How the Paramount/Warner Bros Deal Could Avoid the Media Merger Curse

A deal would demonstrate the ambitions of Paramount CEO David Ellison, the son of Oracle Chairman Larry Ellison. (CHRIS DELMAS/AFP via Getty Images)

Key Points

About This Summary

• Wall Street is excited about Paramount Skydance’s bid for Warner Bros. Discovery due to strategic benefits and cost savings.
• Shares of both companies rose after news of Paramount’s all-cash bid for Warner Bros.
• The new company would control a wealth of media properties including the Warner and Paramount movie studios, CBS, HBO, and Turner sports.

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% to $17.46 while Warner Bros. stock was up 29% to $16.17 Thursday after The Wall Street Journal reported that Paramount is readying an all-cash bid for Warner Bros. backed by the deep-pocketed Ellison family.

Shares of both companies are higher Friday in early trading with Paramount up 2% at $17.79 and Warner Bros up 9% at $17.68. 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 rumored 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,” Supino wrote with UI referring to user interface.

Supino sees initial cost synergies of $3 billion mostly from the elimination of duplicative costs and elimination of Warner Bros. corporate overhead. The combination could lead to the departure of Warner Bros. highly paid CEO David Zaslav.

The new company would control a wealth of media properties include the Warner and Paramount movie studios, CBS, HBO, and Turner sports. Supino wrote the deal can get regulatory clearance with a key issue being that the combined movie studios would command about 24% of the domestic box office.

One of the knocks against Paramount is that it’s subscale relative to industry giants like 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.

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% of Paramount‘’s roughly 1.1 billion shares while the public holds about 30%.

As part of the deal, Skydance got 200 million five-year warrants—which are long-term options—struck at $30.50 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 $300 billion—is critical to a potential deal since Warner Bros is considerably larger than Paramount. Warner Bros. market value is around $40 billion and its enterprise value (including net debt) is about $70 billion. Paramount has a market value of $19 billion and an enterprise value of close to $30 billion.

Supino wrote that his “guesstimate” is that Ellisons would make a large equity contribution as part of the deal of around $30 billion, which could involve the purchase of 1.8 billion Paramount shares.

Barron’s wrote favorably on Paramount in early August when the stock traded under $11. We argued that “buying Paramount stock now means investing alongside one of the world’s richest families in a business that Ellison is determined to make work.”

So far, that thesis has played out as Ellison has gone on the offensive, backed by his family’s deep pockets.

One caveat is that big media mergers historically haven’t 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.

Write to Andrew Bary at andrew.bary@barrons.com