Paramount’s (PSKY) acquisition of Warner Bros. Discovery (WBD) has cleared legal hurdles, but delays in financing timing have left it facing a higher interest burden. The merged company will carry a massive debt load, and its deleveraging plan relies heavily on cost cuts and revenue growth, while the weakness of the traditional television business and investor concerns about execution risk make achieving that goal highly uncertain. Moody’s speculative-grade rating and governance risk warning further underscore the severe financial test facing this media mega-merger.
Paramount has spent months pitching investors on the financing bonds for its acquisition of Warner Bros. Discovery, but as negotiations dragged on, financing costs rose accordingly. The $110 billion acquisition is finally moving forward after overcoming litigation obstacles, but because growing concerns about global inflation have pushed up borrowing rates, issuing debt this week rather than three months ago will cost the company hundreds of millions of dollars more in interest each year. Various estimates show that the additional annual interest burden ranges from $250 million to more than $500 million.
For a company that will ultimately carry a huge debt burden, this is undoubtedly a thorny problem. According to CreditSights data, Paramount will issue about $42 billion in bonds and $9.5 billion in loans to finance the acquisition. After the deal closes, the company will have more than $87 billion in investment-grade and high-yield debt, ranking among the largest borrowers in Bloomberg’s junk bond universe. To keep debt under control, the merged company needs to generate enough earnings, find enough cost savings, and perhaps sell assets to repay debt. Chief Executive Officer David Ellison plans to cut $6 billion in costs annually, and Paramount hopes to achieve that goal within three years. But the company relies heavily on traditional television network operations, which means significantly boosting revenue could prove quite difficult.
Not all investors believe Paramount can meet its targets. According to people familiar with the matter, some investors abandoned participating in the debt deal because of execution risk. Warner’s 2022 acquisition of Discovery also adopted a similar approach, only for its credit rating to be cut to junk last year while it was also considering splitting its business, which undoubtedly makes the situation even less favorable.
On Tuesday, Paramount launched the sale of its senior bonds, a type of debt that has first claim on company assets if the company runs into trouble. The company hopes to issue about $30 billion of such bonds, in addition to about $12 billion of second-lien junk bonds and $9.5 billion in loans. According to people familiar with the matter, the final financing cost depends on the outcome of the offering, and the company’s annual interest expenses could increase by as much as $500 million compared with expectations when the May financing plan was about to be finalized.
