February 21, 2024

Old habits die hard. So Warner Bros. Discovery’s CEO David Zaslav just sat down with Paramount Global chief executive Bob Bakish to talk about merging, and the media business yet again confronted the possibility of a spasm of mega-deals reshaping the landscape.

Happy holidays!

Related Stories

When the opening bell rang on Wall Street, however, investors didn’t exactly give the idea of “Warnamount” a ringing endorsement. Shares of Paramount slipped 1% and WBD slid 4% in early trading. Paramount is 40% below its 52-week high, and WBD has lost more than half its value since the April 2022 close of the WarnerMedia-Discovery merger.

While the business has reckoned with more seismic deals in recent years, among them Disney-Fox and AT&T-Time Warner, this time the reality seems to be dawning that bigger is not always better. Streaming platforms swim in red ink and legacy media assets (mainly linear TV) are eroding. Yes, Zaslav has hinted at opportunities to be had, but WBD was not really considered a buyer given its oft-stated focus on reducing its enormous debt. It’s not clear how trying to swallow a company with hefty debt of its own solves any problems.

Citi media analyst Jason Bazinet told Deadline he sees little upside to the combination. Investors “watched CBS and Viacom merge,” he said. “They watched Disney and Fox merge. And they watched Discovery buy Scripps and [merge] with Warner Bros. Discovery. And none of those were the elixir that allowed you to generate huge amounts of cash flow.” A company message of “‘We have this great idea, we need to do more M&A,’” he said, won’t go over as well as it once did, “because you can’t draw a straight line between M&A and profitability in streaming.”

Robert Fishman, an analyst with MoffettNathanson, also threw shade on the putative merger in a note to clients this morning, emphasizing the “increasing sense of desperation around media.” He wondered why “any company would try to catch a falling knife? What is the rush with the likelihood of waiting for an even cheaper price if a real advertising recession transpires?”

One film finance exec told Deadline he was struggling to see the logic. “What I want to know is…how are shareholders going to benefit?” he said. “How do these two companies pay down their debt…and build value so their share price, which has been in the toilet, can grow?”

Deal chatter has been pervasive this year, even if the economy hasn’t been especially hospitable for M&A. Disney publicly floated selling linear cable and broadcast networks before reconsidering; Paramount has had a similar push-pull with BET Media, which is now back in play. “It’s almost like in that movie scene where everyone’s got their hands up in the air, and they’re…running around in circles, they don’t know what to do,” said LightShed Partners’ Rich Greenfield on CNBC about the Par-WBD chatter.

RELATED: Byron Allen Resubmits $3.5 Billion Bid For Paramount Global’s BET, VH1

“Advertising is in secular decline. Cord-cutting is worse than these companies expected. Streaming losses are in the billions. I think this is really sort of an ‘aha’ moment, an inflection point, a watershed moment…where they’re realizing there is no growth.” Piling linear TV assets atop linear TV assets “is not the right answer. That is not fixing the problem. The problem is they can’t compete with Netflix.”

Merger Mechanics

A merged company might try investors’ patience, but the industry couldn’t help drawing on a white board to imagine how the pieces could be combined. Paramount+, which has 63 million subscribers but still loses money, could be shut down to save costs, with some of its top shows migrating to Warner Bros. Discovery’s Max, industry players speculate.

On the TV side, a deal would bring some gold-plated TV IP to Warner Bros., including Star Trek, NCIS and the Aaron Spelling library.

It would finally align Warner Bros. TV with a major broadcast network. The studio previously owned the WB and later half of The CW, neither of which rose to the level of the Big 3.

And combining CBS News and CNN would create a TV news powerhouse. The two have flirted with a merger for more than two decades while collaborating on newsgathering.

A combination gives WBD more marquee sports rights, including NFL. WBD’s Turner networks already share NCAA March Madness with CBS.

One possible scenario being circulated suggests that WBD could sell the Paramount movie studio to David Ellison, the Skydance CEO who is said to be pursuing Par and already co-owns some of the studio’s biggest film franchises. WBD might merge CBS Studios into WBTV, likely divest most of Paramount’s cable networks. However, it seems an unlikely move to split IP, like Star Trek, with film going to Skydance and TV to Warner Bros. TV. 

On the film side, merging both motion picture studios would, in the short term, create a bloated feature slate similar to the aftermath of Disney and Fox before they pared down releases.

In 2023, Paramount and Warner Bros have grossed a combined $1.78 billion domestic, $4.7 billion at the global box office across 23 theatrical releases (both new and carryovers from 2022). Together, they would be the clear No. 1, though these have been unusually fallow times for perennial leader Disney.

A unified Warner Bros and Paramount would bring together the former’s DC Studios brand, which is in the process of being revamped by new studio bosses Peter Safran and Guardians of the Galaxy director James Gunn across film, TV and more. While DC still has previous regime movies in the pipeline, i.e. Matt Reeves’ The Batman 2 and Todd Phillips’ Joker sequel, Safran and Gunn have ambitious plans kicking off with the latter’s Superman Legacy in 2025.

Paramount is the home studio of Tom Cruise in his Mission: Impossible franchise and the actor’s highest grossing movie ever Top Gun: Maverick ($1.49 billion) as well as the Star Trek franchise. The studio has been trying to revitalize that movie series post JJ Abrams on the feature side, and Gunn’s touch could do the trick; the Gene Roddenberry franchise largely built out in recent years on Paramount+ by Alex Kurtzman. Warners has Harry Potter and the Wizarding World, which is largely eyeing a TV series future on HBO, while Paramount has Transformers which they’re extending out into a new animated movie in 2024.  

