Bottleneck Capital
Long/Short Investor, Technology, Media & Telecom
Paramount Skydance and Warner Bros. Discovery slipped as if California Attorney General Rob Bonta's cancelled Monday settlement meeting were bad news, but it looks like a state raising its price. The DGA and IATSE publicly urged him weeks ago to settle with conditions because the delay itself hurts their members, so the pressure on him runs one way, and cancelling one sitdown after the other side plays games fits a negotiation. x.com x.comÂ
Paramount Skydance has 50-100% upside if its Warner Bros. Discovery merger looks likely to go through, odds that are only beginning to be priced in. At a market cap of about $8-9 billion, the stock still sits in bankruptcy territory, because a failed merger would essentially bankrupt Paramount, which cannot survive long on its debt. Big money will be made or lost on it, most likely made. x.comÂ
Warner Bros. Discovery's merger-arbitrage spread was and remains too tight for the risks. A 9% discount requires Paramount Skydance's equity backstop to be ironclad, credit markets not to break and Oracle to stay solvent. States may also try to block the Paramount Skydance deal, and a "non-MAC MAC" could still threaten it. x.com x.comÂ
Paramount Skydance's debt levels are unsustainable in a rapidly changing entertainment industry. Its cost of capital is too high and the numbers it assumes are not attainable, making it the entertainment version of the Titanic. Bloomberg, quoted by @carlquintanilla, reports angry calls from money managers to the banks that underwrote the debt, with paper losses on the investment-grade notes alone topping $100 million. x.comÂ
Warner Bros. Discovery is worth about $10 a share, far below the $31 Paramount Skydance is paying for it. Its management will profit handsomely from that overpayment, but the deal will lead to more economic destruction in Hollywood. x.comÂ
