S&P issues Paramount Sky(PSKY.US) rating warning! Sky-high acquisition may lead to debt overload, leverage ratio could soar

According to Tongce Financial APP, a Standard & Poor’s Global Ratings analyst stated that Paramount Tandu (PSKY.US)'s proposed $111 billion acquisition of Warner Bros. Discovery (WBD.US) will put pressure on its credit rating, although the combined company may eventually reduce its debt levels over time.

Standard & Poor’s currently assigns a “BB+” rating to Paramount Tandu, the highest level within the junk bond category. The entertainment company successfully reached an agreement to acquire Warner Bros. Discovery this week, defeating Netflix (NFLX.US) in a months-long competition.

Earlier this week, Paramount Tandu increased its all-cash bid to acquire Warner Bros. Discovery’s entire equity from $30 per share to $31 per share, surpassing Netflix’s offer of $27.75 per share. Warner Bros. Discovery’s board of directors stated in a Thursday announcement that Paramount Tandu’s new acquisition plan, totaling $111 billion, is more favorable to shareholders than the earlier agreement with Netflix. Given Paramount Tandu’s higher bid, Netflix had four business days to revise its own proposal. However, the streaming giant ultimately chose to withdraw, bringing an end to the months-long bidding war with multiple revised offers.

Naveen Sarma, a Standard & Poor’s analyst, said on Friday, “The combined company will carry a very large amount of debt, approximately $80 billion. Considering the leverage level after the merger, it is clear that the rating will face significant pressure.” He added, “Its leverage ratio will be higher than what is acceptable to maintain this rating.”

Sarma estimates that, depending on the final financing terms, the leverage ratio—meaning the company’s debt relative to a certain earnings metric—could reach 7 times or higher. However, he noted that to maintain a “BB+” rating, the company may need to keep its leverage ratio below 4.5 times.

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