Paramount, Warner Brothers Merger Risky With $55 Billion Price Growing

I’m getting a lot of questions about a major consolidation in the entertainment industry. The new Paramount Skydance PSKY entity is the result of August's $8 billion merger between Skydance Media and Paramount Global. 

Paramount Skydance is controlled by David Ellison, son of Oracle ORCL co-founder Larry Ellison. Oracle shares recently skyrocketed, briefly making the senior Ellison the world's richest man.

We recently explained why the Austin, Texas-based software giant is still a great stock to own. Oracle is also rumored to be part of a group that may gain control of social media platform TikTok. 

Skydance has barely digested Paramount, which was apparently just an appetizer. The entree is a much larger target, Warner Brothers Discovery WBD.

Warner Brothers shares have jumped by about 50% over the past week, and now boast a market capitalization of $45 billion. That’s approximately the same amount as the rumored Paramount Skydance bid. While an offer has yet to materialize, rumor has it that it could be an all cash bid.

While it’s not unusual for the shares of a target of an acquisition to skyrocket in this manner, it is unusual to see shares of the acquiring company make a similar move. Paramount Skydance shares have gained 31% in just the past month.

Obviously, the market likes this merger. There are clear synergies and promotional opportunities. Imagine one company controlling Warner Brothers Studios, HBO Max and CBS, and numerous other production facilities and outlets. That same entity would also own "South Park," "Mission Impossible," "Star Trek," SpongeBob, Bugs Bunny and dozens of other properties and franchises.

One goal would be to use past and future iterations of its properties to create a streaming service that could rival major players like Netflix NFLX, Amazon Prime Video AMZN, Disney Plus DIS and Apple TV+ AAPL. 

If the Warner Brothers merger goes through, Paramount Skydance would own HBO Max (125 million subscribers) and Paramount Plus (77 million subscribers). The 200 million-plus subscribers would put the new company into a position to challenge Netflix, which has over 300 million subscribers.

Warner Brothers and other players understand how valuable and potentially dominant this newly combined entity could become. Because of this, I expect that by the time negotiations are complete, Paramount Skydance will ultimately pay a premium above $55 billion for Warner Brothers.

What's the downside? If a deal can’t be reached, I’d expect shares of both Paramount Skydance and Warner Brothers Discovery to fall back to earth. There is great opportunity in the consolidation of the entertainment industry, but at current prices, a Paramount Skydance/Warner Brothers Discovery merger is a risky proposition. 

At the time of publication, Ponsi was long AAPL, ORCL and DIS.