Warner Bros Discovery, Paramount merger face challenges of debt, TV asset decline

Warner Bros Discovery and Paramount Global are likely to be “worse off” together as a merger will leave them billions deeper in debt and saddled with dying traditional television assets, Wall Street analysts said on Thursday.

Shares of both companies extended losses after dropping sharply a day earlier on news that their CEOs had met to discuss a potential deal.

The deal talks follow months of industry speculation about consolidation among companies that lack the scale to compete with streaming pioneer Netflix (NFLX.O) while steadily losing customers in the traditional TV business to cord-cutting.

“It (the potential deal) looks like a play for survival at all costs. Both businesses are heavily indebted and it is likely further debt will need to be issued to make this deal possible,” said Quilter Cheviot technology analyst Ben Barringer.

The merger will create what analysts said would be the largest movie studio in Hollywood and a streaming business with the third-highest U.S. subscribers. The firms together will also account for up to 40% of total time viewed on traditional TV.

But the ongoing decline in the TV business – their main profit engine – is also expected to make it harder for the firms to deal with the extra debt that would accompany the merger.

Warner Bros Discovery has tried to prop up its cash flow and aggressively lower costs over the past few months, but it still has about $45 billion in debt. Paramount has about $15 billion.

Risky Timing
Several analysts questioned the timing of the deal talks as the upcoming U.S. Presidential election would ramp up the regulatory uncertainty facing big mergers. Reuters