Is Paramount’s Challenging WBD Takeover Just Another Hollywood Misstep?
The potential acquisition of Warner Bros by David Ellison’s Paramount Skydance has sparked significant interest in Hollywood.
Ellison, the fresh face in top-tier media leadership, aims to rescue the beleaguered studio as it grapples with challenges posed by declining linear TV networks and costly streaming ventures. His smaller company has emerged as a contender to absorb the much larger Warner Bros. However, achieving this ambitious goal would involve taking on substantial debt and likely result in the cutting of billions in costs, potentially leading to significant layoffs.
This narrative mirrors both the anticipated deal for Paramount Skydance and the recent acquisition of WarnerMedia by David Zaslav’s Discovery Communications. The resemblance became clear as Paramount triumphed in negotiations over competitors like Netflix, which ultimately opted out of the bidding process.
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As Hollywood assesses the ramifications of this proposed mega-deal, the question emerges: Is this transaction poised to become another costly, poorly executed Hollywood venture?
Bernstein Research analyst Laurent Yoon pointed out in a note to clients that “this is effectively the same position WBD was in from ‘22 (post-merger) through ‘25,” highlighting a period that restricted growth despite having quality studios and intellectual properties.
After the merger of WarnerMedia and Discovery in 2022, Zaslav enjoyed a honeymoon phase following the tumultuous leadership of telecom giant AT&T. Initial reports depicted him settling into his new Los Angeles residence, the former estate of late Paramount production chief Robert Evans, and emphasized his commitment to the film industry despite limited experience. At his Burbank office, he showcased the desk once used by Jack Warner, a figure he frequently evoked in early discussions about the merger.
Zaslav touted the merger’s “transformative” potential to Wall Street, asserting that two content companies joining forces would bring unique advantages.
However, the advantageous period soon began to dissipate. As the company’s leverage ratio reached five times its earnings—nearly double that of many competitors—doubts grew regarding the anticipated benefits.
Cloudy Optics
Zaslav’s operational missteps, including the cancellation of completed films like Batgirl for tax write-offs, raised ire within the creative community. Additionally, plans to overhaul Turner Classic Movies were reversed only after facing backlash from high-profile filmmakers. The situation deteriorated further in 2023, as industry labor conflicts led to dual strikes by the Writers Guild and SAG-AFTRA. Zaslav was even jeered during a commencement speech at Boston University and faced criticism for a lavish party at Cannes.
Following the April 2022 merger, WBD stock value plummeted to approximately one-third of its level, fluctuating between $12 and $15 for over two years. After dipping below $8 last spring, the shares rebounded amid speculation of a potential sale and discussions regarding a spinoff of Discovery Global. Currently, the share price exceeds $28, with Zaslav presenting a proposal from Paramount at $31 per share, escalating from an initial offer of $19. Increased competition from Comcast and Netflix further contributed to this rise.
Despite the positive developments and the substantial benefits coming to Zaslav through his employment contract, historical concerns loom large. Yoon estimates that the merged Paramount-WBD entity could result in nearly $100 billion in debt, with a leverage ratio exceeding six times.
Yoon noted, “Overpaying for WBD to accelerate growth is perhaps better than facing a mediocre standalone trajectory,” adding optimism that this path could lead to greatness, albeit contingent on significant cost reductions and prioritizing debt repayment.
In remarks made by Netflix co-CEOs Ted Sarandos and Greg Peters, the company emphasized its robust performance and commitment to organic growth, stating, “This year, we’ll invest approximately $20 billion in quality films and series and will expand our entertaining offering.”
This level of expenditure sets a high bar for competitors who must support both broadcast and cable networks while pursuing streaming ambitions. Paramount recently faced downgrades from ratings agencies, attributed to its exposure to declining linear TV assets. With Ellison’s company, backed by his father’s considerable wealth, eyeing sports rights, the challenge remains: How to balance debt reduction with the ambition to become a top content provider and streaming giant?
Analyst Robert Fishman of MoffettNathanson noted that the primary challenge facing Paramount Skydance post-merger would be “balancing the content investment required to reach its strategic goals against the need to manage leverage.” He questioned whether the company would strive to deleverage naturally to regain investment-grade status or seek additional capital to expedite its objectives.
Questionable Track Record
As the situation continues to unfold, past remarks by Peters have gained a new resonance. During a conference last October, in light of the swirling speculation regarding a potential Warner acquisition, Peters expressed skepticism about large media mergers.
He emphasized that the company has historically been “builders rather than buyers,” and cautioned that “one should have a reasonable amount of skepticism around big media mergers. They don’t have an amazing track record over time.”