On the feature animation side, Warner Bros is rebuilding post Warner Media under former Skydance Animation Head Bill Damaschke. Paramount is looking to feature takes of its Nickelodeon properties, i.e. the next SpongeBob 2025 title The SpongeBob Movie: Search for Squarepants. Recently Paramount was able to revive the Teenage Mutant Ninja Turtles brand under Seth Rogen and his Point Grey production company with Teenage Mutant Ninja Turtles: Mutant Mayhem which spawned $1 billion in retail.  

Speaking of retail, Paramount and Warner Bros could benefit from their Looney Tunes, Harry Potter, Nickelodeon and Turtles brands.  

In terms of overseas TV output deals for features, Warner Bros is the stronger around the globe, especially in Asia, however, Paramount does count good deals across Europe.  

Ultimately, however, a true merger would create an ultimate situation of less product in the marketplace. That means less money for exhibitors, and less for producers, writers and talent. Long-term output deals on streaming and TV would merge.   

“Creating less product and room in the marketplace, that’s exactly when antirust law is supposed to step in,” says one studio insider.  

Washington’s Shadow

Getting the merger past regulators may not be a cakewalk, and it would also be reviewed against a backdrop of uncertainty. MoffettNathanson’s Fishman cited that in his note. “We have difficulty understanding why any Board, let alone a media company given the track record over the past few years, would agree to go through the challenging regulatory process of merging companies without at least a clearer understanding of which political party will be in power after November,” he wrote.

Axios, which first reported the WBD-Paramount talks, said executives are sure a deal would pass muster. There is only one broadcast network between the two companies. But there are two studios. And the combined cable networks would account for 35% to 45% of all linear TV viewing, by Fishman’s estimate — “a greater share than any single entity has controlled since the pre-cable network era,” he noted. That glut of networks would generate “pushback” from regulators, Fishman predicts.

The Federal Trade Commission, chaired by Lina Khan, challenges deals regularly, appearing unfazed by its mixed results. It failed to block Microsoft’s acquisition of Activision Blizzard but certainly slowed down the closing. Just this week, it had a big success in another industry, forcing gene-sequencing company Illumina to divest Grail, which makes tests to detect cancer. That was a vertical merger, meaning the businesses of the two companies don’t overlap.

WBD has hired bankers to look at Paramount. Zaslav is on the move months before a lock-up period under the so-called Reverse Morris Trust transaction, which created WBD, expires April 8 — the second anniversary of the closing. It would mainly allow other parties to buy WBD without a massive tax hit.

Zaslav, as the potential buyer, may relish his “first time running the show on his own,” one analyst figures, recalling that John Malone gave up his super-voting shares of Discovery in the merger with WarnerMedia.

But the CEO has constituents besides Wall Street.

The question is, “Is he fostering a culture that breeds success creatively, consistent with the history of Warner Bros.?” Relations overall were strained by the strike. And Zaslav’s “compensation really got out of kilter. It isn’t a good look.”

Warner employees have been through the wringer with deal after deal. AT&T first proposed buying Time Warner in 2016 before Donald Trump got elected. Then his antitrust regulators put the company through the wringer, with the deal not closing until after a court battle nearly two years later. Then, after a stormy run as WarnerMedia, the company then got smashed together with the home of Flip or Flop and Dr. Pimple Popper. “This has been too much for too long for the employee base, which is not healthy,” said LightShed’s Greenfield.

Why Paramount?

In any potential media M&A, Paramount has been the likeliest to be taken out first. It has massive streaming losses and no timeline given for break even. It’s heavily linear and advertising dependent. It’s smaller than others, so less expensive. Parent National Amusement, controlled by Redstone, has also been squeezed, raising $125 million from Byron Trott’s BDT & MSD Partners in May. This fall, it reached a deal with lenders to restructure some of its debt.

As a result, some Wall Streeters have started to call for the closure of Paramount+, the quickest way to stem losses, and have Paramount return to being an “arms dealer,” selling film and TV content to third parties, a business now decidedly back in vogue.

“I think many of these companies will decide not to be in the streaming business in the same way that they have been, and others will keep their pedal to the metal,” one analyst told Deadline. “The two that have struggled the most with profitability are Paramount+ and Peacock, and of those two, [Comcast-owned] Peacock has essentially unlimited resources, while Paramount+ has real financial constraints.”

The question is, could a combination — of Paramount+ and Max, of Paramount+ and Peacock, or of Max and Peacock — rival Disney+ or Netflix? Or might all three, Paramount+, Max and Peacock, band together to create a third super-streamer, perhaps ultimately under the wing of cash-rich Comcast?

Big Tech, of course, is increasingly fascinated by media and entertainment. Yet Amazon, Apple and Google haven’t expressed much desire to expand the scope of their overall businesses, despite endless rumors of Silicon Valley scooping up Hollywood assets. Even if they wished to, they’re not likely to make big moves since the tech sector has been repeatedly clobbered by regulators.

The way 2023 is ending suggests 2024 will bring a lot more what-ifs and maybes, for an industry eager for some notion of stability. “We should buckle up for what will likely be endless speculation,” Fishman wrote. “And the more desperate these media companies and executives get in the weeks and months ahead, the more likely some deal will happen in 2024, even without any fundamental reason for it.”