Paramount Skydance completes $110 billion Warner Bros Discovery takeover

A $52 billion package, priced at a premium

Banks wrapped up syndication of roughly $52 billion of debt, the company sold $30 billion of US dollar investment-grade bonds, $12.4 billion-equivalent of junk bonds and $9.46 billion of loans, according to people familiar with the matter. It was raised in a single week. Bloomberg ranks it among the largest debt financings in recent history.

The price was steep for debt rated investment grade. The longest-dated blue-chip note, maturing in 2066, will pay investors a yield of almost 9%. Paramount priced $5.25 billion of 10-year investment-grade bonds at 262.5 basis points over the benchmark Treasury. With the 10-year Treasury yield at 5.3%, that worked out at roughly 7.925%, according to Bloomberg data cited by MarketWatch. Three of the investment-grade notes will yield more than 8%. Just two US investment-grade notes were issued this year with such yields, according to Bloomberg-compiled data.

The junk tranche carried $11.4 billion of US dollar bonds in three parts plus a €885 million euro note due in five years. A 10-year dollar note was issued at about 9.13%, and the five-year euro note priced at 7%.

Demand was heavy, if short of this year's norm. Investors placed more than $109 billion of orders for the investment-grade sale, or 3.6 times the $30 billion on offer. That compares with an average of about four times for comparable sales this year, according to Bloomberg data. The high-grade slice would be the fifth-largest US sale of its kind on record. The junk bonds drew more than $23 billion of orders for $12.4 billion, the biggest junk sale Bloomberg has ever seen.

The investment-grade portion was split into eight US dollar tranches. Maturities ran from two to 40 years, and Paramount aimed to raise about $32 billion from it. Apollo Global Management, Bank of America and Citigroup led the offering.

The delay premium

The financing was meant to land around midyear. Bank of America and Citigroup opened investor calls for more than $44 billion of bonds in dollars and euros, the main slice of the package.

Lawsuits by 12 state attorneys general and the Writers Guild of America had held the deal up until settlements cleared the way. Waiting cost money. Borrowing now rather than three months earlier will cost Paramount hundreds of millions of dollars a year in extra interest, Moneyweb reported. Inflation fears had lifted rates during the wait. Treasury yields had pushed to multi-decade highs when the deal launched. Many issuers that were eyeing high-grade offerings chose to wait. Some of it was clawed back during the sale. Chief financial officer Dennis Cinelli said spread tightening saved roughly $200 million a year in interest, Bloomberg reported.

The backdrop stayed unhelpful. The US government was paying more than 5% to borrow for 30 years, the most since 2004. The 2066 Paramount note still priced at 8.90%.

Paramount also changed the structure mid-sale. It pulled an eight-year euro-denominated junk bond and cut the investment-grade sale by $2 billion. The proceeds moved into loans, taking the US dollar loan to $8.5 billion from $6.5 billion. The merger agreement required a $7 million daily payment to Warner Bros shareholders if the deal did not close before October. The eventual payment was about $41.9 million, according to a regulatory filing cited by Reuters.

Debt burden and the savings test

The combined company starts with almost $80 billion of debt. Moody's Ratings said the Warner purchase would add more than $30 billion to Paramount's borrowings and push debt to roughly seven times a measure of earnings.

"Credit metrics at closing will therefore resemble those of highly speculative issuers with very low single-B ratings," Moody's wrote in a note to clients. Moody's also flagged governance concerns. It listed high debt, concentrated ownership, a plan to put new debt ahead of existing senior unsecured bondholders, and uneven achievement of financial targets. S&P Global Ratings assigned a BBB- rating to the first-lien debt. It cited the Ellison family's pledge to cut debt to 3.75 times by 2028 and to three times in 2029.

The assets now under that debt include Harry Potter, DC Studios, CBS, CNN, TNT, Paramount+ and HBO Max. Equity holders are carrying the risk. Paramount Skydance stock traded at $9.97 on 29 September, down 3% and 25% below its year-start price. Warner Bros Discovery sat at $30.86, up 7% year to date. Around 1,000 investors placed orders for the debt, and prices of some newly issued paper fell after the sale.

What happens next

Warner Bros shares stopped trading on Nasdaq. The combined company now trades on the New York Stock Exchange under the ticker SKYD. The company's biggest test, according to Outlook Business, is generating enough savings and cash flow to reduce debt.

Paramount has set a target of more than $6 billion in annual cost savings within three years of the merger. S&P's rating assumes debt falls to 3.75 times by 2028 and three times in 2029.