Oregon's attorney general has withdrawn a court motion seeking to delay Paramount Skydance Corp.'s (NASDAQ: PSKY) $110 billion acquisition of Warner Bros. Discovery Inc (NASDAQ: WBD), removing the most immediate legal obstacle for now. However, the state's broader lawsuit remains active, and Oregon officials are evaluating their next steps after Paramount resisted requests for records related to its regulatory lobbying efforts.
Market Reaction and Deal Spread
U.S. markets were closed for the weekend, but Friday's trading reflected ongoing investor caution regarding the WBD deal. Warner Bros. Discovery shares ended the session at $26.59, a discount of $4.41 to the $31 cash offer. The gross deal spread, representing the potential return for merger arbitrageurs, stood at 16.6%, excluding costs and the risk of deal failure. This gap often attracts hedge funds that buy shares below the offer price, betting on a successful close.
Paramount Skydance Shares Slide
Paramount Skydance shares experienced a sharp decline, losing nearly 10% of their market capitalization, while WBD stock barely moved. Investors appeared less focused on whether WBD would receive its payout and more concerned about how the acquisition might strain Paramount's finances. Paramount shares fell up to 9% on Thursday as the deal faced mounting pressure.
Financial Risks and Ticking Fee
Paramount faces significant financial exposure if the deal drags on. After September 30, a "ticking fee" of $0.25 per WBD share per quarter will apply, adding approximately $650 million in consideration over three months—equivalent to about 6.2% of Paramount's $10.53 billion market cap. The $7 billion termination fee tied to regulatory issues is nearly two-thirds of Paramount's current valuation, underscoring the high stakes involved.
Regulatory and Legal Landscape
Oregon's withdrawal merely shifts the timeline of the legal battle, not its substance. Jenny Hansson, a spokesperson for Attorney General Dan Rayfield, stated that Paramount has made clear it will not comply with the state's investigative demands, and the company is acting as if it is "above the law." California, New York, and other states are also scrutinizing the merger.
Markets face several key decision points this week. A California-led group could file a lawsuit as early as next week. The European Union has a July 14 deadline for a ruling on foreign subsidies and a July 22 deadline for a merger-control decision. Paramount has stated it will not close the deal before July 22. The EU's Foreign Subsidies Regulation aims to determine if outside government support distorts competition.
Debt Concerns and Analyst Downgrade
Debt has become the primary equity concern. Arete Research analyst Pierre-Marie d'Ornano downgraded Paramount to Sell from Neutral, slashing his price target to $2 from $14, citing the "hardly inspiring" track record of large media deals. He noted that Paramount faces "similar challenges" along with more expensive debt and tighter covenants, and estimated the combined entity would hold $86 billion in gross debt.
Paramount's Strategic Rationale
Paramount argues that scale is essential. CEO David Ellison stated in February that the deal would provide "certainty and speed to closing." The combined studio is expected to release 30 films annually and compete more effectively against Netflix Inc (NASDAQ: NFLX) and Walt Disney Co (NYSE: DIS).
Outlook
Oregon's withdrawal may offer only short-term relief. If a state court issues an injunction or the EU extends its subsidy probe, the deal could close after September 30, potentially increasing cash payments to WBD holders and delaying cost savings. If regulators ultimately block the deal under certain conditions, WBD could lose its $31 per share cash protection, and the $7 billion breakup fee would apply. Paramount must navigate regulatory lawsuits and pursue remedies up to an adverse threshold, leaving little room to walk away.
U.S. markets open Monday with attention focused on two factors: the EU ruling on July 14 and Warner Bros. Discovery's 16.6% deal spread. Oregon's move paused one countdown, but the cost of delay remains significant.
