Warner Bros. Discovery (WBD) shares declined 3.6% on Friday following a Reuters report that California, New York, and several other states are preparing to file a lawsuit to block the proposed $110 billion merger between Paramount Global and Skydance Media. The stock closed at $26.24, down 2.8%, after touching a session low of $25.915. Trading volume reached approximately 49.4 million shares.
The legal threat has widened the discount between WBD's market price and the $31-per-share cash offer from Paramount. The gap now stands at nearly 15%, reflecting investor concerns about execution risk. This discount suggests market participants are pricing in potential delays, revisions, or outright challenges to the deal. Paramount Skydance shares also slipped 4.2% to $10.22.
California Attorney General Rob Bonta told Reuters that his office is nearing a decision on whether to pursue litigation. 'There's not a lot of time left before we will need to act if that's what we decide to do,' Bonta said. He emphasized California's 'central role' in protecting Hollywood jobs as the merger progresses. Paramount Chief Legal Officer Makan Delrahim responded that the company is 'always prepared to remedy legitimate and articulated violations of the antitrust laws,' but maintains that the deal does not violate any such laws.
Paramount argues that the merger would create a stronger competitor in streaming and theatrical markets, not a weaker one. The company has committed to keeping both studios operational and releasing at least 30 theatrical films annually post-merger, aiming to address concerns from actors, writers, and theater owners. However, a lawsuit alone would not immediately halt the deal, though it could delay closing by months if a judge grants an injunction during court proceedings. Paramount has agreed to pay WBD shareholders a 'ticking fee' of 25 cents per share per quarter if the deal extends beyond September 30.
Regulatory hurdles are not limited to the U.S. European regulators are also reviewing the transaction. Paramount submitted its request for EU antitrust clearance this week, and the European Commission is expected to decide by July 7 whether to approve the takeover, require concessions, or launch a full-scale investigation. The merger would reduce Hollywood's 'big five' studios to four, intensifying competition with streaming giant Netflix and box-office leader Disney.
WBD's financial performance remains under pressure. First-quarter revenue was $8.9 billion, down 3% after adjusting for currency fluctuations. Free cash flow was negative $476 million, and net debt stood at $30.1 billion at the end of March. Net leverage was 3.4 times. The company's Global Linear Networks segment continued to contract, adding to operational challenges.
Investors will closely watch WBD's annual meeting on June 9 at 10 a.m. ET for any updates on regulatory timing. The stock's trajectory hinges on legal and regulatory outcomes. If states secure an injunction, WBD shares could fall further toward a standalone valuation reflecting its debt, declining linear TV business, and negative free cash flow. Conversely, if regulators clear the deal, the gap to Paramount's $31 cash offer could narrow quickly. For now, the stock is reacting to courtroom schedules rather than media earnings.
