Paramount Skydance shareholders will get special stock warrants as the company gets closer to finishing its $80 billion acquisition of Warner Bros. Discovery. The deal is expected to close on Tuesday.
To help pay for the deal, Paramount plans to sell $47 billion in new shares next week. This follows a $52 billion debt sale completed this week. Current public shareholders will also get stock warrants, which are long-term options to buy shares at a set price, along with the new share offering. The total value of the Warner deal, including debt, is about $110 billion.
The warrants could help ease some of the losses from Paramount’s recent stock drop, which fell sharply on Thursday as the price of its new debt weakened. They may also give investors a chance for gains if Paramount shares rise over the next decade.
On Wednesday, Paramount sold $52 billion in high-yield bonds as part of the merger financing. By early Friday, the company’s existing 10-year unsecured debt was yielding about 10%, showing that investors are worried about Paramount’s heavy debt load and its ability to meet financial goals. Shares bounced back a bit on Friday, outperforming the overall market.
The $47 billion share sale, expected to be priced at about $12 per share, is backed by the Ellison family. This move will significantly dilute current shareholders, as the total number of shares will jump from about 1.1 billion to around 5 billion. The warrants are meant to let public shareholders join the Ellison-led group in the capital raise and help offset some of the dilution.
Paramount plans to give about 470 million warrants to public shareholders who are not part of the Ellison-led group. Investors will get one warrant for each share they own. These warrants are long-term call options, with an exercise price equal to the new share offering price and a 10-year window to use them. The record date is Monday, and the warrants are expected to start trading on the New York Stock Exchange on Oct. 13. Some estimates say the warrants could be worth a few dollars each when they are issued. They do not have immediate value because the exercise price is higher than the current stock price, but they could become valuable if Paramount shares rise over the next decade. Using a standard options-pricing model with 30% annual volatility, Barron’s estimated each warrant could be worth about $3. The warrants can be redeemed after three years if Paramount shares trade above a certain high level.
It is not yet clear how Paramount shares will trade after the warrants are issued. The stock will probably drop to reflect the value of the warrants, but it is uncertain if it will fall by the full estimated amount, since the warrant value is a significant part of the current share price.
One downside of the warrant issue is that it will probably be a taxable event for shareholders. A New York tax expert told Barron’s that the distribution is unlikely to be tax-free for U.S. or foreign investors. It will likely be treated as a taxable property distribution under IRS rules, not as a tax-free stock dividend.
In late September, Seaport Research Partners said it is still cautious about the stock and kept a neutral rating. The firm pointed to the big dilution from the Ellison-led cash infusion, which is expected to add about 3.92 billion new shares and bring the total to just over 5 billion. Seaport also raised concerns about Paramount’s high debt, with net debt around $79 billion and a debt-to-EBITDA ratio of about 7.3.
Most Wall Street analysts are still cautious about Paramount. Of the 25 analysts Bloomberg tracks, most have a bearish or neutral view, and only a few are optimistic.
