Paramount Skydance Corp (PSKY.US) has spent months pitching financing bonds to investors for its acquisition of Warner Bros. Discovery (WBD.US), but as the negotiation period dragged on longer than expected, financing costs have climbed accordingly.
The $110 billion acquisition deal has finally been able to proceed after overcoming legal obstacles. However, with growing concerns about global inflation pushing up borrowing rates, issuing bonds this week rather than three months ago will add hundreds of millions of dollars in annual interest costs. Multiple estimates show the additional annual interest burden ranging from $250 million to over $500 million. For a company that will ultimately carry a massive debt load, this is unquestionably a thorny problem.
According to CreditSights data, Paramount Skydance Corp will issue approximately $42 billion in bonds and $9.5 billion in loans to finance the acquisition. After the deal closes, the company will carry over $87 billion in investment-grade and high-yield debt, placing it among the largest borrowers in Bloomberg's high-yield bond universe.
To keep debt in check, the combined company needs to generate sufficient earnings, find enough cost savings, and perhaps sell assets to repay debt. CEO David Ellison plans to cut $6 billion in costs annually, and Paramount Skydance Corp hopes to achieve this goal within three years. But the company's heavy reliance on traditional television network operations means significantly boosting revenue could prove quite difficult.
"If overall debt expenses rise, it could put pressure on cash flow," said industry research analyst Stephen Flynn. "That's a problem, and there are other issues that could complicate the planned deleveraging." A representative for Paramount Skydance Corp declined to comment. Bank of America and Apollo Global Management also declined to comment, while a Citigroup representative did not immediately respond to a request for comment. These three firms are the lead arrangers of the debt deal.
Not all investors are convinced that Paramount Skydance Corp can meet its targets. According to people familiar with the matter, some investors withdrew from participating in the debt deal due to execution risks. Warner Bros. Discovery took a similar approach when it acquired Discovery in 2022, only to have its credit rating downgraded to junk last year while also considering a business split, which has certainly made the situation even more unfavorable.
M&A Track Record Is Dismal
"The historical record of media megamergers is abysmal," wrote CreditSights analysts Hunter Martin and Brian McKenna. The two analysts believe the merger makes strategic sense, "but we are concerned about the overall debt burden and execution risk," especially Paramount Skydance Corp's "very aggressive" targets for cost cuts and synergies.
On Tuesday, Paramount Skydance Corp launched its senior bond offering, a type of debt that holds first claim on company assets if the company runs into trouble. The company aims to issue approximately $30 billion of such bonds. It is also issuing about $12 billion in second-lien junk bonds and $9.5 billion in loans. According to people familiar with the matter, the final cost of financing depends on the offering results, and compared with expectations when the May financing plan was about to be finalized, the company's annual interest expense could increase by up to $500 million. They estimate the premium is about 0.5 to 1 percentage point higher than the rate Paramount Skydance Corp would have incurred had it issued bonds mid-year.
Flynn said the additional interest cost from the bond issuance could be even higher, potentially 100 to 150 basis points above what Paramount Skydance Corp would have originally paid, amounting to about $450 million to over $600 million annually. If the financing had been finalized earlier, interest costs could have been lower, but the original plan was upended by legal and union challenges to the deal. The related disputes have now been resolved.
Meanwhile, the 10-year U.S. Treasury yield has surged over the past three months to its highest level since 2007. Credit spreads — which measure the extra yield investors demand to buy corporate bonds relative to Treasuries — have also widened, particularly for junk-rated securities. Moody's expects Paramount Skydance Corp's bond issuance to fall within this rating range, including the new first-lien notes. However, the latter received investment-grade ratings from Fitch Ratings and S&P Global Ratings.
Against this backdrop, Paramount Skydance Corp's Ellison hosted a conference call with investors on Monday. People familiar with the situation said management received a large number of questions about the cost synergy plan. Some investors expressed skepticism about whether these targets can be achieved and decided not to participate in the bond offering, but the pricing of the bond deal under discussion was attractive enough for some of them to offset those concerns, according to people familiar with the matter.
Moody's on Monday rated the new first-lien and second-lien notes as speculative grade. Moody's rating rationale is based on Paramount Skydance Corp delivering on cost synergies, repaying debt, and asset sales, which are expected to significantly deleverage the company in the initial years, and it cited "the Ellison family's substantial financial resources and its public commitment to reducing leverage" as supporting factors. "High leverage, highly concentrated equity ownership, a plan to weaken the recovery position of existing senior unsecured bondholders, and management's mixed track record of achieving financial targets reflect significant governance risks," Moody's said.