Warner Bros’ takeover offer is hampered by Paramount’s $54 bn debt
Even if Paramount Skydance Corp. succeeds in taking over Warner Bros. Discovery Inc. despite the company’s objections, it confronts another significant challenge: managing the enormous $54 billion of debt it intends to assume. Paramount has secured a temporary financing package for the combined company; however, it has not established a maximum rate for more permanent borrowings related to the transaction. The outcome may resemble a high-stakes Hollywood disaster in the M&A realm, as Paramount’s costs could escalate beyond expectations if the debt markets deteriorate and funding expenses rise sharply. To secure the financing, Paramount is presenting itself to credit markets as a hopeful contender among Corporate America’s elite — an investment-grade borrower eligible for lower interest rates and underwriting fees. Paramount is required to present a comprehensive list of cost reductions and efficiency improvements to achieve that esteemed blue-chip status.
Furthermore, Paramount’s debt package is being designed to ensure that the company, rather than its bankers, bears the risk if interest rates for the longer-term financing rise during what may become a protracted takeover battle extending into 2026. Paramount’s aggressive bid is in contention with a cordial proposal from Netflix Inc., which has already received the green light from Warner’s board. Consequently, any additional offers could escalate the final price — along with Paramount’s debt — even further. Bankers have experienced this scenario previously. The financing from Bank of America Corp., Citigroup Inc., and Apollo Global Management Inc. is poised to become one of the largest debt packages for an acquisition in history, prompting a desire to prevent a recurrence of 2022, when lenders faced challenges with so-called hung loans. That’s banker lingo for acquisition debt they underwrote but were unable to sell to investors until much later, often at a significant loss, because rates and the price investors demanded for assuming the risk increased. The financing provided by the trio of lenders is characterized as a bridge loan, structured as investment-grade secured debt alongside non-investment-grade unsecured components, denominated in both dollars and euros to maximize liquidity, according to sources familiar with the situation. This distinctive hybrid structure is anticipated to provide investors with greater yield than what is usually observed in an investment-grade deal, the people said. It is essential to note that the long-term financing is provided without any limits on the interest rate. This indicates that lenders may increase costs for Paramount if the market worsens, according to sources.
The duration that credit raters anticipate for the deal’s cost savings to materialize may result in a more costly route for Paramount to achieve a successful merger. However, with over a year and some extensions available to refinance the bridge loan, the company is positioned to wait for more favorable market conditions, according to sources, who also noted that several banks have expressed interest in participating. Neither Paramount, Netflix, nor the lenders provided comments for this article. Messages sent to representatives for Warner went unanswered. Banks are beginning to restore their risk appetite as buyout momentum gains traction, leading to predictions of a record year for M&A in 2026. This comes after a prolonged period of event-driven financing, during which merger activity nearly came to a halt in 2022, due to Russia’s invasion of Ukraine, a spike in inflation, and a significant increase in interest rates. According to sources, the funding for Paramount’s bid will be divided equally among the three providers. Apollo will be financing its portion in the same capacity as a traditional bank lender — the firm will underwrite the package with plans to sell off its stake to investors, instead of via its private credit arm, the sources indicated. As a borrower rated on the cusp of junk, Paramount is likely to pay more for its debt than Netflix, a high-grade issuer that’s relying on a $59 billion loan. Netflix’s proposal includes a bridge loan from Wells Fargo & Co., BNP Paribas SA, and HSBC Holdings Plc, with the debt ultimately being substituted by bonds. Paramount’s loan will be secured by the company’s assets, whereas Netflix’s loan is unsecured, indicating that lenders did not require backing by specific collateral.
This is likely attributable to Netflix’s more robust balance sheet and superior credit ratings. A team of Morgan Stanley analysts noted that rising debt levels pose a risk for Netflix investors. The streaming company, rated A by S&P Global Ratings and a notch lower at A3 by Moody’s Ratings, faces potential vulnerability to a downgrade to the BBB tier, according to analysts. On a conference call held on December 8, Paramount’s interim Chief Financial Officer Andrew Warren stated that a crucial ratio of debt to a measure of earnings is expected to be approximately four times at the conclusion of the acquisition. The borrower aims to achieve an investment-grade rating within two years by reducing leverage to approximately two times, he stated. Credit raters at Moody’s anticipate that the debt leverage for Paramount’s deal will significantly increase, reaching approximately seven times earnings before interest, taxes, depreciation, and amortization, once the deal is finalized. In contrast to Paramount’s estimate, this figure does not account for any synergy benefits; Moody’s acknowledged that the ratio might decrease subsequently with the application of free cash flow and the achievement of the majority of cost savings. According to sources, pro forma net leverage is projected to be approximately 5.5 times, and it anticipates that the Paramount family rating will be downgraded to junk. “While we think the potential for cost savings is significant, we also believe that they will take several years to realize and think that the rating agencies will be unwilling to give full credit,” analysts including Hunter Martin and Joshua Kramer wrote in a Dec. 8 note. Nonetheless, the arrangement presents certain financial benefits for Paramount. Lenders can earn lucrative banking fees of approximately 2.5 percent on typical LBOs; however, Paramount anticipates paying an amount that aligns more closely with an investment-grade deal. The bankers will not face any consequences, either: Even a 70-basis-point fee, which is typical for an investment-grade deal, would result in a substantial $378 million payday for them.
