A merger of Paramount-Warner has Wall St salivating despite underwhelming media tie-ups
Wall Street has embraced Paramount’s potential takeover of Warner Bros Discovery, sending both companies’ shares soaring despite the poor track record of media mergers.
Wall Street is excited about the prospect of Paramount Skydance’s bid for Warner Bros Discovery – despite a poor record of media mergers – because of strategic benefits and cost savings from a potential combination.
Paramount shares rose 15.6 per cent to $US17.46 ($26.30) while Warner Bros stock was up 29 per cent to $US16.17 after The Wall Street Journal reported that Paramount was readying an all-cash bid for Warner Bros backed by the deep-pocketed Ellison family.
Warner Bros could be getting a lift from speculation that other bidders might be interested in the company. It isn’t common for the buyer in a rumoured merger deal to rise but investors see considerable benefits to Paramount from buying the larger Warner Bros.
“We admit, we find this concept exciting,” wrote Wolfe Research analyst Peter Supino in a client note dated Thursday.
“Strategically, a deal would create the world’s largest film and TV studio and a top five global streamer with the content, subscribers, and fixed-cost leverage to compete with industry leaders on the basis of content, technology (AI, streaming UI, ad tech) and marketing.”
Mr Supino identified initial cost synergies of $US3bn, mostly from the elimination of duplicative costs and elimination of Warner Bros corporate overhead. The combination could lead to the departure of Warner Bros CEO David Zaslav.
The new company would control a wealth of media properties including the Warner and Paramount movie studios, CBS, HBO, and Turner sports.
Mr Supino wrote the deal can get regulatory clearance with a key issue being that the combined movie studios would command about 24 per cent of the domestic box office.
One of the knocks against Paramount is that it is subscale relative to industry giants such as Netflix and Disney, including in streaming. A deal for Warner Bros would address that problem.
A deal also would demonstrate the ambitions of Paramount CEO David Ellison, the son of Oracle chairman Larry Ellison. Mr Ellison, who had headed Skydance, a small movie and TV production company, became CEO when Skydance took control of Paramount in early August. Skydance, which is majority controlled by the Ellison family, owns about 70 per cent of Paramount’s roughly 1.1 billion shares while the public holds about 30 per cent.
As part of the deal, Skydance got 200 million five-year warrants – which are long-term options – struck at $US30.50 a share. The warrant exercise price is a sign of the Ellisons optimism about Paramount – and the stock – under their control.
The Ellison family fortune – estimated at around $US300bn – is critical to a potential deal since Warner Bros is considerably larger than Paramount. Warner Bros’ market value is around $US40bn and its enterprise value (including net debt) is about $US70bn.
Paramount has a market value of $US19bn and an enterprise value of close to $US30bn.
Mr Supino wrote that his “guesstimate” is that the Ellisons would make a large equity contribution as part of the deal of around $US30bn, which could involve the purchase of 1.8 billion Paramount shares.
One caveat is that big media mergers historically have not worked out. Look at Viacom CBS or the Discovery/Warner Bros mergers.
But a Paramount/Warner deal could be the exception because of scale and cost-saving opportunities. The way to play it is through Paramount stock – and the public float is small.
Dow Jones
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