Paramount wraps up $52bn debt sale to fund Warner buyout

Paramount Skydance Corp has informed potential lenders that it anticipates achieving over $6 billion in annual cost savings within three years of completing the Warner Bros. Discovery acquisition. These savings are a key focus for managing the combined company's substantial debt levels. The company projects that 30% of the savings will be realized in the first year following the merger, with that percentage increasing to approximately 70% in the second year and reaching full capacity by the third year, as disclosed to eligible debt holders.

This timeline provides a clearer indication of how swiftly management expects the transaction's economics to result in reduced leverage. Simultaneously, Paramount is engaged in one of the largest acquisition-financing operations in the corporate debt market. On Monday, the company announced plans to issue approximately $44.4 billion in senior secured notes, consisting of first-lien securities denominated in US dollars and second-lien bonds denominated in both dollars and euros.

These funds, coupled with cash, term loans, and previously arranged equity financing, are intended to finance the Warner acquisition and refinance specified debt. The bond issuance follows Paramount's recent announcement of a proposed $7.5 billion senior secured incremental term loan. Earlier regulatory disclosures revealed the company's intention to raise $39.5 billion in first-lien secured debt and $12.4 billion in second-lien secured debt to replace existing bridge commitments, although the final amounts and structure may vary based on market conditions.

The acquisition of Warner Bros. Discovery was agreed upon in February at a price of $31 per share, valuing the target at $81 billion in equity terms and around $110 billion including debt. Paramount aims to merge Paramount Pictures, CBS, and Paramount+ with Warner Bros., HBO, CNN, and other Warner assets, forming a larger media conglomerate.

The savings strategy encompasses technology integration, corporate efficiencies, procurement, property consolidation, and overall operational streamlining. Paramount intends to standardize the combined business on common enterprise systems and merge streaming technology, areas where duplicative infrastructure presents opportunities for cost reductions.

The pace of these savings is crucial, as leverage is anticipated to increase significantly upon the deal's completion. Paramount has assured credit rating agencies that it and its controlling shareholder are dedicated to reducing net debt to adjusted earnings before interest, tax, depreciation, and amortization below 3.75 times by fiscal 2028 and below three times by fiscal 2029.

However, these ratings agencies have cautioned about execution risks. S&P Global Ratings recently downgraded Paramount's issuer credit rating to BB from BB+, asserting that leverage will remain elevated for the next two years but should improve post-2028 as synergies are realized and related restructuring costs decline. S&P also assigned a BBB- rating to the proposed first-lien secured notes and a BB rating to the second-lien notes, citing the Ellison family's commitment to meeting the deleveraging targets while acknowledging that integration challenges, deteriorating structural pressures on traditional media, or adverse economic conditions could impede debt reduction.

The financing is taking place amidst challenging conditions for long-term borrowing costs. US Treasury yields have surged, elevating the base rate against which Paramount's new securities will be priced and heightening scrutiny of the cash savings supporting its leverage projections. The scale of the offering necessitates investors to manage a substantial amount of media-sector debt across investment-grade and speculative-grade tranches.

Initially, Paramount backed the acquisition with $47 billion in equity, provided by the Ellison family and RedBird Capital Partners, alongside committed debt financing. When announcing the agreement, the company stated that, after accounting for all synergies, net debt to EBITDA at closing would be approximately 4.3 times, with a trajectory towards investment-grade credit metrics within three years.