Arete Sees 79% Downside for Paramount After $110 Billion Warner Deal

Arete Research analysts have raised concerns about Paramount Skydance Corp. NASDAQ:PSKY, the parent company of CBS and other media businesses, as it prepares to acquire Warner Bros. Discovery Inc. NASDAQ:WBD, a major media company, for $110 billion. The transaction, announced in late February and expected to close in September despite remaining regulatory hurdles, could leave the combined company with $86 billion in gross debt. Pierre-Marie d'Ornano, an analyst at Arete Research, downgraded Paramount stock from neutral to sell and reduced his price target to $2, the lowest among analysts tracked by Bloomberg. The target suggests potential downside of about 79% from Paramount's Thursday closing price. d'Ornano argued that the proposed transaction would be the most highly leveraged media deal to date and questioned whether Paramount's management team has the experience required to operate such a heavily indebted company.

Paramount shares closed 4.3% lower at $9.33 in New York, extending their decline to four consecutive sessions, after falling as much as 9.3% earlier in the day. The stock has now declined by more than 30% this year. Arete analysts noted that large media mergers have historically faced difficulties caused by declining traditional television businesses, ambitious streaming expectations and complex capital structures. They suggested that the Paramount-Warner Bros. transaction could encounter similar pressures, while also carrying more expensive debt and restrictive maintenance covenants. Paramount responded that its management team has maintained a disciplined balance-sheet strategy focused on investing for long-term growth, restoring investment-grade credit metrics and returning excess cash to shareholders after reaching those goals.

Investor views on Paramount remain divided, with the average price target across 15 analysts tracked by Bloomberg standing at $11.40, suggesting potential upside of 22% over the next 12 months. Wells Fargo & Co. NYSE:WFC, a financial-services company, has the next-lowest target at $7, while Benchmark Co., an investment research firm, and Morgan Stanley NYSE:MS, a financial-services company, hold the only two buy-equivalent ratings, with targets of $19 and $14. Matthew Halbower, chief executive officer of Pentwater Capital Management, an investment firm holding about $1.3 billion in Warner Bros. shares and roughly $40 million in Paramount stock, argued that investors committing $47 billion of Paramount equity at prices between $12 and $16 per share may challenge Arete's $2 valuation. Although the U.S. Justice Department ended its investigation into the transaction last month, the deal could still face legal action from several states, a requested 60-day delay from Oregon's attorney general and concerns raised by the UK government.