Fitch puts Skydance's debt-to-EBITDA ratio at 7.8 times, against a 2 to 3 times norm

Skydance closed its $110 billion takeover of Warner Bros Discovery on 6 October, according to the Economic Times, and the combined company now carries nearly $80 billion in net debt. Its own plan targets a leverage ratio of 3 times, but not until 2029, TheWrap reported.

Fitch Ratings analyst Wunmi Adekanmbi told TheWrap the deleveraging "is not going to be organic". TheWrap reported that the debt load will weigh on all of the company's decision-making, including creative risk-taking.

Storyboard18 put the transaction at approximately $111 billion including the assumption of Warner Bros Discovery debt. Warner Bros Discovery shareholders received roughly $31 in cash per share at closing, and the shares ceased trading on Nasdaq.

Where the $6 billion is supposed to come from

Skydance has committed to at least $6 billion in run-rate synergies over three years, with 70% delivered within the first two years, according to TheWrap. Its public case is that the money comes from overlap rather than headcount. Board member and deal architect Gerry Cardinale has argued the majority of the savings would come from non-labour costs, including unifying technology systems across the direct-to-consumer businesses. David Ellison said after the closing that the savings would not primarily come from workforce reductions.

The wider plan, as reported by TheWrap, targets at least $12 billion in EBITDA, more than $30 billion in annual content investment and over $10 billion in free cash flow by 2030. Linear TV, the business under the most pressure, accounts for approximately two-thirds of the company's EBITDA.

Ellison has said the debt is manageable. "We absolutely have the ability to manage the debt and de-lever while investing for growth," he said at a media event last month, according to TheWrap.

The cuts already visible

Skydance offered buyouts to some employees and is moving to a five-day-a-week in-office policy, according to a memo reported by the Economic Times on 27 October. Qualifying employees were to be told the terms and given a window to decide on the one-time offer. "As we bring our teams together, we recognize that not everyone will see their future here, and we respect that," Ellison and co-CEO Ynon Kreiz said in that memo.

Storyboard18 reported on 8 October that layoffs would begin in India at top and senior management levels, citing a top source familiar with the developments. Executives from the former Warner Bros Discovery business were expected to bear the brunt. The day-one memo of 6 October from Ellison and Kreiz warned of "difficult decisions that affect our workforce" and did not disclose how many employees could be affected.

An August report commissioned by Los Angeles County estimated that around 4,500 direct film and television jobs in Los Angeles could be lost over the three-year integration. Counting indirect jobs, it put 10,360 job-years at risk. The report said the figures were not a layoff forecast and that the companies had not announced cuts of that scale.

Warner Bros India declined to comment when Storyboard18 asked.

What the analysts say

Moody's senior vice president Jason Cuomo told TheWrap the company needs to "either outperform or bridge the gap" between current projections and its committed levels. S&P Global Ratings analyst Naveen Sarma said Skydance is "trying to upgrade the plane while it's flying". Experts told TheWrap that more cost cutting, raising more equity or asset sales may be required to hit the targets. A Skydance spokesperson said the company has "significant scale and free cash flow generation" to support its priorities.

What happens next

Skydance reports third-quarter results on 9 November, with investors focused on its new strategy. The shares have fallen by about a third this year.