Warner Bros. Discovery stock Monday hit its lowest point since the company's merger with Paramount Skydance was reached in February as Wall Street appears to be putting little more than a 50% chance that the deal will get done.
Warner Bros. stock dropped 1.8% Monday to $25.28, ending about 18% below the $31-a-share cash offer from Paramount, whose stock also declined Monday. Warner Bros. stock had been trading around $27 in June. Paramount's deal for Warner Bros. initially totaled $110 billion including assumed debt.
Paramount shares dropped 2.1% to $8.04 Monday after hitting their lowest level since a group led by the Ellison family reached a deal to gain control of the media and entertainment company in July 2024. The stock had been as high as $20 last September.
The downdraft in both stocks came after Paramount's surprise disclosure Friday that it was delaying its merger -- which it had hoped to close by the end of September -- until June 1, 2027, or after a federal court rules on an antitrust lawsuit from state attorneys general seeking to block the deal. The uncertain timing on the trial could push a ruling into 2027.
In an email to Paramount staff Monday, CEO David Ellison stated "we remain highly confident that this transaction does not pose any legal issues, and we will complete it and bring these two companies together."
If Ellison is right, investors stand to earn a 20%-plus return in less than a year if the deal closes. That's more than the single-digit annual return common on takeover arbitrage situations where the odds are viewed as favorable on deal completion.
Figuring the implied odds that the deal closes is a tricky calculation that involves an estimate of where Warner Bros. stock would trade if the deal isn't completed.
Barron's is assuming a price of around $18 a share, which could be high given that Warner stock traded around $12 before reports of Paramount's interest in the company last September.
The hypothetical math here would be that investors stand to make nearly $6 a share if the deal closes and lose more than $7 a share if the deal dies. That works out to an implied deal odds of just over 50%, Barron's estimates.
The weakness in media stocks this year likely wouldn't help the valuation of a stand-alone Warner Bros. Industry leader Netflix is down 25% this year to $70, and Disney is off 15% to around $97.
At $18, Warner Bros. would be valued at about nine times projected 2026 Ebitda (earnings before interest, taxes, depreciation and amortization) based on an enterprise value (equity value plus net debt) of around $75 billion. That would be a slight discount to the stronger Disney at about 10 times. Netflix trades at closer to 17 times .
One positive for Warner Bros. is that it would get a $7 billion payment from Paramount, or more than $2 a share, if the deal dies on regulatory objections. One negative for Warner Bros. is the disappointing box office for its big summer movie release: Supergirl.
The prospect of potentially ample returns on Warner Bros. stock wasn't enough to prevent a downgrade from Seaport Research Partners analyst David Joyce, who cut his rating to Neutral from Buy in a note dated Sunday, noting that the merger delay announced Friday "was not our dance card."
"With this additional delay and potential uncertainty (although if successful, there's much more than the cost of carry to be earned: there is 20% upside to the deal price before factoring in the $0.25/Q ticking fees starting after September), we think there are better areas to deploy capital," Joyce wrote.
Paramount is on the hook for a 25-cent per share quarterly "ticking fee" to Warner shareholders if deal is delayed past Sept. 30.
The Warner Bros deal is one of the largest and most popular ones in the takeover arbitrage community.
Arbs, however, are taking losses on a deal that many viewed as a likely candidate for deal completion given the lack of federal antitrust objections and the Ellisons' connection to President Donald Trump. But the state attorneys general's suit -- and the traction it got -- surprised Wall Street. Many thought Paramount would be able to reach a deal with them, clearing the way for deal completion.
That has created a potentially large payoff for investors if the deal closes -- and risk if it fails.
The outcome also matters for Paramount. The weakness in its stock reflects fresh uncertainty about the Warner deal. The delay in closing likely will prove costly financially and strategically.
If the deal dies, Paramount would be left as a subscale media company, although it could potentially merger with NBCUniversal which Comcast plans to spin off to its shareholders.
Write to Andrew Bary at andrew.bary@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 27, 2026 17:42 ET (21:42 GMT)
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