Skydance Shares Slide as Bond Selloff Signals Doubts on $110B Paramount-Warner Deal

Skydance Corporation shares closed at $7.06 (£5.30) on 14 October, down 23.84% from the previous day's unadjusted closing price, as the stock began trading without warrant entitlement. Separately, weakening bond prices and ratings downgrades have drawn attention to the company's post-merger debt burden.

The acquisition of Warner Bros. Discovery closed on 6 October at an enterprise value of roughly $110 billion (£82.5 billion). Debtwire estimated Skydance's net debt at $84.3 billion (£63.23 billion) at closing, after deducting estimated cash of $5 billion (£3.75 billion).

Shares Fall After Warrant Distribution

Skydance distributed approximately 471 million warrants to eligible public Class B shareholders on 13 October. Each warrant gives its holder the right to buy a share at a specified exercise price.

The warrants began trading on 13 October, while the shares began trading without entitlement to the distribution the following day.

Skydance said the New York Stock Exchange adjusted the shares' reference price from approximately $9.27 (£6.95) to $9.07 (£6.80) to account for the warrant distribution. The shares subsequently closed at $7.06 (£5.30), with the reported 23.84% decline measured against the previous day's unadjusted closing price.

JPMorgan Flags Weak Bond Performance

Newly issued investment-grade corporate bonds underperformed JPMorgan's broader investment-grade index by 27 basis points over the 10 days to 8 October, according to a bank note reported by Bloomberg.

It was the weakest relative performance for new issues since April 2020, according to strategists led by Nathaniel Rosenbaum.

Excluding Skydance, the newly issued bonds would have outperformed the index by about four basis points over the same period. The comparison shows the influence of Skydance's bond losses on the wider new-issue market, rather than a direct increase in its borrowing costs.

Skydance's bonds carrying a 9.125% coupon and maturing in 2036 traded at about 91 cents on the dollar on 13 October, down from their issue price of 100 cents on 30 September. The coupon is the contractual interest rate, distinct from the yield investors receive when buying at a different price.

Debtwire also reported that the spread on Paramount Global's five-year credit default swaps widened to 577 basis points on 13 October from 268 basis points on 17 September. A broader North American high-yield credit index was broadly flat.

Credit default swaps are contracts used to hedge or take positions on credit risk. Debtwire said the widening reflected both increased default risk and lower expected recoveries on the underlying obligations.

Ratings Agencies Flag Leverage Risks

S&P Global Ratings cut Skydance's issuer rating to BB from BB+ on 24 September. Fitch Ratings also lowered its issuer rating to BB from BB+ around the acquisition's completion, citing higher leverage and integration risks.

Both issuer ratings are below investment grade. However, Fitch assigned a BBB− investment-grade rating to the company's first-lien secured debt, reflecting its different position in the debt structure.

Issuer ratings and ratings on individual bonds therefore describe different aspects of credit risk. Secured creditors can have stronger claims on assets than holders of debt ranking behind them.

The merger financing package totalled about $52 billion (£39 billion), including $30 billion (£22.5 billion) in US-dollar investment-grade bonds, $12.4 billion (£9.3 billion) in equivalent high-yield bonds and $9.46 billion (about £7.1 billion) in loans.

That financing package is separate from the combined company's total debt and its net debt after cash is deducted.

Analysts Question the Integration Plan

Skydance has targeted $6 billion (£4.5 billion) in run-rate merger synergies, meaning the annualised benefit once the savings are fully implemented.

Debtwire's base case assumes realised savings of $1.75 billion (£1.31 billion) in 2027, $3.75 billion (£2.81 billion) in 2028 and $5.1 billion (£3.83 billion) in 2029. These figures are estimates for the respective years, rather than cumulative savings or company guidance.

The projections assume continued growth in streaming and studios alongside declining earnings from traditional television. They exclude asset sales and equity issuance, and do not anticipate delivery of the full savings target before 2030.

The combined group includes Paramount Pictures, CBS, Warner Bros., HBO, CNN and Discovery's television assets, alongside Paramount+ and HBO Max.

Debtwire said its projected savings would leave the company short of management's leverage targets. Even its more optimistic scenario, which assumes the full savings target is achieved by 2029, puts leverage at about 3.1 times that year, above the 3-times target.