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Wall Street weighs in on why Warner Bros. should or shouldn’t buy Paramount

Shares of Warner Bros. Discovery (WBD) and Paramount (PARA) are in the spotlight on Thursday following reports of talks about a potential merger between the two legacy media companies. While Wells Fargo says it prefers Warner Bros. as a standalone, Citi argues that the company could lower its debt leverage with a Paramount deal.

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MERGER DISCUSSIONS: Warner Bros. Discovery’s CEO David Zaslav met with Paramount’s CEO Bob Bakish on Tuesday in New York City to discuss a possible merger, multiple sources told Axios‘ Sara Fischer. Zaslav also has spoken to Shari Redstone, who owns National Amusements, Paramount’s parent company, about a deal, according to the report.

Meanwhile, sources told The Wall Street Journal‘s Joe Flint and Jessica Toonkel that no formal talks between the two companies are currently under way. The report further noted that a deal between Paramount and Warner could face significant regulatory challenges.

Commenting on the news, Wells Fargo says that while it does not know the structure for a potential Warner Bros. Discovery plus Paramount combo, it prefers Warner Bros. Discovery as a standalone. The firm also said it thinks Warner Bros. is better off as a seller than buyer given the strength and uniqueness of Warner Bros. and HBO, but management may have different ideas. Any deals will likely require significant regulatory approvals of 1-2 years. Perhaps the biggest conclusion is that Media’s challenges inevitably lead to rationalizations, Wells adds.

Meanwhile, Citi said that “above all else” the firm suspects investors will focus on the pro forma leverage. Its analysis suggests the new entity would “only” need about $1B of savings to result in lower pro forma leverage versus standalone Warner Bros. and based on the cost structure of Paramount the firm suspects the cost savings are apt to be larger than $1B. So, if this transaction does occur, Citi would expect leverage to fall, assuming the transaction uses 100% equity financing. The firm, which is maintaining its Buy rating and $19 price target on Paramount and Buy rating and $16 price target on Warner Bros., suspects Paramount, as the potential target, to see upward pressure on its share price and Warner, as the potential buyer, may see downward pressure.

Also discussing the news reports, Barclays said any potential deal, should one emerge, is “more likely about buying time through cost synergies” and for Warner management to run a bigger portfolio for a bit longer. However, “combining two of the most challenged assets across legacy media is unlikely to somehow transform the combination into a better company,” the firm told investors. The more players Paramount engages with, “the narrower its path may end up being in the absence of real progress,” added Citi, which keeps an Underweight rating and a $12 price target on Paramount shares.

NOTABLE: According to a report by Bloomberg on Wednesday, Paramount is in talks to sell its Black Entertainment Television, or BET, network to a management-led investor group that includes BET Chief Executive Officer Scott Mills and Chinh Chu, a former Blackstone (BX) executive who runs New York-based CC Capital Partners, people with knowledge of the matter said. The sources added that a price of “a little under” $2B has been discussed.

Byron Allen has offered $3.5B to buy Paramount’s BET and VH1, Deadline‘s Anthony D’Alessandro, Jill Goldsmith, and Dade Hayes have since reported. Allen had previously bid for BET, but Paramount took it off the table after deciding the offers it received weren’t high enough.

PRICE ACTION: In Thursday morning trading, shares of Warner Bros. have dropped about 4% to $11.20, while Paramount’s stock has slipped almost 1% to $15.37.

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