Paramount-Warner $110 Bn Deal Done, But New Skydance Faces $80 Bn Debt Overhang

Paramount Skydance completed the biggest merger in Hollywood’s history with its $110 billion acquisition of Warner Bros Discovery on Tuesday. While the deal has created a new entertainment giant, Skydance, its life begins with a debt burden of about $80 billion.

The transaction gives David Ellison-led Skydance control of some of the industry’s biggest film franchises, television networks and streaming businesses including Harry Potter, Mission: Impossible and DC Studios, along with CBS, CNN, TNT, Paramount+ and HBO Max.

Warner Bros shares have ceased trading on Nasdaq, with the combined company now trading on the New York Stock Exchange under the ticker SKYD.

The scale of the deal has left Skydance with a substantial financial challenge as Paramount had raised $52 billion through loans and bonds in just one week to finance the transaction, one of the largest debt financings in recent history, as per a report by Bloomberg (BBG).

Why Skydance Has Large Debt Burden

Paramount initially secured a $57.5 billion short-term bridge loan from Bank of America (BofA) and Citigroup, working with Apollo Global Management, after winning the bidding war for Warner Bros. The bridge financing was subsequently refinanced through a combination of loans and bonds, the report said.

The timing proved expensive as borrowing costs had risen because inflation concerns pushed government bond yields and credit spreads higher.

The resulting increase in Paramount's interest costs could be around $250 million-$500 million a year compared with financing the deal several months earlier, as per BBG.

However, Paramount did manage to reduce borrowing costs by 37.5 basis points during the debt sale, saving roughly $200 million a year in interest, according to CFO Dennis Cinelli, the Bloomberg report said.

The financing also exposed investors to immediate losses as prices of some newly issued debt fell after the sale. Nevertheless, around 1,000 investors placed orders for the debt, it added.

Merger Faced Lawsuits And Financing Delays

The Paramount-Warner deal was far from straightforward. Paramount had beaten Netflix in the bidding for Warner Bros after improving its offer and securing a personal funding guarantee from Larry Ellison, David Ellison's father.

Paramount also agreed to pay Netflix a $2.8 billion breakup fee and had promised Warner Bros shareholders a $7 million-a-day ticking fee if the transaction missed the September 30 deadline. The eventual payment was about $41.9 million, according to a regulatory filing, as per Reuters.

Regulatory approval came relatively quickly, but lawsuits by 12 US states and the Writers Guild of America delayed the closing. The plaintiffs raised concerns about competition, consumer prices and employment in Hollywood.

The merger was eventually cleared after Paramount reached settlements with the states and the writers' union.

$6 Bn Savings Target Key To Debt Reduction

The immediate test for Skydance is now whether it can generate enough cash and savings to bring down its leverage. Paramount has set a target of more than $6 billion in annual cost savings within three years of the merger.

The company has said that much of this will come from combining technology infrastructure, negotiating supplier contracts, reducing overlapping marketing expenditure and consolidating real estate rather than relying solely on job cuts.

The combined company expects to generate more than $10 billion in free cash flow by 2030 and reduce debt to about 3 times annual adjusted earnings by the end of 2029, per Bloomberg.

According to a report by Reuters, Paramount expects to combine its streaming operations, including HBO Max and Paramount+, into a single service.

The company also plans to maintain a substantial theatrical slate, with at least 30 films a year in each of the first two years after closing, rising to 32 annually in the following three years.

Ellison Has To Make The Merger Work

Ellison has appointed former Mattel CEO Ynon Kreiz as co-CEO, with Kreiz responsible for day-to-day operations and integration while Ellison retains responsibility for creative direction and broader strategy.

According to MoffettNathanson analysts, the combined company could generate EBITDA of $16 billion in 2028, rising to $19 billion in 2030, while revenue could reach about $67 billion in 2028 and roughly $70 billion in 2030, Reuters reported.

The challenge is therefore no longer closing the deal. It is proving that Hollywood's new giant can use its scale, streaming businesses and entertainment franchises to generate enough cash to service and reduce its $80 billion debt load.