Share of both Warner Bros. Discovery and Paramount Global slid Thursday as the markets weighed the idea of the two entertainment giants combining.
Warner Bros. Discovery dropped 69 cents or 6%, to $10.97 in morning trading, after closing Wednesday’s session down 5.6%. Paramount Global shares fell 43 cents, or 3%, to $15.07, adding to a 1.5% decline the day before.
The declines come as speculation about a deal continues after Warner Bros. Discovery CEO David Zaslav met with Paramount Global CEO Bob Bakish on Tuesday in New York to discuss the possibilities of bringing the two Hollywood conglomerates together. TheWrap reported that Zaslave also spoke with Shari Redstone, the controlling shareholder of Paramount Global.
While the stocks are falling, Wall Street analysts had measured views on the potential combination.
Citi said that “above all else” the firm suspects investors will focus on the amount of debt any new company would carry, according to TheFly.com.
The firm said in a note to clients that the new entity would “only” need about $1 billion of savings to end up with less debt than Warner Bros. Discovery on its own, and based on the cost structure of Paramount, the analyst suspects the cost savings are apt to top that figure.
Citi kept a “Buy” rating on both stocks, with a $19 price target and Paramount and a $16 price target on Warner Bros. Discovery, meaning both stocks are expected to gain over the next year. The analyst noted that Paramount shares are most likely to gain in the near term since it is the potential M&A target.
Wells Fargo noted that Warner Bros. Discovery has apparently engaged bankers to crunch the numbers on the deal, a possible step forward after the high-level executive talks. But the analyst, in a note to clients, said Wells prefers Warner Bros. Discovery as standalone company, according to TheFly.com.
In fact, the note said, Warner Bros. is better selling than buying, given the strength and uniqueness of Warner Bros. and HBO, but acknowledged that management may have different ideas.
The note also predicted that any deals will likely require up to two years to obtain the necessary regulatory approvals for any deal.
The comments came on the heels of news that Paramount was separately offered $3.5 billion by Byron Allen for its BET Media Group.
Barclays analyst Kannan Venkateshwar said in a note to clients the challenges of combining Warner Bros. and Paramont “is unlikely to somehow transform the combination into a better company,” according to TheFly. Instead, the analyst said Paramount should engage with other potential buyers.
The more players Paramount engages with, “the narrower its path may end up being in the absence of real progress,” added the analyst, who kept an “Underweight,” or “sell” rating and $12 price target on Paramount shares.