- Reports suggest Warner Bros Discovery and Paramount discussing tie-up
- Combined entity could have better chance against streaming rivals
- Both companies saddled with big debts and declining cable TV operations
Plans for a combination between two of Hollywood’s ‘Big Five’ studios – Warner Bros Discovery (WBD:NASDAQ) and Paramount Global (PARA:NASDAQ) – have received a lukewarm reaction from the market.
Reports suggest initial talks have taken place between the pair over a merger, with Warner Bros Discovery likely to be the dominant player in any such move.
Its shares slumped 5.7% to $11.66 on the speculation while Paramount Global slipped 2% to $15.50. Warner Bros has a market valuation nearly three times that of its peer at $28.4 billion.
Both companies carry pretty significant debt – by the reckoning of Bernstein analysts $14 billion for Paramount and for $43 billion for Warner Bros. This is 6.1 times and 4.1 times earnings respectively.
AIMING TO COMPETE IN STREAMING
Greater scale could allow both businesses to compete more successfully in the streaming space where their current Max and Paramount Plus platforms have struggled to gain much traction in a market heavily dominated by the likes of Netflix (NFLX:NASDAQ), Disney (DIS:NYSE) and Amazon (AMZN:NASDAQ).
If nothing else, it would give the companies a larger volume of exclusive content with which to attract subscribers.
At the latest count Netflix has 247.2 million global subscribers while Paramount Plus has 63.4 million and Warner Bros Discovery has 95 million.
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The two last remaining names from the birth of Hollywood in the 1920s, Paramount is controlled by billionaire Shari Redstone while Warner is helmed by David Zaslav.
The latter is probably further ahead in terms of cost cutting and getting debts under control but both have cable TV operations which are seeing an exodus of subscribers.
AJ Bell investment director Russ Mould commented: ‘Bigger isn’t always better and given both are burdened with linear cable TV networks which appear to be in structural decline there is a danger combining will just double the problems. No surprise then to see share prices in both companies trading lower in reaction to the speculation.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Tom Sieber) and the editor (James Crux) own shares in AJ Bell.
