Paramount Skydance’s David Ellison has prevailed in his dogged pursuit of Warner Bros. Discovery: He’s won the deal. Now comes the hard part: making the economics of the combined company work, given an extremely high debt load of the combined media company.
Following the announcement of Paramount’s settlement with the 12 Democratic state attorneys general resolving their antitrust case to block the WBD deal, the merger is set to close with about two weeks, Ellison wrote in a staff memo Monday. The outcome is “a clear positive for the pro-forma PSKY + WBD,” Morgan Stanley analysts Sean Diffley and Daniel Duran said in a Sept. 22 research note, especially in the context of “the wide range of potential outcomes and fears in the marketplace.” Under the terms of the settlement, Paramount is not being forced to make any divestitures out of the gate, with minimal “behavioral commitments” — including the release of at least 30 films per year by Paramount-Warner Bros. with a 45-day theatrical window, something Ellison had already promised. They specifically highlighted its leg up in the streaming wars: The combination of HBO Max and Paramount+ puts it on a path to achieve more than 240 million subscribers by 2030, according to the Morgan Stanley analysts.
They estimate there’s a 28% overlap in HBO Max/Paramount+ subscribers and “while there will inevitably some churn out of the gate,” about 23% of consumers Morgan Stanley surveyed who didn’t subscribe to either service said they would likely add it as an additional streaming service (and 17% said it would replace another service). Ellison has said the plan is to combine HBO Max and Paramount+ into a consolidated streaming platform, but details on the timing and what that will look like haven’t been divulged to this point. That said, Paramount-Warner Bros. will have to wrestle with a staggering amount of debt accrued in swinging the $110 billion merger, along with debt from preceding deals.
At the end of 2026, the combined company’s net debt will be $77.2 billion, the analysts estimate. That will drop only slightly, to $75.1 billion in 2027 — with interest expense coming in at $6.37 billion next year, per their forecast. How will it pay that down?
Paramount-WB will be able to “de-lever” the mountain of debt over the next three years, according to the Morgan Stanley analysts. They expressed confidence in the merged company saving more than $6 billion (representing 11% of operating expenses) through the consolidation of tech stacks, procurement efficiencies, “rationalizing real estate” — and layoffs in redundant corporate overhead and marketing functions. That should help boost the merged Paramount-Warner Bros.’s free cash flow from $2.16 billion in 2017 to $8.12 billion in 2030, the analysts forecast.
As such, the company should be able to reduce its leverage of net debt to adjusted EBITDA from a ratio of 6-7x at deal close to 3-4x within three years, per the Morgan Stanley analysis. Discovery] was significantly greater and we believe scale and IP are important in an ever increasingly fragmented media ecosystem,” Diffley and Duran wrote. They noted the new company will be the home to franchises like Game of Thrones, Lord of the Rings, Harry Potter and the DC Universe.
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