Shares of Skydance Corp., formed through the merger of Paramount and Warner Bros. Discovery, fell as much as 27% in trading Wednesday. The drop came as the Skydance, led by chairman and CEO David Ellison, distributed about 471 million warrants giving holders of Paramount Skydance's PSKY Class B shares the option to purchase stock in the new company.
Skydance's stock — which began trading Oct. 6 on the New York Stock Exchange under the symbol “SKYD†— closed down 22.2%, to $7.06/share, as of the end of regular trading Wednesday.
Each warrant issued to PSKY holders initially allows them to buy one share of Skydance for $12. (The warrants, trading on NYSE under “SKYD.WS,†had an Oct. 13 closing price of $2.20 apiece. PSKY stock was delisted from the Nasdaq on Oct. 5.) If all of those warrants were exercised, that would raise about $5.65 billion for the company, while it would also increase the share count and dilute ownership of current shareholders. It's not known how many warrants have been exercised so far. Holders of the warrants have up to 10 years (until 2036) to exercise the warrants
In connection with Skydance's distribution of stock warrants to PSKY holders, the NYSE announced after market close Tuesday that it would adjust the official closing price of Skydance's Class B common stock downward by $0.19368 per share (from approximately $9.27 to approximately $9.07) based on the official closing price of the warrants at $2.20 each, a pro-rata calculation for the approximately 9% that 471 million shares of Class B common stock entitled to receive a warrant represents of shares outstanding.
According to Skydance, the pre-warrant market capitalization of the company was $46.6 billion (at a price of $9.27/share for Class B shares). The implied value with the warrants would have given Skydance a market cap of $45.6 billion at the $9.07/share price of the Class B stock. With the stock drop Wednesday, the market cap stood at around $35.6 billion.
The warrants issued to PSKY shareholders are intended to provide them the opportunity to purchase shares of Skydance's Class B common stock “on similar terms†to those offered to the parties in the $47 billion equity syndicate backing the Warner Bros. Discovery deal, including David Ellison; his father, Larry Ellison; Gerry Cardinale, managing partner of RedBird Capital Partners; LionTree; and the sovereign wealth funds of Saudi Arabia, Qatar and Abu Dhabi. Those equity investments in SKYD were priced at $12 per share.
While the movement of Skydance's stock price Wednesday has more to do with the issuing of the stock warrants, Wall Street has not been bullish on the combined Paramount-Warner Bros. The company will have pro-forma annual revenue of nearly $70 billion — but it also will have to deal with almost $80 billion in net debt.
The distribution of the warrants “marks the final step in the WBD transaction closing process,†Wells Fargo analysts led by Steven Cahall said in a research note published Wednesday morning. They noted that “media mergers have a less than ideal history in terms delivering on pro-forma EBITDA expectations,†citing CBS and Viacom, Disney and 21st Century Fox and Discovery and WarnerMedia.
That said, the Wells Fargo analysts wrote, “We think SKYD will successfully deliver its ~$6bn in planned cost synergies. The main risk is whether the integration and disruption causes some leakage in core ops, and/or whether Media fundamentals change or are disrupted by tech. This history means investors may discount pro forma EBITDA to account for the leverage & risk.†The firm has an “underweight†rating on Skydance's stock with a 12-month price target of $7.00/share.
The Paramount-WBD deal, valued at $111 billion including the assumption of WBD debt, brings together two major studios, TV networks including CBS, CNN, Comedy Central, MTV and TBS, and streaming services Paramount+ and HBO Max.
Last week, after the deal closed, Ellison and co-CEO Ynon Kreiz (former chief of Mattel) announced their senior executive leadership team for the new Skydance.
