Paramount (PSKY.US) $110 Billion Acquisition Financing Delayed: Bond Issuance Postponed for Three Months, May Have to Pay $500 Million More in Annual Interest

According to Zhitong Finance APP, Paramount (PSKY.US) has been pitching financing bonds to investors for months for the acquisition of Warner Bros. Discovery (WBD.US), but as the negotiations have dragged on, financing costs have also risen.

This $110 billion acquisition deal is moving forward after overcoming legal obstacles. However, as growing global inflation concerns have driven up borrowing rates, issuing bonds this week instead of three months ago will result in the company shouldering hundreds of millions of dollars in additional annual interest. Multiple calculations show the extra annual interest burden could range from $250 million to over $500 million.

This is undoubtedly a tricky issue for a company that will ultimately be saddled with massive debt. According to CreditSights data, Paramount will issue about $42 billion in bonds and $9.5 billion in loans to finance the acquisition. After completion, the company will have over $87 billion in investment-grade and high-yield debt, making it one of the largest borrowers in Bloomberg's junk bond space.

To control debt, the merged entity will need to generate sufficient earnings, find significant cost savings, and may even need to sell assets to repay debt. CEO David Ellison plans to cut costs by $6 billion annually, with Paramount aiming to reach this target within three years. However, the company relies heavily on its traditional television network business, making significant revenue growth potentially difficult.

"If overall debt costs rise, it could depress cash flow," said industry research analyst Stephen Flynn. "This is a problem, and there are also other issues that could further complicate the planned deleveraging."

A Paramount spokesperson declined to comment. Bank of America and Apollo Global Management also declined to comment, and a representative from Citi did not immediately respond to a request for comment. These three firms are the main coordinators for this debt transaction.

Not all investors believe Paramount can achieve its goals. According to sources, some investors dropped out of the debt deal due to execution risks. When Warner acquired Discovery in 2022, a similar approach was taken, resulting in a downgrade to junk status last year and talks of a potential business split, further complicating the situation.

M&A Track Record Dismal

"The track record of media mega-mergers is terrible," wrote CreditSights analysts Hunter Martin and Brian McKenna. The two analysts believe the merger makes strategic sense, "but we are concerned about the overall debt burden and execution risks," especially Paramount’s "very aggressive" targets on cost cutting and synergies.

On Tuesday, Paramount launched its senior bond issuance, a class of debt with first claim on company assets in the event of distress. The company aims to issue about $30 billion of these bonds. Additionally, about $12 billion in second-lien junk bonds and $9.5 billion in loans will be issued.

According to sources, the final financing cost depends on the outcome of the issuance. Compared to expectations when the deal was about to be completed in May, the company’s annual interest expense may increase by up to $500 million. They estimate a premium of about 0.5 to 1 percentage point above the rate Paramount should have paid for bonds issued mid-year. Flynn notes the extra interest cost may be higher, at 100 to 150 basis points above Paramount’s previous rate, or approximately $450 million to over $600 million a year.

Had the financing been finalized earlier, interest costs could have been lower, but the original plan was disrupted by legal and union challenges to the deal, which have now been resolved.

Meanwhile, the 10-year US Treasury yield has surged to its highest level since 2007 over the past three months. Credit spreads—measuring the extra return investors demand over Treasuries for corporate bonds—have also widened, especially for junk-rated securities. Moody’s expects Paramount’s bonds to be rated in this range, including the new first-lien notes. However, the latter secured investment-grade ratings from Fitch Ratings and S&P Global Ratings.

Against this backdrop, Paramount’s Ellison hosted a call with investors on Monday. People familiar with the matter said management received many questions about cost synergy plans.

According to informed sources, some investors expressed skepticism about whether these targets could be met and chose not to participate in the bond issuance, but the pricing of the discussed deals is attractive enough for some to outweigh these doubts.

On Monday, Moody’s rated the new first-lien and second-lien notes as speculative grade. Moody’s rating logic is based on Paramount fulfilling cost synergies, repaying debt, and asset sales, believing these steps could enable the company to significantly deleverage in the early years. The “deep financial resources of the Ellison family and their public commitment to reducing debt” were cited as supporting factors.

“High leverage, highly concentrated equity, plans that weaken the recovery prospects for existing senior unsecured bondholders, and management’s mixed track record on delivering financial targets reflect significant governance risks,” Moody’s said.