Paramount and Warner Bros: streaming heavyweight or big loser? (NASDAQ:PARA)

Gareth Cattermole

Reports of a possible deal between Warner Bros. Discovery (NASDAQ:WBD) and Paramount Global (NASDAQ:PARA) (NASDAQ:PARAA) brought mixed reviews from Wall Street analysts.

Some are doubtful it can pass regulatory muster in Washington D.C., while others see the U.S. government looking approvingly upon a competitor to Netflix (NFLX) and Disney (DIS).

Talks between the media giants are informal and preliminary according to various news reports, and several possibilities appear to be in play.

Paramount controlling shareholder Shari Redstone has also held talks about the sale of the company’s movie studio and other assets to Skydance, whose holders include RedBird Capital and David Ellison, the son of billionaire Larry Ellison. Skydance, which produced the Paramount release Top Gun: Maverick, has emerged as a leading candidate to take over Redstone’s National Amusements, which has a controlling stake in Paramount.

Bloomberg also reported on Wednesday that Paramount is in talks to sell Black Entertainment Television to a management-led investor group for about $2B.

Warner Bros. Discovery, under the terms of its Reverse Morris Trust deal that led to Discovery and WarnerMedia combining, are unable to execute on any deal until April.

Shares of Warner Bros. Discovery fell 5% on Thursday, while Paramount was off around 1%.

Barclays

Barclays has one pressing concern on a potential deal: does it really solve any problem?

While a deal could buy time via cost synergies and give Warner Bros. management a chance to run a bigger portfolio (and monetize Paramount’s assets to delever the balance sheet), the firm’s analysts don’t see a radical transformation happening.

“Fundamentally, combining two of the most challenged assets across legacy media is unlikely to somehow transform the combination into a better company,” analysts led by Kannan Venkateshwar wrote in a report. The bank noted “the combination of Warner Media and Discovery, despite billions in synergies, has resulted in cash flow actually going down and EBITDA remaining unchanged.”

David Zaslav and his team “clearly misjudged” what they were getting from AT&T in Warner Media and haven’t a good track record with respect to deals, the analysts said.

J.P. Morgan

In a streaming world, companies need massive scale to keep customers paying rather than bouncing services from month to month, J.P. Morgan said.

Netflix has the scale and Disney can get there.

The rest “simply don’t have enough content to get and keep customers, and will need additional scale and the commensurate cost savings to survive in the long term,” analysts led by Philip Cusik wrote in a note.

“Though that Warner [and] Paramount would be received poorly by investors, regardless of synergies, due to the high remaining linear exposure, long regulatory review process, and high leverage,” the analysts wrote.

“Having watched for nearly 20 years mergers in the communications space of declining revenue businesses that are intent on cost savings to survive, we are not hopeful that investors will get excited about shares of media companies just because of the potential synergies.”

TD Cowen

A merger would face “very tough antitrust scrutiny from the Biden Administration, including around increased content leverage over pay TV providers and writers/unions,” TD Cowen’s Paul Gallant wrote in a note.

Gallant said the Biden administration has been “extremely supportive” of labor unions and it might view blocking the deal “as politically attractive” ahead of next year’s presidential elections.

A combination, however, would create a “pro-competition counterweight” to Netflix, Disney and Amazon (AMZN), which could appeal to regulators.

Needham

Needham analysts Laura Martin and Dan Medina said the streaming assets of Paramount and Warner Bros. are sub-scale, but combined, their bundle would be one of the largest.

“We believe a merger between WBD and PARA would maximize value for both,” the analysts said.

Contrary to other banks, Needham said its contacts in D.C. believe that Warner Bros. Discovery would be able to get regulatory approval for a deal to buy Paramount, “whereas [Apple or Amazon] can not.”

Together the companies would represent the largest share of cable channel viewing plus they would own broadcaster CBS, allowing them to negotiate better with distributors like Comcast, Verizon (VZ) and AT&T (T).