$110B Valuation is a Joke, but the Lawsuit is the Real Killer

As an investor who reviews 500 projects a year, I'm used to finding stories in data and risks in stories. But the deal of Paramount Skydance acquiring Warner Bros. Discovery (WBD) made me feel for the first time that behind the $110 billion number lies a logical flaw more fatal than any valuation model.

The transaction hasn't been formally finalized yet, but attorneys general from 12 US states have already filed a joint lawsuit. California Attorney General Rob Bonta, leading the charge, stated that this deal would "reduce competition and harm consumer interests." It looks like routine procedure—every major M&A faces antitrust scrutiny—but this time is different. Twelve states joining forces, not the federal government, says what? It says local interest groups have already smelled blood.

This deal is valued at $110 billion, but can National Amusements (Paramount Skydance's parent) and WBD shareholders really get that amount? I calculated that Paramount Skydance's cash-plus-stock bid is around $8 billion, with the rest being debt assumption. WBD's debt is nearly $50 billion, plus Paramount's own liabilities, resulting in a post-merger entity debt ratio exceeding 60%. In the current high-interest-rate environment, this financial structure is more anxiety-inducing than streaming subscription numbers.

From a valuation logic perspective, the core of this deal is the "Content Moat"—Paramount has Mission Impossible and Star Trek, WBD has HBO, DC, and CNN, seemingly forming a content giant. But the problem is, the monetization efficiency of these IPs is declining. In 2023, churn rates for Paramount+ and HBO Max in the US reached 18% and 15% respectively, while Netflix was only 6%. The competitive barrier in the streaming industry has shifted from content quantity to user stickiness and algorithmic recommendation, and neither Paramount nor WBD is strong in these areas.

Regarding the business model, the merged company wants to pursue a "vertical integration" route: Content Production + Streaming Platform + Cable Networks. But cable TV revenue is accelerating downward—in 2024, paid cable TV subscribers in the US decreased by 12% year-on-year, an irreversible trend. As for streaming, Paramount+ and Max combined account for less than one-third of Netflix's user count, with high overlap between the two. How big can the synergies be? I calculated that even cutting 20% of overlapping costs, the savings amount to less than 3% of total debt—a drop in the bucket.

Source: News Image

Back to the indictment itself. The 12 state AGs chose "antitrust" as the grounds for litigation—specifically, pointing out that the merged company would hold over 40% of NBA broadcasting rights and exclusive distribution rights for many HBO gold-standard series. But the deeper reason is that these states worry the merged media giant will squeeze the survival space of local independent producers and regional sports broadcasts. Note that many small and medium TV stations in the US survive on local sports events and self-produced programs. If Paramount and WBD join hands, they can bundle advertising packages, directly knocking these small stations out of the game.

Where are the competitive barriers? Logically, IP and distribution channels are hard barriers. But Netflix has proven that original content can catch up quickly through data-driven approaches, while TikTok and YouTube are stealing user time. What actually makes this deal attractive to investors is "undervalued assets"—like CNN's news brand and HBO's paying user base. However, the core value of these assets lies in content, not channels. And the value of content is being diluted by AI and User Generated Content (UGC).

On investment judgment, my attitude is clear: If this deal is blocked by the court, it might be good news for Paramount and WBD shareholders. Because the $110 billion valuation includes too much "synergy premium." Once regulatory resistance causes delays or term modifications, the premium will collapse first. If the deal eventually passes, caution is warranted instead—integrating two large traditional media companies has no historical success stories: AOL-Time Warner and Disney-Fox aftermaths prove that cultural integration and technical debt are scarier than imagined.

What I care about most right now isn't whether this deal will close, but the "undisclosed details" in the indictment. The 12 state AGs surely have emails and data from internal communications between Paramount and WBD. Once these materials are disclosed in court, they may explain the situation better than any financial model.

Original Link: https://www.ithome.com/0/976/298.htm