The logline seems awfully familiar.
A hero named David rides to the rescue of Warner Bros, a treasured but troubled Hollywood studio. The hero’s much smaller company manages to swallow the much larger one that owns the studio. It has become a takeover target due to declining linear TV networks and expensive forays in streaming.
The hero is a fresh face in the C-suite of top-tier media players, charming many industry veterans by pledging loyalty to movie theaters. But then, a second-act complication: Completing this mission, it turns out, will require taking on a massive amount of debt. In order to pay down the debt, billions of costs will be cut, likely resulting in untold thousands of layoffs.
That narrative sums up both the anticipated deal for David Ellison‘s Paramount Skydance to buy Warner Bros. Discovery as well as the 2022 acquisition of WarnerMedia by David Zaslav‘s Discovery Communications. The flashbacks were triggered Thursday evening when Paramount emerged the winner after months of jockeying with Netflix, which walked away from the fight.
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As Hollywood processes the series of events, the question has arisen: Is this new mega-deal destined to be another over-budget, ill-fated Hollywood sequel?
“This is effectively the same position WBD was in from ‘22 (post-merger) through ‘25,” Bernstein Research analyst Laurent Yoon wrote in a note to clients. That was “a period that constrained growth despite having quality studios and IPs,” he added.
In 2022, as WarnerMedia and Discovery came together, Zaslav was afforded an extensive honeymoon after telecom giant AT&T’s wayward stewardship. Press coverage showed him in his new Los Angeles home (late Paramount production chief Robert Evans’ former Beverly Hills estate) and emphasized his eagerness to embrace the movie business despite limited experience with it. Visitors to Zaslav’s office at the Burbank studio lot were shown the actual desk once used by Jack Warner, whom the CEO often name-checked in initial remarks about the deal.
The “transformative” nature of the merger was also touted to Wall Street. “We firmly believe that two content companies coming together have unique advantages,” Zaslav told analysts on an earnings call soon after the transaction closed.
Honeymoons must eventually end, however. When it became fully apparent that the company’s leverage ratio was five times its earnings – nearly double that of many peers – concerns started to mount about when the “advantages” would materialize.
Cloudy Optics
Operationally, Zaslav also stumbled in noticeable ways, infuriating the creative community by axing completed films like Batgirl in order to realize tax write-offs, or aiming to gut Turner Classic Movies before pushback from A-list filmmakers reversed the plan. In 2023, the optics worsened. As the industry endured labor strife leading to dual strikes by the Writers Guild and SAG-AFTRA, Zaslav was heckled during a commencement speech at Boston University and teamed with Graydon Carter to throw a splashy (if tightly secured) party in Cannes.
WBD stock, meanwhile, skidded to about one-third of its level following the April 2022 deal close, staying largely in a range between $12-$15 for two-plus years. After slipping below $8 last spring, the shares revived amid chatter about a potential sale and plans were articulated for a spinoff of Discovery Global. Today, the share price is above $28 and Zaslav has managed to secure a proposal from Paramount at $31 a share, plus numerous other incentives, after initially having an offer at $19. Comcast entering the derby along with Netflix last fall provided even more of a boost.
Despite the elements of triumph (and a windfall of hundreds of millions coming to Zaslav per his employment contract), echoes of history are hard to escape. Yoon estimates the combined Paramount-WBD entity will have almost $100 billion in debt, with a leverage ratio greater than six times.
“Overpaying for WBD to accelerate growth is perhaps better than facing a mediocre standalone trajectory,” he wrote. “At least this gives them a shot at greatness, in our view. But we do not expect them to come out swinging too hard. … Before they can invest in growth, they’ll need to cut deep and fast, and allocate most of their [free cash flow] to interest expense and de-levering.”
In their lengthy statement explaining why they had decided to exit the Warner merger process, Netflix co-CEOs Ted Sarandos and Greg Peters worked in a flex. “Netflix’s business is healthy, strong and growing organically, powered by our slate and best-in-class streaming service,” they said. “This year, we’ll invest approximately $20 billion in quality films and series and will expand our entertaining offering.”
That amount of spending, allotted to a single platform, will be where the bar is for competitors who need to feed broadcast and cable networks along with streaming. In Paramount’s case, the company has been downgraded by ratings agencies, who cite its exposure to decaying linear TV assets. Ellison’s company, which is backed by his father Larry Ellison’s immense wealth, has shown an appetite for sports rights, but how will it balance its need to retire debt with its desire to become a leading streamer and content power?
“The biggest challenge facing Paramount Skydance post-merger,” wrote MoffettNathanson analyst Robert Fishman in a client note, will be “balancing the content investment required to reach its strategic goals against the need to manage leverage. Will PSKY attempt to delever naturally to get back to investment grade, or can the company recapitalize after closing the deal to accelerate the timing?”
Questionable Track Record
In a town hall meeting Friday, Zaslav sought to sell employees on the idea that a bigger deal would be better, but Deadline spoke with a number of rattled and dispirited staffers dreading the likely cutbacks. If the deal closes, the Warner assets will be in the hands of their fourth corporate owner in less than a decade.
With the dust still settling, a remark made by Peters last fall now hits differently. Appearing at a conference last October, amid speculation that Netflix could enter the Warner Bros fray, the exec downplayed that scenario.
The company has long been “builders rather than buyers,” he explained. What’s more, he added, “One should have a reasonable amount of skepticism around big media mergers. They don’t have an amazing track record over time.”