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Written by Jeremy Bowman for The Motley Fool
After a settlement with several state AG's, the Paramount-WBD merger looks set to close soon.
The settlement imposes a number of requirements on the new company.
Paramount will have roughly $80 billion in debt following the merger.
2026 has been a wild year for Paramount Skydance (NASDAQ: PSKY). After closing its merger with Skydance last August, Paramount, under new CEO David Ellison, aggressively pursued Warner Bros. Discovery (Nasdaq: WBD) and, in the end, outbid Netflix for the Hollywood conglomerate.
The merger between two of Hollywood's biggest studios was met with outcries from industry creators and regulatory pushback. However, after Paramount agreed to a settlement with several state attorneys general who had sued to block the merger, the deal now looks set to go through, pending a last-minute intervention by a judge on Thursday.
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Investors aren't cheering, though. The stock is down 26% year-to-date, and it actually fell earlier this week on news of the settlement, showing investors are skeptical that it's the right move for the company, as the deal imposes significant requirements, including a minimum number of theatrical releases, a minimum commitment of domestic production spending, and that the company must keep both the Paramount and WBD Hollywood studio lots open.
Paramount has just an $11 billion market cap right now, but the company is expected to have around $80 billion in debt after the deal closes.
Considering where current interest rates are, that will cost the company at least $4 billion in interest expense annually, and likely closer to $6 or $7 billion. At this point, Paramount is only modestly profitable, with an operating income of $1.1 billion in the first half of the year.
Warner Bros. Discovery has struggled mightily since its formation, and the company just reported a quarter with an 11% decline in revenue and operating income of $237 million, which was completely erased by $511 million in interest expense. WBD currently has $32 billion in debt, which will get rolled into the combined company's expected debt balance of around $80 billion.
Overall, while the new Paramount-WBD will have a wealth of content assets to work with, legacy media companies have struggled with the transition to streaming, which has eroded profits in cable and at the box office. So far, neither of these companies has figured out a model for profitable growth in the streaming era.
Perhaps, as a combined unit, the new company will be strong enough to deliver that for investors, but I think it's more likely it won't, especially given the weight of $80 billion in debt.
Paramount is overpaying for WBD, and the combination is unlikely to end well.
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Jeremy Bowman has positions in Netflix. The Motley Fool has positions in and recommends Netflix and Warner Bros. Discovery. The Motley Fool has a disclosure policy.