By Andrew Bary
Warner Bros. Discovery stock hit a three-month low this past week -- a price it hasn't dropped to since its Paramount Skydance merger in February. And now, it is offering an unusually high return for a takeover arbitrage situation after an uptick on Tuesday.
In afternoon trading, Warner Bros. was up 0.9% to $26.72. It closed down almost 3% on Friday, finishing at $26.24. The stock now offers a 17% return to the deal price of $31 a share in cash.
That's an unusually wide spread for a takeover deal, considering that Paramount is targeting a closing date by the end of the third quarter. Many takeover arbitrage situations offer spreads of 5% to 10% with longer periods until expected closing. The shorter the period until closing, the more attractive a takeover arbitrage situation.
Before Friday's drop, Warner Bros. had traded at about $27 for more than a month.
Friday's decline came after media outlets reported that state attorneys general are prepared to challenge the merger on the grounds that Paramount would have too much power with its control over Warner Bros.' TV and movie businesses.
Workers and their unions in Hollywood -- within the entertainment industry more broadly -- are worried that the Paramount/Warner deal will take jobs. The merger isn't expected to face a federal challenge. The U.K. antitrust authority is looking into the transaction, Bloomberg reported on Monday.
For Roy Behren of the Merger mutual fund, which holds Warner Bros., the stock is "extremely attractive" because of the wide spread and what he considers a strong merger agreement backed by structural safeguards along with the backing of Oracle Chairman Larry Ellison. Ellison's son, David, is CEO of Paramount and an architect of the Warner Bros. deal.
Behren, who co-manages the $2.5 billion fund, is assuming a closing date in October -- to be conservative -- and calculates that Warner Bros. stock offers a 30%-plus annualized return to that date.
Paramount is confident enough of closing before Sept. 30 that it will give Warner Bros. shareholders a 25 cent per-share bonus, or ticking fee, if the deal doesn't close before then -- with additional quarterly ticking fees of 25 cents a share until closing.
One encouraging sign for the deal is that Paramount apparently wants to avoid a legal challenge at the state level. The entertainment company, Bloomberg reported on Monday, has given a list of concessions to the state attorneys general, including California's Rob Bonta.
Paramount didn't immediately respond to a request for comment.
The Warner Bros. deal spread was wide by arbitrage standards even before the latest decline in the stock, in large part because of the sheer size of the size of Warner Bros. -- the equity value of the deal is close to $80 billion. This is one of the largest takeover arbitrage situations, and arbitrage specialists collectively have a limited pool of capital to allocate to one transaction.
Paramount shares also have been weak, trading around $10. They're off 22% this year.
Paramount is closer to its 52-week low of about $8.60 than its $20-plus high for two key reasons: concerns about the company overpaying for Warner Bros. and taking on too much debt after outbidding the larger Netflix. Weakness in several big entertainment stocks, including Netflix and Disney, may also be weighing on Paramount.
Write to Andrew Bary at andrew.bary@barrons.com
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June 09, 2026 14:52 ET (18:52 GMT)
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