Paramount's credit rating lowered to 'junk' due to concerns about its debt

Paramount's Acquisition of Warner Bros. Discovery Raises Debt Concerns

Paramount Pictures studio lot at 5555 Melrose Ave., Hollywood, June 5, 2024. (Brian van der Brug/Los Angeles Times)

After Paramount Skydance secured a surprise win to acquire Warner Bros. Discovery, the company now faces a new challenge: managing the enormous debt that comes with the deal.

Both Fitch Ratings and S&P Global Ratings have downgraded Paramount's credit status, citing concerns about the financial burden the company will inherit—at least $79 billion—once it takes over Warner Bros. Discovery. This acquisition will bring major networks like CNN, HBO, TBS, and Cartoon Network under Paramount's umbrella.

Fitch recently placed Paramount on a "negative" watch list and lowered its rating to BB+, moving the company into "junk" bond territory. The agency pointed to the uncertainty surrounding Paramount's $110 billion agreement to purchase Warner Bros. Discovery, which received board approval from both companies last Friday.

S&P Global Ratings echoed Fitch's concerns with a similar downgrade.

Financing the Mega-Deal

To fund the acquisition, Larry Ellison—David Ellison's billionaire father—has pledged to back $45.7 billion in equity. Meanwhile, Bank of America, Citibank, and Apollo Global have committed over $54 billion in debt financing for Paramount.

Fitch highlighted several risks, including the heavy reliance on debt, expectations of significantly increased leverage, and a lack of clarity about the company's financial strategy after the merger.

Clearing the Path for the Merger

Last week, Paramount paid Netflix a $2.8 billion "termination fee" to formally end Netflix's pursuit of Warner Bros. This payment allowed Warner Bros. and Paramount to finalize their merger agreement.

Paramount aims to complete the merger by the end of September, pending approval from Warner Bros. Discovery shareholders and regulatory bodies, including those in the European Union.

Executives have acknowledged that the combined company will carry $79 billion in debt—much higher than the $55 billion Warner Bros. Discovery had after its 2022 separation from AT&T, which led to significant cost-cutting and layoffs.

Warner Bros. Discovery still holds $33.5 billion in debt, which will transfer to Paramount. Paramount also plans to restructure approximately $15 billion of Warner Bros. Discovery's existing obligations.

Paramount CEO David Ellison at a 2024 Netflix premiere. (Evan Agostini/Invision/AP)

Cost-Cutting and Industry Impact

Paramount has told investors it expects to achieve over $6 billion in cost reductions or "synergies" within three years—a target that has raised concerns among entertainment workers, especially in Los Angeles.

Some industry leaders, including Netflix Co-CEO Ted Sarandos, have speculated that Paramount may need to find as much as $10 billion—or even $16 billion—in additional savings to make the numbers work.

Amid widespread anxiety about further layoffs, Paramount COO Andrew Gordon has sought to reassure employees, stating that the company will look for savings beyond workforce reductions to preserve its film and television output.

Gordon, who joined Paramount last August as part of the Ellison acquisition, previously worked at Goldman Sachs and RedBird Capital Partners, a Paramount investor.

During a recent call with analysts, Gordon explained that Paramount would seek efficiencies by merging technology platforms and cloud services for its streaming brands, such as Paramount+ and HBO Max. The company will also target reductions in corporate overhead, marketing, procurement, business services, and real estate.

It remains uncertain whether Paramount will sell its historic Melrose Avenue lot or consolidate operations at the Warner Bros. and Paramount campuses in Burbank and Hollywood. Employees are currently spread across the region, with HBO based in Culver City, CBS stations in Studio City, and other teams in Hollywood near the Paramount lot.

Challenges and Market Response

Standard & Poors noted that merging PSKY (Paramount Skydance) and WBD (Warner Bros. Discovery) could result in a much stronger company, but the process is complicated by the fact that Skydance, the smallest of the three entities involved, will be in control.

Skydance Media, led by David Ellison, was the driving force behind the Paramount acquisition, forming the new Paramount Skydance entity. The final name for the merged company has not yet been revealed.

Following the news, Paramount's stock dropped over 6% to $12.45, while Warner Bros. Discovery shares fell 1% to $28.20. Netflix shares edged up slightly to close at $97.70.

This article is adapted from a report originally published by the Los Angeles Times.