- Fitch downgrades Paramount credit to junk after Warner merger.
- Combined company expected to carry $79 billion debt.
- Deal financed with $54 billion debt and $45.7 billion equity.
- Paramount seeks over $6 billion cost cuts after merger.
The downgrade of the credit rating of Paramount Skydance to junk has been triggered by concerns by the rating agencies regarding the heavy debt burden that the company will have after the acquisition of Warner Bros. Discovery that it has planned. On Monday, Fitch Ratings downgraded Paramount to BBB- instead of BBB+ and put the company on negative watch akin to uncertainty regarding the financing structure of the approximately 110 billion dollar deal.
The downgrade relegates the debt to the speculative-grade, which depicts the high risk levels to the lenders and investors. S&P Global Ratings also expressed the same fears regarding the financial future of the company, indicating that the merging is going to create a company with a huge leverage once the merger is done.
Paramount Skydance executives noted that the new company will come out of the deal with a debt of about 79billion. The merger shall put together the current assets of Paramount and the portfolio of the Warner Bros. Discovery consisting of major media outlets which include CNN, HBO, TBS and Cartoon Network. According to Fitch, this was the downgrade as there was doubt concerning the way in which the deal would be financed and how the company would cope with a considerably larger debt load.
Some of the main risk factors mentioned in the agency included materially elevated leverage and limited visibility on post-transaction financial policy and capital structure. The transaction will be based on sophisticated financing structure which will consist of equity guarantees and massive debt financing.
Larry Ellison, a technology executive with a fortune of billions, has accepted to ensure that he provides equity funding in to the tune of $45.7 billion to fund the acquisition spearheaded by his son, Paramount chief executive David Ellison. The biggest financial institutions such as Bank of America, Citigroup and Apollo Global Management have invested over 54 billion dollars in debt financing loans to facilitate the takeover.
Merger Comes on top of Existing Debt Burden
The merger will make the new corporation assume considerable current liabilities of the Warner Bros. Discovery which has already accumulated about 33.5 billion in debt. The history is a spinoff of the company having nearly 2022 out of AT&T, a deal that left the media group liable to almost 55 billion dollars and initiated several rounds of austerity measures and reorganisation.
According to the suggestions of paramount executives about the merger integration, approximately one-fifths of the $15 billion in debt of Warner Bros. Discovery will be reorganized. This is a competitive process of bidding where Netflix had earlier on sought to acquire Warner Bros. Discovery and finally backed out.
Paramount made a payment of 2.8 billion termination fee to both Netflix to officially abandon the search and get the agreement of a merger with the board of directors of Warner. Paramount is confident that the acquisition will be finalized by the end of September as long as shareholders and regulators of the Warner Bros.
Discovery (including the European Union authorities) give their consent. According to Standard & poor the merger would later lead to a company which is even more powerful in entertainment, but unusual risks arise as a result of the manner in which the deal is being undertaken. The ratings agency stated that the merger of PSKY with WBD would make the two companies a material stronger business than they are when operating separately. But this deal has its own casualties as this would be a merger of three companies, where the smallest company, Skydance will be the dominating factor.
Cost-cutting Strategies are Concerning Industry
In order to cope with the huge level of debt, Paramount has informed its investors that it likely will achieve in excess of 6 billion cost reduction and operation synergies in less than three years. The threat of massive savings has created panic throughout the entertainment business more so in Los Angeles where the corporation has large film and television production facilities.
The streaming competition is already causing waves of acquisitions, layoffs and production cuts as Hollywood tries to handle the rising costs. There are some executives in the industry who think that the savings target will simply have to increase significantly. The proposed cost reductions of greater than 10 billion dollars to get the economics of the deal to work have been floated by Netflix co-chief executive Ted Sarandos.
In recent statements to Bloomberg News Sarandos increased that estimate to up to 16 billion. The chief operating officer of Paramount Andrew Gordon commented that the company will explore other efficiencies other than cutting down the number of its employees to maintain the same level of film and television output. In an interview on a conference call with analysts, Gordon mentioned that Paramount would centralize the technological platforms and cloud vendors to meet its streaming services, including Paramount+ and HBO Max.
Other areas of elimination that would save the company cost include corporate overhead, marketing cost, procurement cost and streamlining the companies real estate space. The joint media conglomerate will be an inheritance of an expansive network of facilities in the Los Angeles region. Warner Bros. continue to operate out of a major studio in Burbank, and the historic studio lot of Paramount on Melrose Avenue in Hollywood.
The business operations to other parts are distributed in places such as Culver City, Studio City and offices along Sunset Boulevard. Although the merger was strategic in terms of reasoning, the reaction of investors was not forthcoming. On Tuesday, after the downgrade, Paramount shares dropped by over 6 percent to 12.45, and Warner Bros.
Discovery shares dropped by 1 percent to 28.20. The stocks of Netflix increased marginally, and they are priced at 97.70. According to ratings agencies, the key that will determine the success of the deal is whether Paramount will be able to make the projected cost savings at the same time cope with one of the biggest debts in the modern entertainment business sector.
