. A deal would be on par with Disney’s 2019 acquisition of 21st Century Fox assets for $85bn, including debt.
A combination makes plenty of strategic sense. Combining TV networks, streaming services and content libraries would give the companies scale to better compete against the likes of Netflix and Disney. But the obstacles to a successful marriage are numerous.
For starters, Paramount Skydance will need to convince the target’s shareholders that selling their shares beats a previous plan to break Warner Bros into two publicly traded companies. One was set to house streaming assets like HBO Max and the and film studio businesses. The other, likely to trade at a more meagre valuation, would house the struggling cable and linear television networks.
While the value of a broken-up Warner Bros — which Morgan Stanley puts at $33bn — is far below its current equity value, its shareholders may have been hoping those parts might later attract their own separate bids at premium prices. Ellison, here, may be hoping to pre-empt a bidding war. Bank of America thinks a take-out price could be at least $30 a share, or $74bn in equity value.
Meanwhile, Paramount Skydance carries about $11bn of net debt, equivalent to about 4 times its ebitda. An acquisition could lead to its ratings getting downgraded to junk and its borrowing costs being pushed up. The risks are heightened by the execution difficulties in merging not two — but three — of the biggest media companies in the US.
On top of that, there is the political uncertainty. Although President Donald Trump is friendly with the Ellisons, a merger would be an opportunity for the administration to insist on conditions. Skydance only got regulatory approval to merge with Paramount after agreeing to eliminate diversity programmes and appoint an ombudsman for CBS News.
The elder Ellison, who briefly became the world’s richest man last week after a jump in the shares of Oracle, presumably has some sway when it comes to arguing Paramount Skydance’s case. Whichever scenario ultimately unfolds, the media and entertainment industry is about to undergo another round of upheaval.