Monday, May 27, 2024

The wrinkles in a potential media merger

Media deal makers aren’t waiting until 2024 to get started on potential big-ticket M.&A. News that David Zaslav, the C.E.O. of Warner Bros. Discovery, expressed interest in combining with Paramount set tongues wagging about a possible union of Hollywood’s top deal candidates. But it’s unclear whether this will be the combination that gets completed, DealBook’s Lauren Hirsch and Michael de la Merced write.

A deal could make sense

Their streaming platforms — Max and Paramount+ — are far smaller than Netflix or Disney+, so putting them together might create a more robust competitor. (Of note: Both companies own valuable sports streaming rights, which could help draw subscribers.)

And it could give the united business more leverage in negotiations with cable providers on the fees for carrying legacy television networks like Comedy Central and Discovery, especially as those channels suffer from falling ratings and stagnant ad sales.

Reasons not to do a deal

But there are plenty of reasons not to do a deal. Warner Bros. Discovery has $40 billion in debt and $5 billion in free cash flow, while Paramount has negative cash flow and $15 billion in debt. In other words, the combined company would have a crushing debt load and little money to pay that down or spend on content — potentially forcing Zaslav to cut more costs, after previous efforts torched his standing with content creators.

The new business would also be heavily reliant on declining TV channels, a situation that investors don’t like. (Paramount, however, may be able to sell BET and VH1 to a buyer such as the media mogul Byron Allen.)

Investors aren’t enthusiastic about the potential combination: Warner Bros. Discovery shares fell almost 6 percent on Wednesday after Axios scooped the talks, while Paramount’s stock declined 2 percent.

Other unknowns

Shari Redstone, who runs Paramount’s parent, may be up for a deal, given that she’s exploring selling a controlling stake in her company to Skydance, a studio backed by the investment firm RedBird Capital. But is the media mogul John Malone, who sits on the Warner Bros. Discovery board, also game?

The Biden administration’s antitrust enforcers, who just finalized an aggressive overhaul of merger rules, is likely to be skeptical of such a combination. How far can talks go without running afoul of I.R.S. rules that would impose a big tax hit on Warner Bros. Discovery if it does a big deal before April?

Some observers think there’s a Kabuki element to these talks. CNBC’s Alex Sherman and The Information’s Martin Peers wonder whether Zaslav’s approach to Paramount, and its quick leak to the media, was a market trial balloon — or a way to draw out Comcast, whose NBCUniversal has long been considered a potential buyer of Warner Bros. Discovery. (NBCUniversal, with its deeper pockets, is financially a more attractive partner for Zaslav’s company, though it would also face antitrust concerns.)

Not all deal makers think that’s the case here. But with investors widely believing that the media industry must consolidate in some way, the only question is which deals get done.

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