Warner Bros Discovery, Paramount will be 'worse off' together: Analysts

Warner Bros Discovery and Paramount Global are likely to be "worse off" together as a merger will leave them billions deeper in debt and saddled with dying traditional television assets, Wall Street analysts said on Thursday (Dec 21).

Shares of both companies extended losses after dropping sharply a day earlier on news that their CEOs had met to discuss a potential deal.

The deal talks follow months of industry speculation about consolidation among companies that lack the scale to compete with streaming pioneer Netflix while steadily losing customers in the traditional TV business to cord-cutting.

"It [the potential deal] 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," said Quilter Cheviot technology analyst Ben Barringer.

The merger will create what analysts said would be the largest movie studio in Hollywood and a streaming business with the third-highest US subscribers. The firms together will also account for up to 40 per cent of total time viewed on traditional TV.

But the ongoing decline in the TV business — their main profit engine — is also expected to make it harder for the firms to deal with the extra debt that would accompany the merger.

Warner Bros Discovery has tried to prop up its cash flow and aggressively lower costs over the past few months, but it still has about US$45 billion (S$60 billion) in debt. Paramount has about US$15 billion.

Risky timing

Several analysts questioned the timing of the deal talks as the upcoming US Presidential election would ramp up the regulatory uncertainty facing big mergers.

"It's risky to push a deal of this size during an election year when antitrust legislation is making a comeback," said Ross Benes, eMarketer senior analyst.

Any deal between the companies will likely happen after April 2024, the end of the two-year lock-up period after which Warner Bros Discovery can carry out another deal without suffering hefty tax implications as per the agreement for its own merger in 2022.

Some analysts believe the talks may encourage NBCUniversal-owner Comcast to make its own move with Warner Bros Discovery.

Comcast's nearly US$180 billion market value is much bigger than Warner Bros Discovery's US$30 billion and Paramount's about US$10 billion. Its CEO Brian Roberts has also been long rumoured to be interested in expanding the company's media business.

"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," MoffettNathanson analysts said. 

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