Paramount Skydance (NASDAQ: PSKY) is in focus this morning after the company sweetened its deal “further” for Warner Bros. Discovery (NASDAQ: WBD) to woo its shareholders and bypass a resistant board.
While the headline price remains a firm $30 per share in cash, the new terms include a $2.8 billion payout to cover its breakup fee with Netflix, $1.5 billion debt backstop, and a unique “ticking fee” that pays shareholders for regulatory delays.
Despite these financial sweeteners, however, it’s reasonable to assume that the WBD board will remain icy, reinforcing that the path to a merger is paved with much more than money only.
Why WBD may still reject a merger with Paramount
Warner Bros. Discovery’s board may still reject Paramount’s proposal because it sees it as a major threat to the company’s long-term stability.
Even with added fees and debt backstops, the board’s core objection remains the debt load. PSKY’s offer requires roughly $94 billion in financing.
The WBD board has characterised this as a “risky leveraged buyout” (LBO) that would leave the combined company with a staggering debt-to-EBITDA ratio (estimated around 7x).
In contrast, Netflix Inc has an investment-grade balance sheet and is offering a deal with far better “certainty of closing.”
Why else is WBD more interested in a deal with Netflix
WBD’s board hasn’t shown much interest in a merger with Paramount Skydance also because it’s not entirely convinced of the buyer’s promise of $9 billion in synergies.
The firm’s directors have publicly argued these massive cost-cuts will “make Hollywood weaker, not stronger” and could lead to the cancellation of major productions just to service the “massive” debt.
Additionally, WBD leadership (specifically David Zaslav) has already committed to a strategy of separating Discovery Global (linear networks) from Studios/Streaming business, which the NFLX deal facilitates.
PSKY’s bid would keep the company whole, which the board currently views as an outdated and riskier model.
What lies ahead for Netflix-Paramount battle for WBD
Finally, Warner Bros. Discovery’s board has labelled Paramount’s $30 per share headline price as “inadequate” because it doesn’t account for the execution risk.
It argues that if the PSKY deal fails to close during the long regulatory window, WBD shareholders would be left with a firm that’s been “restricted from pursuing its key initiatives” for 18 months.
The “ticking fee” Paramount added today ($0.25/share per quarter) is a direct attempt to solve this, but the board likely considers this “pennies” compared to the potential value destruction of a failed 1.5-year merger process.
Ultimately, Paramount is betting that “cash is king”, while WBD remains focused on the crown’s stability.
With a massive debt load and a clash of strategic visions, this “sweetened” $30 offer may still be a bitter pill that WBD refuses to swallow.
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