"Media Mergers with the Highest Leverage in History" Face Short Selling! Arete: After Paramount (PSKY.US) merges with Warner (WBD.US), it may struggle to handle the massive debt, with the target price slashed to $2.

According to Arete Research analysis, Paramount (PSKY.US) management may lack sufficient experience to handle the massive debt resulting from its merger with Warner Bros. Discovery (WBD.US). The parent company, which owns CBS and other media businesses, announced at the end of February that it would acquire Warner Bros. for $110 billion. Despite facing some regulatory hurdles, the deal is still expected to be completed in September of this year. Arete analyst Pierre-Marie d'Ornano stated in a report to clients that once the deal is finalized, the merged media giant will take on a total debt of up to $860 billion. As a result, Arete downgraded Paramount's stock rating from "neutral" to "sell" and significantly reduced the target price to $2 - the lowest forecast among all Wall Street analysts covering the stock. This target price implies a downside potential of approximately 79% from Thursday's closing price. Arete explained in the report on Thursday that historically, "large media mergers have always been difficult." They described the Paramount-Warner deal as "the most leveraged media merger to date," and questioned whether the management has the ability to navigate such a highly leveraged balance sheet. The $2 target price is 71% lower than the second lowest target price of $7 given by Wells Fargo & Company analyst Steven Cahall. In contrast, Benchmark Co. and Morgan Stanley are the only two institutions with a "buy" rating, with target prices of $19 and $14 respectively. The average target price from the 15 analysts tracking the stock is $11.40, suggesting a potential increase of about 22% in the next 12 months. In response to external criticisms, a Paramount spokesperson stated in an email declaration, "Paramount's management team has developed a clear and rigorous plan for managing its balance sheet, and we are ahead of our schedule. Our capital allocation priority has always been consistent: investing in long-term growth, restoring investment-grade credit metrics, and returning excess cash to shareholders after achieving our goals." On Thursday, Paramount's stock price fell 4.3% to $9.33, marking the fourth consecutive trading day of decline, with an intraday decline reaching 9.3%. The stock has fallen by over 30% year-to-date. Meanwhile, Pentwater Capital Management CEO Matthew Halbower stated in an email that the company holds about $1.3 billion of Warner Bros. stock and around $40 million of Paramount stock. He noted that after the deal is completed, "several experienced institutional investors will inject a total of $47 billion in equity capital into Paramount at a price of $12 to $16 per share." He added, "Research analysts find it difficult to argue that Paramount's stock value will be lower than what these institutional investors are willing to pay." However, d'Ornano disagrees. He wrote in the report, "The history of large media mergers is dismal, with frequent underperformance attributed mainly to the ongoing decline of traditional TV businesses, overly optimistic expectations for streaming businesses, and unwieldy capital structures." He believes that this acquisition "faces similar challenges, but with higher debt costs and more stringent maintenance covenants." d'Ornano further pointed out, "In our view, high leverage on the balance sheet requires specific management thinking and skills, which do not seem evident in the Paramount team." He also mentioned that this ability is more commonly seen in companies under the control of cable television billionaire John Malone, while Paramount's current leader is David Ellison. Although the U.S. Department of Justice concluded its antitrust investigation into this Hollywood mega-deal last month, there are still some hurdles to clear. Top lawyers from multiple states are drafting legal challenges to pave the way for antitrust lawsuits, with the attorney general of Oregon calling for a 60-day postponement of the completion date. Additionally, the UK government has also expressed concerns about the deal.