Warner Bros/Paramount: bloated structures should curb ambitions

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The allure of the streaming entertainment era is the opportunity to consume shows and music à la carte. Media mergers and acquisitions should proceed similarly. Earlier this week, the chief executive of Warner Brothers Discovery and Paramount started discussions about a possible deal.

Both companies have done multibillion-dollar blockbuster deals in recent years. But instead of creating juggernauts, they have produced Frankenstein monsters. While both struggle under heavy debt loads, Paramount is the more desperate. It has interesting assets, such as the Paramount film studio and sports rights on its CBS network. But a buyer would be foolish to pay a premium price for the group, given regulatory and integration challenges. 

The paradox for entertainment conglomerates is that their profitable businesses — pay and broadcast TV — are fading quickly. Therefore these are not given much value. Streaming, once prized for growth, has so far failed to deliver scale and economic returns.

When Paramount was created by reunifying CBS and Viacom four years ago, the combined company generated $6bn in operating profits. In 2023, Paramount will hit half that, a fall blamed largely on losses in streaming. Its market capitalisation is down to $10bn, against $17bn in total debt.

The company’s controlling shareholder, the Redstone family, has its own issues. The Redstone investment vehicle owns 77 per cent voting control of Paramount and about a tenth of the economic interests. Earlier this year, it accepted an investment from a merchant bank to pay off some of its debts. 

Meanwhile, Warner is still digesting the acquisition of Warner Brothers from two years ago. This has disappointed on savings and profits. Warner’s shares are since down more than half.

Media moguls rarely grasp humility. A bidding war may well erupt for Paramount. Brand-name assets remain few and far between. But capital structures born in a different era of valuations should force some modesty this time. 

A deal with Warner would most likely be an all-stock affair. Paramount trades at an enterprise value/ebitda multiple of 11 times (assuming its debt is worth 100 cents on the dollar). Warner gets just 7 times. Buying Paramount as a single enterprise will prove expensive for a bidder, given the debt. The muddled structure warrants a less ambitious strategy of buying it in parts.