Til debt do us part

After a yearlong courtship complete with lawsuits, rival suitors, and financing drama, Paramount and Warner Bros. Discovery finally tied the knot today, closing their roughly $110 billion merger and creating a new media mega-giant named Skydance. Shares will trade on the NYSE under the ticker SKYD.

The combination puts a head-spinning who’s who of Hollywood under one roof, bringing together streaming services and TV networks like HBO, CBS, CNN, Paramount+, and HBO Max, along with franchises ranging from Harry Potter to Mission: Impossible.

The wedding bill

But married life is no picnic: Skydance now has to prove that the empire it just built is financially sustainable, starting with a balance sheet carrying roughly $80 billion of debt.

Paramount raised about $52 billion of debt to fund the acquisition, including investment-grade bonds, junk bonds, and loans, and it did so at an especially painful time for borrowers. The longest-dated bonds were issued at yields approaching 9%, while the broader surge in Treasury yields has pushed borrowing costs to levels not seen in decades.

To ease some of that pressure, Skydance is targeting $6 billion in annual cost savings, bringing in former Mattel CEO Ynon Kreiz as co-CEO to focus on combining overlapping operations and streaming businesses, and aiming to bring leverage below four times annual EBITDA by 2028.

Skip the honeymoon fund

That calls into question the investment case for the newly combined company, and Wall Street is far from convinced.

Wolfe Research maintained an Underperform rating, calling the path ahead an “uphill climb” as leverage approaches 7x EBITDA. Citizens, meanwhile, reiterated an Outperform rating and argued that combining Paramount and Warner Bros. creates a deep enough library of content and intellectual property to become a more formidable streaming destination. For now, though, skepticism still dominates: Only three of the 25 analysts tracked by Bloomberg rate the stock Buy or equivalent, while 10 recommend selling it.

Investors looking for less complicated media bets may instead turn to more established rivals. Disney shares are down 8.57% this year, but Wolfe Research sees “very good risk/reward” in the stock, while Netflix, down 26.74% this year, picked up another vote of confidence from TD Cowen yesterday. The firm reiterated its Buy rating, arguing that Netflix remains positioned to deliver double-digit revenue growth alongside expanding margins and free cash flow over the next several years.

For Skydance, it’s certainly been quite the rocky start. But if the pair can make it through thick and thin, there may still be a happily ever after.—SY