S&P Issues Paramount Skydance Rating Warning! Sky-High Acquisition May Lead to Debt Pressure, Leverage Ratio Expected to Soar

According to Zhitong Finance, S&P Global Ratings analysts stated that Paramount Skydance (PSKY.US)'s proposed $111 billion acquisition of Warner Bros. Discovery (WBD.US) will put pressure on its credit rating, even though the merged company could eventually reduce debt levels over time.

S&P Global Ratings currently assigns Paramount Skydance a "BB+" rating, which is the highest in the junk grade category. The entertainment company successfully struck a deal to acquire Warner Bros. Discovery this week, beating out Netflix (NFLX.US) in a months-long competition.

Earlier this week, Paramount Skydance raised its offer to acquire all shares of Warner Bros. Discovery from $30 to $31 per share in an all-cash deal, surpassing Netflix's bid of $27.75 per share. In a statement on Thursday, the Warner Bros. Discovery board said that the new $111 billion acquisition proposal from Paramount Skydance is more favorable to shareholders than its earlier agreement with Netflix. Given Paramount Skydance's superior offer, Netflix originally had four business days to revise its own proposal. However, the streaming giant ultimately chose to withdraw, bringing the months-long bidding war between the two sides to an end.

S&P Global Ratings analyst Naveen Sarma said on Friday, "The combined company will carry a very large amount of debt, around $80 billion. Considering the leverage level of the merged company, it's clear that the rating will face significant pressure." He added, "Its leverage will be higher than what is acceptable for maintaining this rating."

Sarma estimates that, depending on the final financing terms, the leverage ratio—the ratio of company debt to a certain earnings metric—could reach 7 times or more. But he stated that to maintain the "BB+" rating, the company may need to keep the leverage ratio below 4.5 times.

It is reported that Paramount Skydance’s planned acquisition will be partially financed with $57.5 billion in debt, with funding coming from Bank of America (BAC.US), Citigroup (C.US), and Apollo Global Management (APO.US). Sarma said the merged entity could reduce leverage by selling overlapping assets (such as TV production facilities and studio land) and cutting costs.